Companies are eager to establish their ESG programs, and it’s not hard to understand why. But as a trio of experts from FTI Consulting detail, there are many reasons why it’s wise to take some measured steps before diving into the deep end.
FTI Consulting’s Beth Junell, Brian Ong and Edith Wong co-authored this article.
Hardly a day goes by without headlines proclaiming the importance of ESG programs. The pervasive influence of ESG initiatives is shaping investors’ strategies, altering customer behaviors and prompting companies to reimagine how they approach business. In fact, global sustainable fund assets reached $2.7 trillion by the end of 2021; and in the U.S. alone, ESG fund assets under management approached nearly $360 billion.
Boards and C-suites that set lofty targets for ending poverty, tackling social inequities and protecting the planet without proper governance carry significant regulatory, financial and reputational and legal risks. Responsibility for implementing the ESG strategy set forth by leadership may fall on compliance teams to lead the development, implementation, tracking, reporting and disclosure of sustainable ESG strategies.
But where do compliance teams start? What questions should they be asking?
Six considerations for compliance teams to operationalize ESG programs
Sustainable ESG strategies must be rooted in integrity, transparency and accountability. Effective compliance functions ensure adherence to applicable regulations, mitigate compliance and fraud risks and facilitate accurate operational and financial processes. As regulatory scrutiny of ESG programs expands, so too does the scope of legal, compliance and reporting responsibilities.
In March 2021, the U.S. Securities and Exchange Commission (SEC) announced the creation of a Climate and ESG Task Force in the Division of Enforcement, the purpose of which is to identify ESG-related misconduct. Two recent enforcement actions highlight the SEC’s focus on alleged violations of ESG-related disclosure and representation rules. In September 2021, Activision Blizzard announced that it was being investigated by the SEC over “disclosures regarding employment matters and related issues” following allegations of sexual misconduct and discrimination. In April 2022, the SEC charged Vale, one of the world’s largest iron ore producers, with “making false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam” in Brazil.
At the outset of developing an ESG program, compliance teams need to work closely with other internal stakeholders to design, audit, remediate and report on the information and indicators underlying ESG initiatives. The internal stakeholder group should identify the key ESG-related issues that represent an organization’s material risks and opportunities. Because the material risks and opportunities will cut across the organization, the internal stakeholder group will likely be cross-functional, including senior management, operations, supply chain, legal and compliance, etc.
Once the organization has identified its internal working group, it’s critical to consider the following, all of which are well-understood by compliance and legal teams within organizations:
- Risk assessments. Risk assessments will determine the relative significance of specific issues relevant to each organization. The materiality of ESG topics is different organization to organization. It is fundamental to ensure that companies have risk assessment processes in place to properly evaluate the risks — and opportunities.
- Jurisdictional implications. Regulatory changes are always evolving and, in some cases, swiftly. It’s important to understand how to navigate and respond to multi-jurisdictional regulatory changes to avoid non-compliance and other punitive measures. This can be particularly challenging for companies that operate globally.
- Identifying potential gaps. What are the deficiencies in a company’s sustainability report that could create risk under new disclosure requirements? Anticipating potential gaps of exposure as disclosure requirements change, with the support of automation and artificial intelligence, will fortify compliance capabilities.
- Data sources. ESG will have different definitions for companies across different industries. Companies need to determine the relevant key performance indicators that will best measure the ESG elements that are important to their business environment and invest in the necessary data infrastructure to develop, collect and aggregate data. Cultivating the right data sources for reporting requirements will ensure that disclosures in regulatory filings and corporate sustainability reports are robust and accurate.
- Establishing employee grievance mechanisms. ESG programs, by nature, deal with sensitive topics that can provoke a range of employee reactions. As such, compliance teams need to ensure that there are employee grievance mechanisms in place, along with clearly defined actions, that show what will occur on reported complaints.
- Events of non-compliance. While teams do their utmost to ensure rigorous compliance, there may be instances where an unexpected issue creates non-compliance. To be one step ahead, compliance teams must always have a remediation plan in place to prepare for these contingencies.
The growing importance of ESG issues is clear. Recent enforcement action by the SEC indicates that regulatory agencies will scrutinize ESG disclosures more rigorously and comprehensively. Designing an infrastructure to enable, monitor and report on ESG programs may be costly upfront. However, if done so effectively with a focus on intent and clarity, aligning legal and compliance with an organization’s strategy, purpose and values, can reduce costs, avoid business interruption and develop a long-term competitive advantage.
Beth Junell is senior managing director at FTI Consulting. She specializes in multi-disciplinary cross-border matters involving fraud and corruption risk management, investigations and compliance programs.
Brian Ong is the global leader of the Anti-Corruption Investigations & Compliance practice and the co-Leader of the Forensic Accounting & Advisory Service.
Edith Wong is a managing director in the Forensic & Litigation Consulting segment at FTI Consulting. She has more than 18 years of experience.