Compliance ‘well-situated’ to handle increasing ESG scrutiny

The Securities and Exchange Commission has made it abundantly clear that it will likely require publicly traded companies to disclose risks associated with climate change and ESG. The agency has launched a number of initiatives and created new positions that telegraph this intention. Companies will have to be careful in how they describe these ESG-related risks, both to avoid lawsuits from disgruntled investors when generic wording or lofty goals don’t meet reality and to avoid describing ESG initiatives as more effective than they really are, also known as greenwashing.

How and where do ethics and compliance play into ESG?

“I think there’s going to be growing connections between the ESG world and the compliance and ethics world, because I don’t think you can do one without the other.”

Stuart Altman, EVP and Chief Compliance Officer, ContourGlobal

For one, strong ethics and compliance programs are already deeply involved in governance issues, monitoring risks arising in areas including antitrust, conflicts of interest, anti-corruption, and privacy. By definition, a company that monitors and properly addresses these risks is displaying good corporate governance. The “G” in ESG covers more than these risks, of course, but compliance can also provide expert guidance in managing them.

On social issues, compliance supports an ethical workplace by monitoring supply chain risks for possible links to human trafficking and promoting sustainable and ethical sourcing of goods and services. Whistleblower hotlines provide an appropriate place within the company for workers to report workplace concerns, anonymously if necessary. Compliance also plays a key role in supporting a workplace culture that promotes ethics and integrity in all business interactions.

On environmental initiatives, compliance’s role is more muted. Companies might not be asking compliance to take the lead on developing plans to reduce a firm’s carbon footprint or convert to renewable energy. But after environmental goals are set, compliance might be asked to play a role in assessing how close a company is to meeting its targets, and perhaps, vet company data for relevance and accuracy.

“I think there’s going to be growing connections between the ESG world and the compliance and ethics world, because I don’t think you can do one without the other,” said Stuart Altman, executive vice president and chief compliance officer at ContourGlobal, during a panel at Compliance Week’s 2021 National Conference. ContourGlobal manages and develops wholesale power generation contracts.

“Ultimately, what we’re seeing is a coming together of the nonfinancial controls worlds within organizations—compliance and ethics, ESG, HR, and anti-trafficking,” said Altman, who was previously global CCO at the Las Vegas Sands Corp.

Compliance clients of advisory firm StoneTurn have a lot of questions about how to handle requests to manage ESG initiatives, according to Valerie Charles, an attorney and StoneTurn partner.

“We’re seeing a trend of CCOs getting the responsibility for ESG,” Charles said during the panel. “I’m getting mixed reviews. I’ve had some people say, ‘This is so far out of my wheelhouse, to think about the carbon footprint. How do I know about this? Now I’ve got to get an environmental consulting firm.’”

“Others say this is multidisciplinary. … If they’ve operationalized their run-of-the-mill compliance program, then this is just one additional piece,” she said. Compliance is “well-situated to handle and codify ESG initiatives.”

How ESG and compliance work together at FedEx

FedEx Corp. has been setting sustainability goals and measuring its progress for 13 years, said Mitch Jackson, the company’s staff vice president of environmental affairs and chief sustainability officer. For the first 12 years, progress was measured in a Global Citizenship Report. This year, the report’s title was changed to ESG to better reflect the goals it is monitoring and measuring, Jackson said.

Issued last week, FedEx’s 2021 ESG Report noted the company’s progress on environmental goals like achieving carbon neutral operations and having 100 percent electric vehicles, both by 2040; social aspirations like nurturing a workplace that is safe, positive, and performance-driven with a workforce that is ethical and diverse; and governance of the risks that are “prioritized based on likely financial impact, probability of occurrence within the next fiscal year, and amount of residual risk remaining to the organization.”

“This isn’t a marketing document. It shows what we believe and says, ‘Here’s how we’re performing,’” Jackson said. “We have long realized (ESG) is not a nice-to-have—it is an integral part of our business operations and has become a necessary part of disclosure.”

At FedEx, Jackson and CCO Justin Ross report up through the general counsel. Much of their work is related, particularly in terms of social and governance issues.

“It’s a partnership,” Ross said recently, describing the relationship between compliance and ESG at FedEx. “One that is growing.”

Compliance is already heavily involved in governance issues, providing training in areas such as code of conduct, anti-corruption, conflicts of interest, and monitoring compliance-related risks. On social issues, compliance is involved in ethics and culture initiatives; manages third-party compliance and reputational risk; and oversees the company’s privacy programs. Compliance is also involved in the development of the content of the ESG report, Ross said.

Compliance and sustainability permeate the organization, Ross said, and the priorities of each often overlap.

“Compliance teams are in a good position to push ESG initiatives because of the overlap in goals and initiatives,” Ross said. “Because both compliance and ESG impact all areas of the company, compliance teams can help push ESG initiatives in much the same way they push compliance initiatives.”

ESG the buzzword of 2021

ESG initiatives are in place at 88 percent of publicly traded companies in the United States, the United Kingdom, France, and Germany, according to a NAVEX Global survey of 1,250 management and senior-level executives released earlier this year. But there are wide variations in how far along those plans are. And while the United Kingdom announced last year it will require companies to report the material impact they experience by climate change, American regulators have so far not mandated ESG disclosures or even suggested which metrics companies should measure their ESG performance against.

“Compliance teams are in a good position to push ESG initiatives because of the overlap in goals and initiatives. Because both compliance and ESG impact all areas of the company, compliance teams can help push ESG initiatives in much the same way they push compliance initiatives.”

Justin Ross, Chief Compliance Officer, FedEx

As a result, American companies have lagged behind their European counterparts in pursuing ESG initiatives and formal program implementation, according to the NAVEX Global report.

“A lot of companies don’t have that connection between compliance and ethics and ESG,” said Altman. Some company executives will say to their compliance departments, “Hey, here’s where we were marked down on this ESG scorecard or metric. Go fix it for next year.”

“Obviously, that’s not the ideal approach,” Altman said. “I think the ethics piece of compliance is often undersold. Ethics is more than just, ‘Don’t break the law.’ It’s how you would want people to behave in their ordinary lives. That includes ESG factors.”