ESG and Compliance Professionals: Five Things You Need to Know and Five Steps to Take Now

On 21 March 2022, the U.S. Securities and Exchange Commission proposed long-awaited rule changes for climate-related disclosures for investors.

In the past couple of years, not a day has gone by without something in the media about Environmental, Social, and Governance (ESG). It is front and center for many investors as well as other stakeholders.

While the debate about whether the “E” is most important, or it is the “S” that really matters, or that the “G” is the glue that holds the “E” and “S” accountable rages on, it’s time for Compliance professionals to grab their seat at the table.

Here are five things that every Compliance professional should know about ESG and five steps for you to take now.

1. ESG is here to stay so you need to learn about it now

What’s the best way to do this?

Study your own organization’s website and scourer the sustainability report.

Go back a few years to see how the reports have, or have not, evolved. This will tell you what indexes or standards your organization is using and give you insights into what information may be important in the future.

Then do some comparisons to see where your organization stands. Pick competitors, companies that have been named as the World’s Most Ethical, or companies that you think have outstanding ESG and Ethics and Compliance programs.

How does your organization stand up?

Is your company’s sustainability report better or worse than others?

Are the disclosures detailed and meaningful or are they vague?

Do they cover all seven elements of the Ethics and Compliance Program or only disclose information about training?

2. How ESG impacts ethics and compliance programs

As you are reviewing your company’s website and reading all those sustainability reports, map the impacts and intersections with the Ethics and Compliance Program.

You might be surprised how many you find.

Your map could look something like this.

3. Develop goals, metrics, and measures

The old adage that there is “no time like the present” holds true here. If you don’t seize the day, others will.

Don’t wait for others in your organization to come to you with their ideas about how the Ethics and Compliance Program (E&C Program) should be described and more importantly what goals, metrics, and measures should be established for the E&C Program.

No one knows the E&C Program better than you do.

Set board but meaningful goals that have metrics and measures that are proof statements for what has been accomplished. Focus on what impact the goals have on behavior and the effectiveness of the E&C Program rather than reporting only on activities.

Here is an example of what the E&G Program goals, metrics, and measures could look like.

4. Ethicswashing is as real as greenwashing

Ethicswashing isn’t new, it’s just that we may not have referred to it in this way before.

Like greenwashing, it is the attempt to portray a company as better than it actually is. It goes beyond puffery or boasting. In its worst form, it is intentionally misleading and an attempt to mask wrongdoing.

As stakeholders use ESG criteria to make their decisions, whether it is to invest in a company or work for it, the pressure to meet the numbers could lead to ethicswashing.

The Ethics & Compliance function has an important role to play to protect the company’s reputation by preventing and detecting both. Dust off the Ethics and Compliance Program charter and give careful consideration to the role that the Ethics & Compliance function should have in ESG oversight.

5. Redesign and upgrade the Board reporting system

Until recently, Boards of Directors have been shielded from liability for compliance failures under the Caremark standard, which required proving that there was an utter failure by the Board to provide oversight of the ethics and compliance program.

This high bar of proof has never been met. However, the dismissal and subsequent settlement for $237.5m of the Boeing shareholder derivative lawsuit along with the previous Blue Bell Creamery case, marks a new Caremark era.

Now the standard has shifted from one of utter failure to failure to prevent. Under this new standard, a Board of Directors can be liable if they failed to prevent wrongdoing because the Board had no reporting process from a source that is independent of management to inform them of mission-critical or red flag risks.

The risk of fraudulent or misleading ESG disclosures along with how the company prevents and detects wrong-doing are mission-critical risks that the Ethics and Compliance function should be reporting to the Board on.

Compliance professionals are uniquely situated to be the independent source to establish this reporting process.

So now is the time to redesign and give your board reporting an upgrade.

Share the blog!

Picture of Kristy Grant-Hart

Kristy Grant-Hart

Kristy Grant-Hart is the founder and CEO of Spark Compliance.
She's a renowned expert at transforming compliance departments into in-demand business assets.

Leave a Reply

Your email address will not be published. Required fields are marked *