ESG Compliance: The role of CCOs, CECOs and their teams

What regulators expect, what investors expect, and more

ESG (Environment, Social, and Governance) is a growing initiative at companies around the globe—but what is the role of the compliance team in managing this challenge? I would argue that our role is to lead the charge, particularly given the expertise of compliance teams in managing risk, due diligence, and performance reporting—all key aspects of a best-practice ESG program.

ESG is here not only to stay, but it will change the landscape of compliance as well.”

Plus, while ESG efforts have gone previously unregulated and un-measured, that’s all set to change in the coming months. In the US, regulations on ESG compliance are brewing, while in the EU, the SFDR has already come into force, bringing new transparency and disclosure requirements for investment firms.

What is ESG compliance?

Before we go into the details of ESG compliance, and the role of compliance teams and compliance officers in managing ESG initiatives, let’s get on the same page and establish a baseline understanding. ESG—Environmental, Social, and Governance—is a set of standards and objectives that attempt to measure a company’s impact on the environment, its impact on people including employees, community members, and laborers, and how well the company is managed. While ESG originated in the finance world as a way to selectively invest, by 2021 ESG awareness has spread far and wide beyond Wall Street to include consumers, people seeking work, and regulators.

ESG Compliance: The regulator’s stance

The Securities and Exchange Commission (SEC) could not have been more clear over the past three months; ESG is here to stay. In February, the Acting Director mandated “the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings.” In March, she requested public input from investors, registrants, and other market participants on climate change disclosure. Also in March, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement.  In a press release, the SEC said, “the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct.  The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.” The SEC has high expectations of organizations around ESG going forward.

ESG Compliance: What investors expect

Just as the regulators have made clear their focus is on ESG compliance, the investor community has already made clear ESG compliance is a top priority going forward. An example is Ben Colton, Global Co-Head of Asset Stewardship at State Street Global Advisors, who said on a recent Across the Board podcast that “The multiple crises of 2020 marked an inflection point in underscoring the connections between resilience and strong ESG characteristics for companies, economies and societies. These lessons prompted us to further elevate the importance of ESG as a value driver. From incorporating climate risk mitigation in our business practices and improving inclusion and diversity, to contributing to local communities through employee volunteer hours and helping launch Small Business Strong, we are working toward a more resilient, sustainable and inclusive future.” According to Compliance Week, even “banks are taking a closer look at environmental and social risks in deciding whether to lend money to certain corporate borrowers.”

The role of the CCO and CECO in ESG compliance

ESG will only gain more traction and become stronger in the coming years. The corporate compliance program is uniquely suited to lead this effort…Do not sit back and let this opportunity pass you by.”

ESG is here not only to stay, but it will change the landscape of compliance as well. Many of the initiatives found in a corporate compliance function over the past 10 years are now part a greater ESG compliance effort. Indeed, some Chief Compliance Officers (CCOs) are moving to take over ESG and sustainability efforts within their organizations. Two prominent CCOs who have moved into or taken over their company’s ESG compliance efforts include Page Moats, who recently became Head of Global Sustainability at Dell Technologies after a stint as CCO, and Kim Yapchai at Tenneco Inc., who added the title of Senior Vice President, Chief Environmental, Social & Governance Officer to her role of CCO.

But more than leading the ESG compliance effort, compliance professionals are uniquely suited to lead their organization’s ESG efforts. What are some of the areas that compliance has the necessary background to help lead ESG efforts?

Due diligence and ESG compliance

Think about one of the most basic functions in compliance —due diligence. Whether compliance is conducting due diligence on a third party, providing certifications to clients or testing your organization’s compliance with sustainability claims or simply documenting adherence to government standards; these are basic functions of corporate compliance. This is where the recent SEC announcements are so critical, as the SEC will focus on performance reporting and practices related to ESG investments, asking for the quantitative and qualitative evidence to support any statements. This is another way of saying Document Document Document.

The “G” in ESG: Governance

The area of Governance is the natural bailiwick of corporate compliance. Here we need only look to the Department of Justice’s 2020 Update to the Evaluation of Corporate Compliance Programs. The DOJ, for the first time, defined that the corporate compliance function must lead an organization’s efforts in the areas of institutional justice and institutional fairness. These are two key components in any best-practice corporate governance applications.

Transparency is another key aspect of good governance, and this is another area where the corporate compliance function is paramount. Compliance must work so that not only does everyone understand the policies and procedures to do business ethically and in compliance; but must make that decisions around these issues are transparent and not opaque. A Warburg Advisors blog post noted, each facet of the compliance program is designed to build “a sustainable governance approach that also avoids predictable surprises of repeat compliance deficiencies.” The bottom line is that a corporate compliance program is in the business of “delivering protection from legal and regulatory liability but it’s also making an impact as a trusted business leader.”

ESG and risk management

Finally, compliance is on the corporate edge of risk management. While risk management has traditionally been seen as helping companies to avoid legal and compliance risk; it is now seen as much broader. Moreover, the biggest risk is now seen to be reputational risk. ESG compliance can be viewed as a mechanism to help prevent such risk if there is a breakdown, or even if a company’s ESG initiatives are being reviewed by investors or the stakeholders identified in Business Roundtable’s Statement on the Purpose of a Corporation.

ESG compliance will only gain more traction and become stronger in the coming years. The corporate compliance program is uniquely suited to lead this effort. But CCOs and compliance professionals must take the initiative. Do not sit back and let this opportunity pass you by.

From the Convercent team

Ready to get started leading your company’s ESG compliance initiatives? Need a gut-check from your peers in ethics and compliance? Attend our upcoming Global Forum, “ESG: Let’s talk about the E, the S, and the G!” on June 16 at 9am MST with Convercent CECO Asha Palmer, Chief Strategy Officer Philip Winterburn, and VF Corporation’s Associate General Counsel, Ethics and Compliance, Karin Johnson. You’ll have an exclusive opportunity to connect with ethics and compliance leaders and practitioners from around the globe as we tackle this escalating challenge.

Sign up for the forum