Environmental, Sustainability and Governance (ESG) is a hot topic this year as more and more financial institutions require ESG reports from publicly traded companies. Most recently, president-elect Biden has selected a number of climate experts for his transition team. John Kerry has been appointed to lead Climate Change for Biden and Larry Fink, a big climate advocate and CEO of Blackrock, is likely to receive a position of power as well. Biden’s pro-business and pro-climate team will add pressure on corporations to align with the climate reality and improve their ESG tracking and reporting. Europe has already taken the lead on this with its approach to validating “sustainable investment” products and it is quite possible that the US tags along on these efforts.
In 2019 – which feels like ages ago – according to a report by the Global Sustainable Investment Alliance, sustainable investment assets stood at $30.7 trillion at the start of 2018 across five major markets—Europe, the United States, Canada, Japan, and Australia and New Zealand—a 34 percent increase in two years. A new report is due out in 2021 and I would suspect the pace of increase may have accelerated.
Pension funds across the board are increasing pressure on companies to report ESG issues and more and more companies are responding. GM recently announced acceleration of its electrification plans, mining industry CEOs are putting sustainability front and centre, and even oil and gas companies are committing to being carbon neutral. At the recent FT Mining Summit,
The sentiment of Mike Henry’s speech was welcomed by Thomas Schulz, who elaborated that sustainability and social best practices are no longer seen as costs to business but rather as requirement and, crucially, a business opportunity for the industry. “In short,” Thomas explained, “sustainability gives customers an opportunity to earn more money. And it doesn’t matter if it is by avoiding costs, risks or through more or better output – there is a commercial impact across all of these areas. At the Summit it was obvious that the industry is pretty much united in seeing this.”
These headlines on the centrality of sustainability to operations are encouraging and headed in the right direction, but it is critical that investors examine and evaluate these bold statements closely. The foundation of operational excellence is compliance to laws, regulations and standards. If your organization is not proactively tracking and managing its obligations it is very likely that surprises will occur. These surprises will inevitably contradict the environmentally progressive and sustainable image the CEO, sustainability team and public relations department are trying to project. A robust compliance program is absolutely critical to ensure ESG and operations are aligned. This article outlines 10 critical compliance areas for ESG programs. The proposed compliance programs span everything from HR to product liability to corporate behaviour – affecting nearly every part of an organization. The only way to tackle such a broad set of risk is to implement a robust compliance system that methodically identifies all of your obligations and creates control measure and systems to reduce non-compliance risk.
Too often large corporate goals get lost at the operational level and small incidents such as spills, worker injuries, or fines can imperil the public image and the ESG targets of the overall company. Small non-compliance issues at the operational level also take up valuable time of staff who may otherwise be able to focus on projects to move the needle on ESG. In short, compliance is a critical first step towards sustainability. If you hope to meet the increasing pressure from investors and set lofty goals for your organization I suggest you focus first on identifying all of your obligations (including ESG) and coming into compliance with as many of them as possible.