By Derek Smith Jr
As the focus on climate change steadily grows and climbs to the top of many governments’ and multinational organizations’ agendas globally, so does the importance of corporate social responsibility (CSR) and environmental, social and corporate governance (ESG) concerns. Closer to home, in the United States of America, there were several reports that the US Securities and Exchange Commission (SEC) had created a 22-person enforcement task force to examine misconduct related to environmental, social and governance issues.
For the avoidance of doubt, CSR involves a company’s outlook, plans and actions towards balancing their negative and positive impacts to the economy and community. CSR is not reserved for only large corporations as its strategies can also be seen in smaller businesses through their culture of volunteerism and donating to local events and charities. In some industries and organizations, CSR now includes diversity and human rights.
On the contrary, ESG considerations for multinational organizations are not optional in many countries — for example, France in the European Union. For clarity, Thomason Reuters notes: “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 considerations.”
Although there are no universal definitions for CSR and ESG, the above provides a general context and basis for the below propositions and opinions regarding ESG.
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”, noted: “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 fine while large penalties have also been imposed on Wells Fargo, Citigroup and Goldman Sachs.” The myth that ESG is only a non-financial problem is a position that should be left in the past as controversial stocks would be avoided by ESG-focused investors. This would 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 c-suite members are not keen to the idea, both risk and compliance functions must take up the baton and articulate the benefits of ESG awareness and the need to embed ESG into the company’s culture. These conversations should not be siloed and should 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 the NYU Stern Center for Sustainable Business, claimed 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 PWC study analyzing almost 1,200 Fortune 100 board directors in 2018 based on Bloomberg bios found that only 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.
In short, there needs to be a convergence between ESG and business risk and compliance programs. Although ESG has been a topic for decades, it appears that only governance was taken seriously. I suggest as reputation risk increases in our ever increasingly transparent workspaces — environmental and social concerns should be given the same attention before it’s too late.
Derek Smith Jr is a Top 40 Under 40 leader; the compliance officer at Higgs & Johnson, a leading law firm in The Bahamas; and the former assistant vice president, Compliance & Money Laundering Reporting Officer (MLRO), at an international private bank. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and an executive member of the Bahamas Association of Compliance Officers.