Companies wanting to prioritize ESG compliance face headwinds integrating ESG into their compliance programs

30 August 2022 – ESG (environmental, social and governance) has risen to become a top compliance concern for companies around the world and across most industry sectors — yet the evidence suggests that many are struggling to embed ESG into their existing compliance programs.

According to a survey of 600 multinational companies, meeting ESG challenges will require improved knowledge of ESG concerns, greater company-wide engagement, more oversight of risks presented by third parties, and continued vigilance against bribery and corruption along the supply chain. 

Hogan Lovells’ Navigating Deep Waters survey, released today, tracks the thinking of experienced compliance professionals who are integrating the social and governance aspects of ESG into existing compliance programs. We surveyed professionals at large multinational companies across the United States, Europe, Asia and Brazil, in sectors including tech and telecoms, lifestyle and consumer, diversified industrials, energy, automotive/transportation, and life sciences. 

Stephanie Yonekura, Global Head of Hogan Lovells’ Investigations, White Collar and Fraud practice (IWCF), said: “Businesses are looking across their organizations to address their impact on both the environment and society. As they face the challenge of navigating increasingly heightened ESG expectations, companies can use existing AB&C compliance measures to assist ESG risk management. The two issues are inextricably linked and companies do not need to – and should not – prioritize one to the detriment of the other. Our survey provides an overview of where businesses are in terms of developing mature ESG programs - and where there are risks still to be addressed. For example, we identified third-party risk as one area that should be at the forefront of companies’ ESG compliance strategies.”

ESG worries pick up among multinationals 

Until recently, the primary external risks for many companies have been around anti-bribery and corruption (AB&C), yet with growing interest in ESG, their top worries have shifted. Of the companies surveyed, 82% told us that ESG risk is their current and future priority for business strategy. 

Liam Naidoo, IWCF partner in London, commented: “It is clear that companies want to do the right thing when it comes to ESG. However it can be difficult to navigate the complex maze of new legal requirements and reputational risks, particularly when it comes to how supply chain and human rights obligations interplay with existing ethical obligations such as anti-corruption. Compliance officers and in-house lawyers who already have experience in white-collar compliance will play an increasingly important role in respect to ESG programmes.”

While companies recognize the importance of ESG compliance, they also struggle to identify an approach that encompasses all of the issues at play. Less than half of the companies surveyed (42%) report having a mature ESG program in place – defined as a program with ESG ownership assigned outside of leadership, ESG culture fully embedded throughout the business, and full implementation of ESG in strategic and operational decision-making, including AB&C programs.

Compliance officers cited the following top concerns: 

  • 82% said that ESG was not embedded in existing risk practices
  • 78% reported a lack of ESG knowledge and skills 
  • 57% cited a lack of engagement

Economic downturn reframes third-party risk 

As economic concerns take center stage, those overseeing compliance face additional challenges. For example, the deepening supply chain crisis has companies reassessing supplier relationships. Yet only 29% of companies report concerns about ESG risks posed by third parties. These risks can range from ‘greenwashing’ to human rights violations, such as unacceptable working conditions at factories in the company’s supply chain. Where responsibility for licenses, permits, contracts, oversight or supervision lie with a third party, the actions of a supplier could legally bind the organization on whose behalf they act. 

Strikingly, just one percent perceive third-party relationships as posing a great deal of ESG compliance risk to their business right now. However, 22% of leaders see third-party risk increasing in the next 12 months, 34% in the next 18 months and 18% in the next 24 months.

Shelita Stewart, IWCF partner in Washington, D.C., added: “With ESG regulatory investigations on the rise and increased public pressure from internal and external corporate stakeholders, it is important that organizations evaluate business decisions through an ESG lens to reinforce the company’s standards for conducting business and proactively mitigate ESG risks.” 

Corruption and ESG risks dampen companies’ outlook 

Corruption – in all its forms – is one of the biggest challenges of ESG compliance and a truly material problem for investors, especially in times of crisis. According to respondents:

  • 74% of respondents cited the countries in which they [or third parties] operate, and associated corruption risk, as a major concern when it comes to ESG compliance.
  • Yet 62% say there is a failure to appreciate the clear links between AB&C violations and ESG abuses. 

Ranging from bribery of public officials, embezzlement, nepotism and lax or absent control structures, corruption is capable of undermining all pillars of ESG. Interestingly, 81% of compliance leaders believe integrated programs will positively impact their reputation.

Crispin Rapinet, IWCF partner in London, commented: “Effective ESG compliance implementation requires full alignment with an effective anti-bribery and corruption strategy. Collaboration between the relevant compliance experts is the best way to ensure both programs are effective and ESG training can help inform employees where risks lie and how to mitigate them to avoid liability. Companies with strong anti-bribery and corruption policies and controls have a strong framework on which to build the governance limb on an ESG program.  While there are plenty of challenges that companies face in implementing their ESG programs, there are huge potential benefits of getting ESG compliance right.”

ENDS

About the survey 

This global survey, conducted by Coleman Parkes, tracks the thinking and actions of compliance officers representing many of the world's largest and most influential organizations. It explores the deep waters of third-party risk through the lens of AB&C and ESG, as organizations are faced with competing priorities. Opinion research was conducted by an independent research company in April 2022 among 600 chief compliance officers (CCOs), heads of legal, or equivalent (referred to collectively as “compliance leaders” in the report), across the world. Respondents were based in the UK, USA, France, Germany, Asia (China, Singapore and Japan) and Brazil. A wide range of sectors were also covered within the research including tech and telecoms, lifestyle and consumer, diversified industrials, energy, automotive/transportation and life sciences. 73% of respondents were from companies with more than $1bn in annual revenue, of which 30% with revenue between $20-50bn and 7% with more than $50bn.

 


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