ESG compliance: Leading with integrity

For many organisations, geopolitical crises and economic challenges may understandably feel like the most pressing concerns. But there’s another issue organisations need to address that’s not going away – ESG compliance.

Regulators are getting tougher on ESG breaches. Over the past two years we’ve seen examples of businesses being fined or investigated for everything from overstating sustainable investment metrics and misreporting health and safety controls, to dumping untreated sewage in the seas and allegations of modern slavery.

It’s not just regulators that are more focused on ESG integrity. You could face activists and investors calling out ESG actions in general meetings, or investigative journalists unearthing some uncomfortable truths and holding you to account. The risk of reputational damage is real. Even if your organisation has not fallen foul of regulators or activists, if another company in your sector has, the spotlight could fall on you next.

Organisations that can demonstrate a strong ESG compliance record have a competitive advantage when it comes to winning new business and potentially, accessing capital. That, of course, can provide incentives for business leaders to present results in an optimistic light – which could lead to greenwashing, bluewashing (overstating socially responsible practices) or fraudulent misreporting. That’s simply not an option. Boards could face criminal liability if they sign off something that’s misleading.

Of course, achieving ESG compliance isn’t straightforward. For a start, you need to stay on top of myriad regulations, standards and task forces. These include, the International Sustainability Standards Board, the UK Bribery Act, UK Modern Slavery Act, UK Green Claims Code, EU Mandatory Human Rights Due Diligence, the Task Force on Climate-related Financial Disclosures and the SEC ESG Task Force, to name a few.

To add even further complexity, regulatory reporting and compliance guidelines vary across sectors and schemes, and change frequently and rapidly. Many organisations are having to rely on constrained internal resources for subject matter expertise on ESG regulations, resulting in them being inadequately equipped, resourced and positioned to provide the support required of them.

Gathering the data needed to demonstrate compliance is also a challenge – it’s often qualitative and disparate. And it’s likely you’ll need to gather data and review processes beyond your own four walls.

So, how can you rest easy that the ESG statements you’re signing off are reliable and that you’re leading with integrity? Here are three key steps.

1. Build a forensically robust ESG compliance framework
   We often get called in by clients after the event – when organisations are looking to track the source of a problem that’s already happened. We take a forensic approach, capturing and analysing both structured and unstructured data, quantifying the extent of the issue, looking at the root cause – what went wrong, why and who was responsible. And that enables us to identify remediation steps and provide ongoing support – for example, in the event of regulatory investigation or a shareholder class action.
   
   It’s much better to take this forensic approach to compliance before you face a problem – to be proactive rather than reactive. With a forensically robust ESG compliance framework, you can be confident that you’re capturing relevant data, reporting it as accurately as possible, and your ESG credentials are rooted by fact rather than aspiration. It enables you to put in place adequate procedures for identifying and mitigating ESG risks, detecting potential misconduct and dealing with any issues that do arise.
   
   
2. Empower your second line of defence – your compliance officers
   Sounds good, but who is there in your business with skills to build such a framework? They may not thank me for saying it, but your compliance officers are ideally positioned to drive this.
   
   Yes, your compliance officers are more used to handling financial crime compliance. But they also have all the necessary skills to drive compliance in the ESG sphere. They’re used to raising awareness. They know how to collect data in a forensic manner. They know how to work under the watchful eye of a regulator. And they know how to test whether good governance has been embedded effectively within processes.
   
   Of course, this isn’t a task you can just throw the way of your compliance officers and expect them to get done overnight. They need to be empowered to put in place a robust ESG compliance framework. That means ensuring compliance officers with sufficient seniority and standing are involved, who can use their expertise and make their voice heard. And they should have regular access to the board, to report on the progress of designing and embedding the ESG compliance framework.
   
   
3. Break down silos between the E, S and G
   Your compliance officers are also well-placed to help break down silos between the E, the S and the G.
   
   Think of your current compliance structure. You likely have a host of functions all looking at different elements of ESG. Your sustainability team may be looking at environmental concerns, HR is focused on the social. Then there’s corporate social responsibility and procurement with a hand in all three areas. In a robust compliance network, these teams work in tandem, not in isolation.
   
   It’s equally impossible to separate the G. Strong governance means establishing appropriate rules, setting the right tone from the top and ensuring transparency and dialogue with regulators on social and environmental factors.
   
   Break down the silos between the E, S and G, and your first line of defence – your people – will have a clearer view of how they should behave, their accountability and how to identify a potential breach.

ESG compliance is not an option or a “nice to have”. You need confidence in what you’re reporting to regulators, investors and the public. To achieve that, it pays to look at ESG through a forensic lens. That’s how you can guard against fraud and misrepresentation.

The time is now to lead with integrity and build a sustainable, resilient and responsible organisation that considers the impact of its actions on society and the environment.

Please contact us if you’d like to discuss how you can design and embed a forensically robust ESG compliance structure.