ESG raised to the power of TRUST

Integrating a culture of integrity into the ESG vision

By Suveer Khanna, Partner, Forensic Services, KPMG in India and Dulari Upadhyay, Director, Forensic Services, KPMG in India

Integrating a culture of integrity into ESG vision

An ancient wisdom - “Vasudhaiva Kutumbakam” – meaning the whole world is one family and accepting diversity through the lens of inclusivity. Today’s focus on ESG is also ingrained through this wisdom, which provides goals to organisations that go beyond maximising profits, instead add overall stakeholder value. As these organisations embark upon their journey towards a better tomorrow, Environment, Social and Governance (ESG) priorities take the centre stage to help organisations build resilience and long-term value creation.

89% Global Leaders planning more stringent ESG practices
 

56% Consumers buying choices to be impacted by ESG
 

1/3rd millennials interested in investing in ESG compliant companies

~250 Public Laws and regulations exist and seek for ESG related information

While the growing demand for ESG is a positive move towards better future, and CEOs today are prepared to walk the extra mile in augmenting their ESG commitments, concern over authenticity of the information presented and the ethical business practices underlying the growth trajectory continue to cripple the efforts made by businesses to achieve sustainable growth. Ample examples are available where investors in high growth portfolio entities have identified the (significant) gaps in governance and thereby, breached TRUST – 86 per cent of US investors’ questions accuracy of companies ESG disclosures2.

Regulators across the globe are tightening the sustainability norms and investors are increasingly treating ESG parameter at par, if not higher, with financial parameters. Although businesses are burning the candle at both the ends to make good on their commitments, the gap in available data, talent and technology, coupled with a quest to grab emerging ESG opportunities to stay ahead of the herd, may blur the line between ‘acceptable’ and ‘unacceptable’ practices.

Regulators across the globe are tightening the sustainability norms and investors are increasingly treating ESG parameter at par, if not higher, with financial parameters. Although businesses are burning the candle at both the ends to make good on their commitments, the gap in available data, talent and technology, coupled with a quest to grab emerging ESG opportunities to stay ahead of the herd, may blur the line between ‘acceptable’ and ‘unacceptable’ practices.

Illustrative ESG threats

Environment

  • Misuse of environmental/ climate resilience funds
  • Tampering of Environmental Monitoring Systems (EMSs) and falsified     reporting for regulatory requirements, cost, reductionimprove ratings or attract investors
  • Greenwashing to appear environmentally conscious
  • Use of hazardous material and inappropriate environmental waste disposals

 

 


 

Social

  • Misappropriation of CSR spend and diversion of aid funds/assets for personal gains
  • Weak value system and disregard for health and safety norms, sexual harassment, or exploitation at workplace.
  • Corrupt behaviour and/or cost pressure on supply chain, leading to impingement of basic human rights, child labour and other forms of modern slavery
  • Decision making influenced by various biases

 

 

 

Governance

  • Inability to prevent asset misappropriation, fraud, corruption, money laundering, due to absence of holistically integrated compliance framework
  • Risk of theft, data leakages, data privacy and authenticity issues due to obsolete physical and system security measures
  • Unethical sourcing and procurement practices
  • Channeling of illicit payments/ operations through complex supply chain system and/or third-party intermediaries 
  • Absence of Board level accountability to ensure integrity across business operations
     

Building trust through bold ESG programmes

Given the stakes, organisations require a more assertive stand against fraud, corruption, human rights violations, inequality, climate change and social and environmental issues, than merely meeting its regulatory obligations. Ethical and responsible business conduct requires propulsion to the ‘G’overnance aspect in ‘ESG’. A coherent integrity approach and a paradigm shift from a ‘risk-based’ to a holistic ‘value-based’ systems are the drivers of this propulsion3.

Skillful creative team is making decisions together

Key considerations for the way forward

Human behaviour – maker or breaker

Business integrity model has evolved over the years, comprehensively incorporating proactive and reactive measures. Its key components include:

Leadership commitment
 

Comprehensive policies and procedure

    Risk assessment and integrity due deligence

Periodic reviews and monitoring
 

Disciplinary measures
 

Incident response plan and investigation strategies

While these models have been successful in removing or stop rolling of ‘bad apples’, systematic fraud and corruption continue to find their way to creep back into organisations with established ethical compliance programmes. Modern times require a more inclusive and holistic approach that inspires individuals/entities to do the right thing. It is synonymous to taking ownership, going above and beyond minimum legal requirements. It requires for successful implementation, a deeper understanding of human behaviour, recognising individual cognitive biases, ethical dilemmas, social and other external factors, and peer pressures that influence individual actions and decisions.

Recommended leadership action for business integrity

It is imperative to elevate the organisation’s integrity functions at par with the business functions to bring independence in decision making, integrate culture of integrity across functions and hold management accountable for delivering on it. Leadership will need to create a foundation based on the following key pillars4:

  1. Commitment to ethics and integrity beyond compliance
  2. Strong corporate culture and incentives to drive continuous improvement and ethical leadership
  3. Leveraging innovative technologies to improve data collection, analysis, decision-making, reporting and overall accountability
  4. Supporting collective action to increase scale and impact
young indian woman working on laptop

In conclusion, while the world is already witnessing the impact of purpose-led approach on profitability5, a study by NYU showed positive correlation between ESG and financial performance (1.4%-2/7% higher stock returns); 52 per cent of CEOs at high-growth organisations believe that their ESG programmes improve financial performance. Integrating business integrity agenda with ESG priorities will become a strategic differentiator for business growth in the marketplace. It will ensure enhanced impact on environment and the society, reduced leakage of funds and protection of the brand, thereby establishing trust with multiple stakeholders.

In our upcoming articles, we will explore further on each of these pillars recommended by WEF on leadership action for business integrity 4.

[1] (a) KPMG 2021 CEO Outlook, KPMG International, September 2021
[1] (b) The ESG agenda for retail and consumer businesses, KPMG LLP UK, June 2022
[1] (c) Millennials Are a Driving Factor in the Growth behind ESG Investments, NASDAQ, May 20214.
[1] (d) Carrots & Sticks 2020 – Sustainable Reporting Policy: Global trends in disclosure as the ESG agenda goes mainstream, The Global Reporting Initiative (GRI) and the University of Stellenbosch Business School (USB), July 2020
[2] Building ESG trust with investors, KPMG LLP, 2022
[3] The Rise and Role of the Chief Integrity Officer: Leadership Imperatives in an ESG-Driven World, World Economic Forum, December 2021;
[4] The Rise and Role of the Chief Integrity Officer: Leadership Imperatives in an ESG-Driven World, World Economic Forum, December 2021;
[5] India ESG assets up 4.7 times in two years to Rs 12,300 crore, shows data, Business Standard, December 2021

Key contact

Suveer Khanna

Partner and Head, Forensic Services

KPMG in India