In July, The Economist provided a scathing diagnosis of the problems with many of the current approaches to environmental, social, and governance (ESG) investing criteria. It proposed doing away with the “S” and “G” to focus on the “E”—and to further reduce the “E” to emissions rather than the environment more broadly.


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This would be an extreme approach—one that would not solve the core issues. The current ESG criteria are far from perfect, but the solution is to invest in understanding the complexities of the political, social, and broader environments and devise appropriate mitigations alongside a transparent reporting framework for ESG risks.

A large part of what makes ESG the “unholy mess” The Economist describes is the interconnected nature of each of its three elements. Indeed, corruption and poor governance often result in negative environmental impacts; for example, through falsification of environmental progress measures or driving communities to environmentally damaging practices to make ends meet.

A report from Transparency International (TI) UK sets out the case for why business integrity and corruption should be considered as core issues in the context of impact investing.

Terminology and impact washing

There is a lot of debate surrounding the terminology used in the context of ESG, impact, and sustainable and responsible investment. Ultimately, we can distinguish two types of investors: those mostly focusing on risk management and those actively seeking to make positive impacts beyond financial returns.

The ESG investors that are in risk management are focused on making sure no ESG-related harm is done as a result of their investment activity. This requires investors to fully understand the impact the businesses they support have on their communities and ecosystems and put in place mitigations where required, engaging in remedial actions such as carbon offsetting or refraining from financing some types of businesses.

Impact investors are focused on development impact, which is seeking to go beyond “doing no harm” and actively working to improve ESG measures alongside generating a financial return. This can include improved labor standards, diversity and inclusion in business, or biodiversity preservation.

Business integrity considerations are relevant to both types of investors.

In October, the U.K.’s Advertising Standards Authority reprimanded HSBC for misleading consumers with its green posters, asking it to ensure “future marketing communications featuring environmental claims were adequately qualified and didn’t omit material information about its contribution to carbon dioxide and greenhouse gas emissions.”

The posters, released ahead of COP26 in 2021, stated HSBC will “‘provide up to $1 trillion in financing and investment globally to help our clients transition to net zero’” and that the bank is “‘helping to plant two million trees, which will lock in 1.25 million tons of carbon over their lifetime,’” the regulator said. The campaign failed to acknowledge the significant financing of fossil fuel companies and other carbon-intensive industries by the bank.

In 2021, the U.S. Securities and Exchange Commission (SEC) launched a dedicated task force on climate and ESG issues, initially focusing on identifying material gaps or misstatements in issuers’ disclosure of climate risks. In May, the agency issued a $1.5 million fine to BNY Mellon for misstating and omitting information about its mutual funds’ ESG investment considerations. BNY Mellon allegedly stated all investments in the funds had undergone an ESG quality review when nearly a quarter of investments in one mutual fund lacked an ESG quality review score at the time of the investment.

Why business integrity matters

Corruption can undermine both the development impact and financial goals investors are attempting to achieve.

TI UK’s partners have shared various examples that demonstrate how corruption and lack of business integrity can affect the labor, human rights, and environment footprints of businesses. In one case, a company was aiming to ensure jobs in a factory were distributed fairly among the local population, engaging the services of a local man to carry out recruitment. Over time, however, it became clear he had been requesting monetary bribes from men and in-kind payments from women in return for a job at the factory.

In another case, a company’s headquarters noticed a spike in the number of health and safety incidents in a factory and went to investigate. It soon emerged a large portion of the workforce was illiterate. The health and safety training and notices had been designed with the assumption the workforce could read. And this had been a reasonable assumption, given all workers were required to present an education certificate upon being hired. As such, corruption within the hiring processes and/or educational system had led to real consequences for workers at these factories.

One investor shared their experience of having invested in a hospital. In addition to a financial return, they were aiming to bring about improved health outcomes. Post-investment, they discovered doctors were receiving kickbacks from pharmaceutical companies. This can have serious consequences for patients, such as not receiving the right medication for their conditions.

The investor had taken a proactive approach to business integrity, which helped to identify the issue, and they subsequently worked to change the corrupt practices at the hospital. This ultimately led to the hospital providing better care to underserved populations. In other words, better management of business integrity led to better development impact.

The serious impact of corruption in relation to ESG issues is also evident from enforcement cases. The SEC charged Brazilian mining company Vale with misleading investors about its dam safety audits prior to the 2015 collapse of its Brumadinho dam, which killed 270 people. The agency noted Vale “manipulated multiple dam safety audits; obtained numerous fraudulent stability certificates; and regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its [ESG] disclosures.”

The state of play

Impact investors are often first movers in markets others deem too risky. However, there are improvements to be made as to how business integrity and corruption are considered and incorporated within impact investing.

TI UK’s report found there is no common anti-corruption framework, standards, or guidance impact investors can follow. Investors consider business integrity in different ways and ask for different action and reporting of their investees. This leads to inconsistency and poses an administrative burden on investees as they try to manage various differing requests.

Anti-corruption efforts typically lack energy or enthusiasm. Anti-corruption is often seen as a chore, with sometimes only minimal compliance being undertaken before investment and when material events occur. A proactive approach to the identification and management of risks, on the other hand, would help reduce corruption and contribute to business resilience through more effective ESG and financial risk management.

For example, a proactive business integrity approach would include a thorough political landscape assessment, including the likelihood of demands for bribes, arbitrary enforcement of regulations, and the introduction of sanctions.

Impact investors generally do not count improvements in business integrity as development impact. Therefore, if a company has a significant effect on reducing systemic bribery within a sector, it is unlikely impact investors are even picking up on this improvement.

What’s next?

The ESG world is moving fast; both interest in ESG and sustainability, as well as critiques of it, are on the rise.

On the impact investing and business integrity side, TI UK and other impact investors, including British International Investment, are starting to work on a common framework or guidance that addresses business integrity for impact investors or development finance institutions. TI UK will provide guidance on what proactive steps businesses should take to identify, assess, and manage business integrity risks in the context of ESG risk management within different aspects of their operations.

Alongside this, TI UK will devise a framework for ESG and impact investors to monitor business integrity risks and performance of their portfolios and bring together impact investors in a biannual forum to discuss business integrity and impact investing challenges, approaches, measurement, and innovations.

More broadly, investor and anti-corruption communities should collaborate more. The anti-corruption community can help investors achieve their development and financial goals, while the investor community can help to amplify the impact of integrity work as companies pay attention to what their investors say. What investors ask of their investee companies can have a real effect on how the companies behave.

Ingrida Kerusauskaite is former head of business integrity at Transparency International UK. Rory Donaldson is program manager, business integrity at Transparency International UK.

The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.