The past several years have seen a flurry of activity on the environmental, social and corporate governance (ESG) front.
A hodgepodge of scattered, fast-paced ESG developments across the public and private sectors puts corporate compliance teams in a difficult position, especially as some companies are still reeling from staff and resource cuts caused by the pandemic.
The European Union has proposed and adopted a string of directives and regulations requiring ESG reporting and sustainability disclosures for various industries and granting additional rights to shareholders. Although delayed until late 2021, the EU still plans to publish a comprehensive proposal for union-wide legislation requiring human rights and environmental due diligence in supply chains.
On this side of the Atlantic, President Biden rejoined the Paris Agreement and signed a series of climate change, racial equality and social justice executive orders. The U.S. Securities and Exchange Commission is considering rules requiring ESG disclosures for public companies. NASDAQ has proposed requiring its listed companies to disclose corporate board diversity statistics. The Commodity Futures Trading Commission has formed the Climate Risk Unit to understand, price and address “climate-related risk and transitioning to a low-carbon economy.” The Department of Labor has reversed course and announced that it will not enforce the Trump administration’s rule that prohibited the consideration of ESG factors by sponsors of retirement plan investments. Thirty-seven states and the District of Columbia now permit for-profit public benefit or social purpose corporations that promote ESG values and other societal benefits in addition to pursuing shareholders’ financial interests.
Companies can prepare for these new requirements by implementing a framework of ESG policies and setting the right tone at the top for championing ESG factors. Those leading ESG efforts should work across departments to map out the company’s ESG risk profile. At a minimum, companies can use existing enterprise controls and reporting capabilities to capture data on ESG risk factors such as human rights and sustainability.
For the sake of efficiency, anti-corruption and other regulatory compliance processes can provide a starting point for addressing ESG risks, given that there is often considerable overlap. Some companies, for example, modify their existing third party due diligence questionnaires to include ESG topics. Companies should also monitor ESG developments to make sure they are prepared and not caught by surprise by policy and regulatory developments.
Companies should not treat ESG as a passing fad. Activist consumers, investors, governments, legislators, regulators and civil society will no longer accept as a legitimate defense Milton Friedman’s notion that business’s sole responsibility is to increase profits. The private sector must become more intentional about its ESG efforts and seek to transform them from a pure cost into a corporate and reputational benefit.