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Well Done Is Better Than Well Said – The Mutual Benefit Of Integrating ESG With Compliance: Part Two

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This is the second of a two-part series highlighting how companies and other organizations can execute their ESG strategies successfully by integrating compliance as a value-added function, so that their ESG actions match their words in an ethical and compliant manner.

PART TWO: WELL DONE

In executing an ESG strategy successfully, Ben Franklin’s adage of “well done is better than well said” is a more appropriate adage than “do well by doing good.” But how can a company truly demonstrate to its long-term stakeholders (the communities in which the company serves, customers, society overall, as well as its employees) that its ESG strategy has been and will continue to be “well done”? The answer is through meaningful investments in and focus on, the often-forgotten component of ESG: the “G” for governance.

“G” as in Good Governance

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Corporate governance indicates the rules, procedures, and ethical standards which corporations, non-profits, and other organizations must follow to fulfill environmental and social responsibilities. Indeed, “G” is the foundation of ESG.

With heightened scrutiny and active challenges by shareholders, governments, and the public, corporate conduct is as important as the financial results it produces. For this reason, regulators and activist investors criticize companies for what they say publicly about the environment (E) and society (S), because it is quite inconsistent with what they actually do. Without good governance (or “G”), there cannot be an effective means to meet the stated and expected goals to protect the environment (“E”) and promote the well-being of society (“S”).

“While we may not be able to control all that happens to us, we can control what happens inside us”

ESG standards present companies and the people who run them, with the opportunity to internally build a culture of ethics and compliance, mitigate risk, deliver profitability, all while building shareholder, employee, and consumer trust. Governance promotes the long-term stakeholders which an ESG strategy is intended to benefit. The right ethical considerations – including acting upon corporate commitments (not just stating them for profit’s sake) must underpin every decision that a company makes, regardless of size or industry.

The Compliance function and Chief Compliance Officer, as owner of a company’s Code of Conduct and Ethics, are the cornerstone of the firm’s corporate culture and system of internal controls to meet regulatory and stakeholder expectations. By partnering with a company’s board of directors, Compliance and the board can hold management accountable to execute tangibly against ESG commitments, work with Human Resources to balance performance merit with diversity, equity, and inclusion standards, and provide the data governance to enable financial and data integrity behind the ESG disclosures regulators and climate proponents expect.

Good governance is compulsory for a company’s board of directors because while it has a fiduciary duty of loyalty to its shareholders through management to maximize share price and profits, it must concurrently fulfil a fiduciary duty of care to longer-term stakeholders including communities, society, and employees to demonstrate that it properly governs and oversees the conduct of a company’s management that they are complying with all applicable laws, regulations, and ethical standards including to meet proposed and evolving ESG disclosures, stated commitments, and requirements.

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Compliance is also expected to foster an environment of trust among its employees and customers so that complaints can be raised, and issues of integrity can be reviewed. From an ESG perspective, if employees raise concerns about workplace harassment or discrimination counter to a corporate pronouncement to achieve diversity, equity, and inclusion, then these employees must not fear confidentially without fear, witness, and especially retaliation. The board must be apprised of these integrity issues to oversee actual corrective action meeting the needs of employees, customers, and the community it serves in a diverse, equitable, and inclusive manner.

“By failing to prepare, you are preparing to fail”

ESG is an incredibly broad umbrella of long-term environmental and social priorities against short-term profit maximization today. The expectations placed continuously on companies by competing stakeholders to achieve and exceed these priorities is tremendous. With the previously mentioned fiduciary duties entrusted to a company’s board of directors’ fiduciary duties, the board must be educated and trained to fulfil these duties. The Chief Compliance Officer is best suited to help the board achieve these objectives – if empowered – by enabling a compliance program which is well designed, and adequately resourced so that the company can demonstrate to the U.S. Department of Justice, SEC, and other U.S. and overseas regulators that the program is “working in practice”. For example, the CCO should provide compliance training to the CEO, the C-suite, and the board of key regulatory requirements such as ESG disclosure requirements based on the execution of a robust compliance risk assessment, monitoring, testing, and reporting program. A strong partnership between the board and the Chief Compliance Officer will strengthen and enable “good governance” or the “G” in ESG so that the company’s ESG commitments can be fulfilled.

Source: Forbes

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