ESG and E&C: Where ESG, Ethics, and Compliance Overlap

What is it compliance officers do every day? First, they perform risk assessments. Then, they build out Codes of Conduct, policies and procedures and internal controls based upon the assessed risks. They train teams on all of these sets of written procedures. They incentivize the doing of compliance and discipline employees who engage in non-compliant behavior. They monitor and enhance compliance programs based upon this monitoring. They create reports around their efforts and report to boards of directors about compliance and work with boards and senior management to move the compliance program forward.  

Notice anything? These tasks overlap almost completely with a corporate ESG program—let’s explore the synergies between the two concepts.


ESG: Building Understanding from the Top Down

A 2021 cross-industry survey, entitled ESG Clarity: Benchmark Your Initiative from Compliance Week and Fulcrum, a UK-based multidisciplinary firm, found that the ethics and compliance function often supports ESG initiatives, but there’s a lack of understanding about how to monitor and measure results. Aaron Nicodemus, reported in Compliance Week, “respondents said while their organizations were largely successful in launching ESG strategies and goals in their business plans, they were less successful in understanding ESG-related risks and applying those lessons to their initiatives. Only 13 percent of respondents said their companies have fully implemented and embedded an ESG strategy. Nearly 70 percent said their firms were either in the process of implementation (40 percent) or that it was more ad hoc at this point (29 percent).” Further, Pam Shearing, a managing partner at Fulcrum, said of these findings, “People are really trying to find their way with ESG, but there is some confusion as to how to measure it. ESG is an evolving conversation and, as such, companies need to continue to work on their ESG strategies. For some companies, there is still a lot of work to do.” 

It’s clear that just like with compliance, ESG starts at the top of an organization. ESG must have full buy-in from senior management in any organization. Shearing also related, “clear goals would become part of the company’s culture, with everyone from the C-suite to the shop floor understanding what ESG is and how to apply it to everyday practices. Employees should be encouraged to report what parts of the initiative are working and what are not so companies can implement remedial steps. You really have to involve everyone to have a culture across the firm that everyone understands what ESG is and how to bring it into their everyday practices.” Sound familiar? 


The Players and Benefits of ESG

But, like compliance, ESG is not simply driven by senior management alone. Take a look at the Business Roundtable’s Statement on the Purpose of a Corporation, which lists that there are at least five stakeholders in every corporation; shareholders, employees, localities, business relationships and customers. It’s clear that ESG is being driven in multiple ways on multiple fronts. In the sSurvey, “40 percent of respondents listed employees as a driver of corporate ESG initiatives. Companies are finding promoting and adhering to ESG initiatives is helpful for retaining employees and attracting new ones. Companies that weathered the pandemic and stuck to their ESG goals can see a competitive advantage in hiring.” Shearing said., “It goes back to ESG-related risks and opportunities. If your firm is doing the right thing for the environment, for society, for employees, and across its supply chain, it really can attract the best talent.” 

Having an ESG program alongside compliance can also be a business positive. The Survey found that nearly 20 percent of respondents said their organization had refused to work with a party on ESG grounds over the past three years. Mirroring the rise of compliance in the last couple of decades, ESG’s role as a business-to-business driver will become one of the most potent reasons companies will accept and incorporate it moving forward. 


Should Compliance Lead the Corporate ESG Effort? 

In the Update to the Evaluation of Corporate Compliance Programs, released by the Department of Justice (DOJ) in June 2020, the DOJ suggests that a Chief Compliance Officer (CCO) and compliance function must have access to all corporate data. With no other corporate function mandated by the DOJ to have access to such data, this is a strong argument for the ethics and compliance team  to lead, or at least inform,the corporate ESG effort. 

The bottom line is that the design, creation, implementation, and enhancement of a corporate ESG program is a natural complement to a corporate compliance program. Every CCO and compliance professional should be looking at their company to see how they can work on an overall ESG strategy. There are no other corporate functions which have the overall reach of compliance, together with government-mandated access to data and information. Further, the work of setting up and running a corporate ESG program involves skills and know-how that a corporate compliance officer uses day in and day out.  


Further ESG and ethics reading: 

Next steps on ESG and Ethics 

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