Most of us would agree compliance and ethics has such an overwhelmingly large scope—to prevent, detect, and deter all illegal and unethical organizational conduct—that expansion of the role is, well, risky. However, there are many proponents of adding environmental, social, and governance (ESG) to compliance’s duties.

ESG is a hot topic. It has rapidly expanded from solely a concern of publicly traded companies to a key global consideration.

Compliance Week’s “Inside the Mind of the CCO” survey asked participants whether their organizations would fund and resource a new function or expect ESG to be picked up by existing roles in the company. A slight majority of respondents (52 percent) said their organizations did not already have or intend to hire a separate sustainability lead.

These results track with data from KPMG’s 2022 Survey of Sustainability Reporting, which found 45 percent of the world’s largest companies have ESG representation “at leadership level.”

Of those hiring a dedicated sustainability function, CW survey respondents were overwhelmingly optimistic (90 percent) there would not be friction between the new hire and compliance. Some take a different view.

“Given the newness and speed with which ESG as its own subject has taken off, and the lack of clarity on what the future will bring, this leads to uncertainty, friction, and even outright disagreement about what to do and how to do it,” said Jay Cohen, senior advisor at Compliance Systems Legal Group.

What issues could arise? Survey respondents that felt there could be friction expressed the following concerns:

  • ESG is like compliance and ethics in nature and role clarity will be important to avoid inefficiencies.
  • ESG is used by many companies as a marketing tool, which can create friction as marketing or investor relations departments are often inclined to emphasize the positive and minimize or omit the negative.
  • Resource allocation may become an issue, likely putting the compliance function in competition for limited headcount/budget.
  • A new ESG function would add work to other group functions.

Many companies are in the early stages of establishing their ESG program. About 24 percent of respondents said their organizations were preparing their inaugural ESG report when asked steps they were taking to comply with the Securities and Exchange Commission’s proposed climate-related disclosure rule. Compliance is leading those efforts in a minority of cases (8 percent), instead more frequently supporting another department (37 percent).

Gwen Hassan, interim compliance officer and former managing counsel of global compliance and ethics at CNH Industrial, said at CNH sustainability was a separate department that reported to a cross-functional committee including all corporate functions (finance, human resources, risk, legal, compliance, manufacturing, etc.). She found this “a good place to start for a relatively immature program.”

Advantages included the understanding sustainability was everyone’s job. Challenges included not having an ultimate, accountable leader for escalation of issues and getting necessary funding.

ESG is also in the developmental stages at Calumet Specialty Products Partners. Dave Bolton, director of internal audit (CAE) and corporate compliance officer at the firm, shared the marketing department currently issues the company’s annual sustainability report.

One key issue: The report is used as a company marketing tool, so it’s initially biased toward putting on a positive slant. Bolton partners with marketing to ensure the report is accurate and supportable. For others in similar situations, he recommended compliance professionals “ensure marketing understands that any statements made need to be supported by underlying data and need controls in place to ensure that data is accurate, complete, controlled, and documented.”

“Given the newness and speed with which ESG as its own subject has taken off, and the lack of clarity on what the future will bring, this leads to uncertainty, friction, and even outright disagreement about what to do and how to do it.”

Jay Cohen, Senior Advisor, Compliance Systems Legal Group

Long term, Hassan suggested designating an executive with clearly defined responsibility for the program. She agreed with Mallory Thomas, a partner with Baker Tilly’s risk advisory practice, who recommended a structure with a cross-functional team that has responsibility for the ESG activities/strategy execution, risk remediation, systems and associated data, and reporting. Thomas stressed the importance of using a collaborative approach and identifying areas of overlap to avoid duplication of effort.

Such an approach has been taken by Tenneco. Kim Yapchai, senior vice president, chief ESG officer at the automotive components manufacturer, reports directly to the CEO. Tenneco also has a cross-functional ESG council and subcommittees.

“The program management and system is centralized so that we drive to a common goal and use a standard management system to measure and track progress,” she said.

Each business group defines and budgets for its own projects. “Since ESG is so embedded in operations, we found it difficult to take a completely centralized approach,” Yapchai added.

“The corporate ESG team partners with the business groups on everything from prioritizing projects to customer conversations,” she said. There is no role friction since both compliance and ESG report to Yapchai, and other stakeholders (e.g., HR; environment, health, and safety; and the corporate secretary) contribute collaboratively to the report as well.

When considering organizational design, Thomas emphasized a key consideration regarding ESG structure is the enterprise strategy. What is its purpose? Regulatory and reporting requirements? Organizational size and impact?

“The importance of these will drive the structure and ownership within the organization,” she said. As organizations build more robust ESG strategies, “A separate function will likely evolve but will still require working across the organization to be successful in executing ESG activities,” she continued. While ESG leaders might drive the strategy and activities, compliance will be needed to assist with the identification of information, data, and reporting.

Bolton anticipates ESG becoming its own function because of a need for people trained in ESG and reporting/frameworks/standards. Citing multiple frameworks, including from the Sustainability Accounting Standards Board, Task Force on Climate-Related Financial Disclosures, and Global Reporting Initiative, he emphasized, “This is specialized and needs to be handled by experts.”

Hassan envisions a possible future with a corporate integrity department, “under which we would find ethics, compliance, and ESG functions all housed.”

For Yapchai, ESG at Tenneco is its own function and separate cost center and will always have a connection to compliance.

“Companies can vary significantly in their structures and how they operate,” she said. “Each company should examine this and find what works best for them.”

Nakis Urfi, product compliance officer and ESG lead at Babylon Health, agreed.

“I just came from a healthcare conference where a large hospital system mentioned they have 19 different departments on their ESG committee,” he said. With that many potential stakeholders, one thing is apparent: ESG might or might not grow to be a separate function but accountability for leading the program must be clear.