The Tribune

As the focus on climate change steadily grows, and climbs to the top of the agenda for many governments and multinational organisations, so does the importance of corporate social responsibility (CSR). And, close to home, in the US there have been several reports that the Securities and Exchange Commission (SEC) has created a 22-person enforcement task force to examine “misconduct” related to environmental, social and governance (ESG) issues.

For the avoidance of doubt, CSR involves a company’s outlook, plans and actions towards balancing their negative and positive impacts on the economy and community. CSR is not only reserved for large corporations, as it can also be seen in smaller businesses through their culture of volunteerism and donating to local events or charities. In some industries and companies, CSR now includes diversity and human rights.

Meanwhile, ESG considerations for multinational companies are not optional in countries such as France. Reuters says: “ESG specifically refers to the three categories of factors on which an investor can evaluate a company for a potential investment. More recently, the focus on CSR has sharpened into environmental, social and corporate governance (ESG) considerations.” While there are no universal definitions for CSR and ESG, the above provides a general context and basis for the following propositions and opinions.

ESG issues are financial issues

The Financial Times writer Chris Flood, in his December 14, 2019 article entitled, ESG controversies wipe $500bn off the value of US companies, said: “ Fines worth at least $243bn have been paid by banks since the financial crisis, according to Keege, Bruyette & Wood, the brokerage. Bank of America has paid about $77bn in fines, while large penalties have also been imposed on Wells Fargo, Citigroup and Goldman Sachs.” The myth that ESG is a non-financial problem is a position that should be left in the past, as controversial stocks will be avoided by ESG-focused investors. This will directly impact portfolio performance, interest and the company’s bottom line.

ESG should be everyone’s business

Do not wait for a scandal or a financial hit to occur before a holistic approach is deployed to address ESG concerns. All stakeholders are essential to the designs, implementation and culture of ESG awareness. If boards, partnerships and top management are not keen on the idea, risk and compliance departments must take up the baton, articulate the benefits of ESG, and the need to embed it into the company’s culture. These conversations should not be held in silos, and must include responsible process owners, executives, board members and all environmental and social stakeholders.

Boards are their own enemy

Tensie Whela, a clinical professor of business and society, and the director of New York University’s Stern Centre for Sustainable Business, wrote in her Harvard Business Review article, Boards Are Obstructing ESG - at Their Own Peril: “Boards remain a stubborn outlier when it comes to embracing sustainability.” Moreover, a PricewaterhouseCoopers (PwC) study analysing almost 1,200 Fortune 100 board directors in 2018, based on Bloomberg biographies, found that just five percent of board members had expertise in the “S” of ESG. Moreover, only 29 percent had any type of ESG relevant expertise.

These results are startling and speak to gaps that require attention. Companies must strategically recruit ESG-aware and experienced board members to enhance their depth of conversations at the board level.

Conclusion

In short, there needs to be a convergence between ESG and business risk and compliance programmes. Although ESG has been a topic for decades, it appears that only governance was taken seriously. I suggest that as reputation risk increases in our increasingly transparent workspaces, environmental and social concerns should be given the same attention before it is too late.

NB: Derek Smith Jr is a compliance officer at a leading law firm in The Bahamas, and a former assistant vice-president, compliance and money laundering reporting officer (MLRO), at a local private bank. His professional career started at a ‘Big Four’ accounting firm and has spanned more than 15 years, including business risk management, compliance, internal audit, external audit and other accounting services. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS).