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An ESG Fireside Chat with KPMG’s Kay Swinburne

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ESG and Compliance – Response and Enhancement

We conclude our five-part series on ESG and Compliance by looking at the final prong in the StoneTurn ESG Framework, that of Response and Enhancement. Many compliance professionals would see this as similar to continuous improvement and you would not be far off. However, it is even more important in ESG because of the dynamic nature of ESG. As Harvard Business School Professor George Serafeim stated in his Harvard Business Review (HBR) article, entitled Social Impact Efforts That Create Real Value, “It seems clear that companies will be under growing pressure to improve their performance on ESG dimensions in the future.” This pressure will continue as a company achieves one set of goals and then moves towards the next set of goals.
This is because, as we have seen from the compliance realm, an ESG program is not simply a ‘check-the-box’ exercise that Serafeim terms “window dressing”. It can include such activities as “improving ESG disclosures, releasing a sustainability report, or holding a sustainability-focused investor relations event.” Just like compliance, and properly seen, ESG “must look to more-fundamental drivers—particularly strategy—to achieve real results and be rewarded for them.” The key way to achieve real results and move them forward is through ESG program responses and enhancements. Once again, similar to compliance, “most companies have been treating ESG efforts like a cell phone case—something added for protection (in this case, protection of the firm’s reputation). Corporate leaders need to replace this mentality with an ambitious and differentiated ESG strategy if they want to see real financial dividends.”
As far back as 2012, Jennifer Hermes, writing in an Environment + Energy Leader article entitled Perspectives on Continuous Improvement in Corporate Sustainability, noted, “It starts with a mindset of continuous improvement. You can’t manage what you don’t measure. Developing defined, realistic benchmarks and strategies – whether to reduce carbon emissions, conserve water, reduce waste to landfills or other eco-conscious pursuits – rallies the workforce and prevents agenda tinkering at the top. Organizations that take consistent steps over time to reach specific sustainability goals often experience long-term operational savings. When everyone is aware of common goals, it also helps to accelerate a deeper understanding of how the complete supply chain contributes to overall environmental sustainability performance.” Hermes concluded, “When you grow a business sustainably, you don’t see a finish line. With every achievement, you learn new ways to continuously improve your environmental performance.” Once again, even if business leaders see compliance as simply reactive and legally based, every compliance professional knows that the only way to maintain an effective compliance program is through continuous improvement. (As does the Department of Justice (DOJ).)
In their article The Seven Deadly Sins of ESG Management Kosmas Papadopoulos and Rodolfo Araujo said, “Companies should avoid a static approach that may focus on adhering to minimum regulatory requirements.” This is because it can become a source of innovation and industry collaboration, through continuous improvement. In Part 3 of this series, I discussed that effective implementation of an ESG program requires regular monitoring using KPIs. This systematic approach to ESG using a compliance perspective is one of the key reasons compliance is the most well-suited corporate function to lead an organization’s ESG efforts.
Jim Deloach, writing in a Forbes.com piece entitled 12 Ways To Drive Better ESG Reporting, added additional reasons for continuous monitoring, all designed to improve your overall ESG program. If you focus solely on past performance and accomplishments, it will present a limited perspective and indeed may well hinder your overall ESG efforts. Deloach recommends “A balanced view that considers future goals and commitments aligned with the strategy presents a fuller picture for investors.” You should strive to align ESG reporting with the company’s financial reporting calendar so that all stakeholders can focus on both financial and ESG performance. “Aligning the two may become more important to facilitate a complete and timely evaluation of the company’s prospects by investors.” This is because the “underlying ESG-related activities drive investments, generate returns, create new sources of revenue, reduce operating costs and enable strategies.”
All of these authors make clear that responses and enhancement of an ESG program are directly aligned to the compliance requirement of continuous improvement. In the 2020 Update to the Evaluation of Corporate Compliance Programs, it stated, “One hallmark of an effective compliance program is its capacity to improve and evolve.” Substitute ESG for compliance and the connection becomes clear.
What should you do with this information generated by your ESG program? Have a strategic plan in place ready to implement your findings of continuous improvement, by using the following:
Review the goals of your ESG strategic plan. This requires that you arrange a time for to review the goals of the Strategic Plan, to determine how this goal in the Plan measures up to ESG implementation in your company.
Design an execution plan. The “Keep it Simple Sir” or KISS method is the best to move forward. This would suggest that for each ESG goal, there should be a simple and straight forward plan to ensure that the goal in question is being addressed.
Put accountabilities in place. In any plan of execution, there must be accountabilities attached to them. This requires mandating a reporting requirement on how the task assigned is being achieved.
Schedule the next review of the plan. There should be a regular review of the process. It allows any problems which may arise to be detected and corrected more quickly than if meetings are held at a less frequent basis.
I hope over this series you have seen not only how but why a Chief Compliance Officer (CCO) or corporate compliance function is the most well-suited in an organization to lead an ESG effort. Quite simply, the process for design, creation, implementation and running of an ESG program is virtually similar to that of a compliance program. The goals of ESG are very similar to the requirement of a CCO and compliance function to be the champions of institutional justice and institutional fairness in an organization. Good government is embedded into compliance as well. There is no conflict of interest in compliance leading this effort as there are multiple levels of oversight, monitoring and verification. Of course, both internal and external audit are there as well with their additional set of eyes.
If you have not done so please check out my podcast, The ESG Report on the Compliance Podcast Network where I explore an ESG issue from the compliance perspective each Monday.

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ESG and Compliance – The Materiality Assessment

Every compliance professional should be aware of what a risk assessment is and its importance in any compliance program. Numerous regulatory frameworks state it be the key foundational mechanism to identifying corporate risk for any corporate compliance program. However, in the Environmental, Social and Governance (ESG) world, you need to understand the material ESG matters for your organization. This transforms a risk assessment into a ‘Materiality Assessment’, which is the starting point from which you manage your non-financial risks and opportunities.
A systematic materiality assessment helps determine which topics should be considered in business or sustainability strategy development, in performance measurement and in reporting. A materiality assessment is the starting point for an overall sustainability framework. It clarifies the strategic focus, helps define suitable goals and KPIs, and sets the framework for internal and external communication.
In a materiality assessment, potentially relevant topics are evaluated from different perspectives to gain a comprehensive picture of the expectations of your business and its impact on society and the environment. According to SustainServ, some “topics must be deliberately left out in order to focus on the most relevant areas. This allows you to ensure long-term business success, meet stakeholder expectations and contribute to sustainable development. Through the exchange with your stakeholders, you not only gather insight into their needs and expectations vis-à-vis your company but also strengthen your relationships.”
KPMG, in their 2017 paper entitled “Environmental, social and governance (ESG) materiality assessment”, said, “to be valuable and credible, the development of ESG reporting practices depends on an holistic approach to your material ESG matters, and not merely the extraction (and in some cases extrapolation) of historic ESG data within your organisation.”
However, KPMG sees the materiality assessment as broader in context and believes that it “should be used as a strategic business tool, with implications beyond corporate responsibility (CR) or sustainability reporting.” This is because it provides an “opportunity to apply a sustainability lens to business risk, opportunity, trend-spotting and enterprise risk management processes. Rather than creating a separate, isolated process, leading companies embed sustainability thinking within existing processes.”
KPMG believes the benefits can broad and varied including the following:

  • Ensuring business strategy takes into account significant social and environmental topics, and the management of sustainability issues is embedded in wider business processes.
  • Identifying trends on the horizon, such as water scarcity or changing weather patterns, that could significantly impact your company’s ability to create value in the long-term.
  • Prioritizing your resources for the sustainability issues that matter most to your business and stakeholders, so you can focus time and money on the most important topics, and on collecting relevant data.
  • Highlighting areas where you need to manage and monitor risks that are important but not currently addressed.
  • Identifying the areas of interest to the most important stakeholders, enabling you to report concise information that gives a meaningful picture of progress to those who need it.
  • Helping to identify where your company is creating, or reducing, value for society.

Antea Group believes that materiality assessments should be viewed as “formal exercises aimed at engaging stakeholders to find out how important specific environmental, social and governance (ESG) issues are to them. The insights gained can then be used to guide strategy and communication, and help you tell a more meaningful sustainability story.” They provide a seven step approach to conducting a materiality assessment.

  1. Identify internal and external stakeholders. You should start by creating a list of relevant stakeholder groups, then identify key contacts within each who can provide a meaningful perspective on your company’s sustainability strategy.
  2. Conduct some initial stakeholder outreach. After you have identified the key stakeholders, reach out to them and seek their participation. You should “Keep your pitch as concise as possible without leaving out essential details. Your objective should be to express to the participant group why their unique insights are valuable and how their insights will be used to inform your company’s sustainability strategy and business practices.”
  3. Identify and prioritize what you want to measure. Next, “determine what sustainability indicators to measure so you actually get the insights you want and need.” They break down these sustainability indicators into:
    1. Economic – This would include issues such as “revenue, profit and company turnover.”
    2. Social – Here you should consider such areas as “labor statistics, human rights, consumer issues and community impact.”
    3. Environmental – This area would include overall carbon footprint, water stewardship, greenhouse gas emissions and waste management.
  4. Design your materiality survey. Just as with risk assessments, materiality assessments should be formal, structured engagements with stakeholders. Make the survey user friendly and equally straightforward to analyze. They suggest, asking “stakeholders to rate the importance and impact of each indicator you identify on a numerical scale, such as 1-5 or 1-10. This will give you quantitative data that can be analyzed and explained visually. Leave additional space for written insights and comments to enhance the results you receive.”
  5. Launch your survey and start collecting insights. Here you should “reach back out to your stakeholders and provide them with the link to the survey and a deadline…When the deadline approaches, reach back out to those who have yet to complete the survey to remind them of the deadline.”
  6. Analysis. As with a risk assessment you have to interpret and analyze the results. Create a forced ranking for your survey results to understand what issues are most important to each stakeholder group. Group the data together to find commonalities and anomalies as well. Map out graphs to visually portray trends, observations, the commonalities and anomalies. They suggest the “end result should be a formal matrix graph that plots how each indicator ranks in significance relative to stakeholder influence.”
  7. Into action. Here they suggest sharing your results and insights with your stakeholders and those outside the organization as well. It can be done in a “formal sustainability report or summary, but then can be shared more widely through other channels, such as the company website or media releases.” (For a great example of this check out the Bank of America Materiality Report here.)

Antea Group ends by stating, “Sharing your materiality assessment results can serve as a starting point for continuing the conversation and maintaining engagement with your sustainability initiatives. Welcome feedback from all stakeholders who view your materiality assessment results so that you can keep the conversation flowing after the assessment is complete. In addition, incorporate your findings into your overall sustainability strategy so you can create communications plans for each group, and more effectively tell your company’s sustainability story.”
The steps laid out herein should be both familiar and comfortable for every compliance professional. As you move into a greater role in your organization around ESG you will be ready to begin the process, with a materiality assessment.

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ESG and Compliance: Policies and Procedures

This week I will be considering the role compliance and a Chief Compliance Officer (CCO) should play in a corporate Environmental, Sustainable and Governance (ESG) program. Over this series, I will explore how the StoneTurn Group, LLP (StoneTurn) ESG Framework provides a structure through which any compliance professional can create an organization necessary for an ESG program. Today we take up ESG policies and procedures.
There are numerous reasons to put some serious work into your ESG policies and procedures. They are certainly a first line of defense when stakeholders coming knocking. Having ESG policies and procedures that outline responsibilities for compliance within the company, detail proper internal controls, auditing practices, and documentation policies are critical for public companies under ESG regulatory scrutiny. The Securities and Exchange Commission (SEC) and other regulators will take a strong view against a company that does not have well thought out and articulated ESG policies and procedures; all of which are systematically reviewed and updated. Moreover, having policies written out and signed by employees provides what some consider the most vital layer of communication and acts as an internal control. Together with a signed acknowledgement, these documents can serve as evidentiary support if a future issue arises. In other words, the “Document, Document, and Document” mantra applies just as strongly to this area of anti-corruption compliance.
Additionally, a company’s ESG policies provide a basic set of guidelines for employees and others to follow. ESG policies should give general prescriptions and should be supplemented by more specific procedures. By establishing what is and what is not acceptable behavior, a company helps mitigate the risks posed by employees who might not always make the right ESG choices.
Bryan J. Sillaman and Alexandra Poe, Hughes Hubbard & Reed LLP, in an article entitled Five Steps to Establishing a Corporate ESG Policy for the Present Moment, suggested that an organization should focus their ESG policies and procedures that are “applicable generally with respect to your industry and then with greater specificity to the conditions, operations and geographic footprint of your particular company.” In the area of Environmental, that could mean your organization’s “contribution to climate change, including energy use (such as its carbon footprint and use of clean energy), waste management, pollution, resource conservation, impact to habitats and environmental remediation.” From there you could consider if your organization has opportunities to promote positive change, in reducing “energy loads, expanding organic food production, or adopting technologies that repair environmental damage.” Moreover, with the passage of the Germany Supply Chain Act and other legislation such as the UK Anti-Slavery Act, both regulators and investors “want to see companies consider their own operations and impacts arising from your supply chain.”
In the prong of Sustainability, what are your policies and procedures around conduct that affects your organization’s relationship with human communities, from employees to customers and local communities where the company operates? Obviously, social justice is a key component, but it quickly expands out to working conditions, whether a state will provide basic social and healthcare services and employ health and safety. From there it can include such disparate topics as “childcare, education, equal opportunity, pay equity, financial inclusion, job creation and social justice. Companies that make products that have the potential to harm people, like guns, toxic materials, alcohol and other addictive substances, have special considerations in this regard.” But all companies must justify having physical operations in geographic locations which will not protect employees from mass shootings or even pandemic related threats such as Covid-19 to the Delta Variant.
In the area of Governance, compliance continues to play a key role. Here consider your organization’s policies and procedures “relating to regulatory compliance and the conduct of
officers and directors and the expectations of integrity set at the top of the organization.” The concerns are as varied as ranging from “accurate and transparent financial reporting, to executive compensation practices, diversity and inclusion, and avoidance of conflicts of interest, sexual harassment and corrupt practices.” Governance policies and procedures should also evaluate the “composition of a board of directors or executive teams, to assess whether representatives to those bodies are well suited to address concerns of all stakeholders and potential ESG risks.”
Cowen Inc. incorporated all of these concepts into its corporate ESG Statement. In the area of Environmental, Cowen states:
Cowen recognizes that the world faces environmental challenges and is committed to promoting a healthy environment. As an organization that engages in the global financial markets, we believe that our business can and should do things to promote a positive influence in matters that improve the world.
In the area of Sustainability, Cowen states:
At Cowen, we pride ourselves in the long-standing culture of respect and empathy for our employees and the community at-large. 
We employ a fair pay practice which ensures that Cowen’s pay practice is competitive with the market for the same or similar jobs, qualifications and experience. 
We believe that diversity and inclusion strategies are the catalyst for success and innovation in the workplace. We believe that differing opinions and lived experiences are valuable and serve to support our business overall. 
Wellness, both physical and financial, is the cornerstone of our employee benefit programs. Our… programs, such as emergency back-up elder/child care, subsidized health club membership and flexible work arrangements, help employees balance work, life and family matters more effectively. 
We also work to create partnerships with vendors that share a commitment to sustainability. Vendors engaged in providing products and services to Cowen are expected to act in a manner that is consistent with our Code of Business Conduct and Ethics. During vendor evaluations, Cowen takes the appropriate steps to ensure ethical business practices, labor and human rights, vendor diversification and inclusion, environmental stewardship, management systems and governance are considered. 
We intend to further improve our social impact across our organization and within the greater community. 
In the area of Governance, Cowen states:
Strong governance, ethical business practices and prudent risk management are critical ingredients to Cowen’s achievement of its goal for long-term value creation for shareholders and driving sustainability.
 Corporate governance guidelines assist the Board in the exercise of its responsibilities and to promote the effective functioning of the Board and its committees. The Board’s goal is to oversee and direct management in building long-term value for the Company’s stockholders. In addition, the Board’s goal is to assure the strength, integrity and vitality of the Company for its customers, clients, employees and the communities in which it operates. 
Cowen’s Code of Business Conduct and Ethics, which applies to all officers, employees and members of the Board, serves as the foundation for high standards of integrity and ethics, the deterrence of wrongdoing and the promotion of compliance with applicable regulations.
The Board and executive management are ultimately responsible for the review and oversight of risk at Cowen. They are supported by a risk management framework which includes committees, departments and systems which monitor, manage and report on market, liquidity and operational risk.
 As we expand our ESG initiative, we will seek ways to further optimize our governance process.
Clearly a compliance function has a large role in filling out the policies and procedures to implement these statements.

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Mythbusting ESG & FAQs Part 2

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The ESG Report

An ESG Framework with Stephen Martin


 
Tom Fox is pleased to welcome Stephen Martin, Partner at StoneTurn, to this week’s episode of the ESG Report. Stephen, an expert in ESG CSR, helps clients proactively improve their ESG programs so they can be better corporate citizens. He and Tom discuss the ESG framework he developed with his team, why mission and governance matter, and the exciting future of ESG.
 

 
Mission and Governance at the Core
Stephen believes that compliance professionals have the right skillset to help organizations understand their wider responsibility. It’s more than just making money, he emphasizes; it’s about making a positive impact on the communities you serve. Compliance officers can help companies make strategic moves to accomplish this goal. Stephen tells Tom that mission and governance are critical. Your mission – what your company is designed to do – would inform how you build out your ESG program and who you select to oversee it. Governance means that you assign the right people and resources to accomplish your objectives. “Until you define your mission and appropriately resource it,” Stephen points out, “you’re never really going to be effective in moving forward on an ESG program front.” 
 
5 Elements of ESG Framework
Tom asks Stephen to outline the elements of the ESG framework he developed with his team. Stephen responds that the elements are:

  1. Risk and materiality assessment – what risks and material impact does your ESG initiative pose to the company and stakeholders?
  2. Policies, procedures, and controls – set these to streamline your processes to accomplish your goals.
  3. Reporting and communication – to educate internal and external stakeholders on why this is important and what your mission is and how you’re going to execute on it.
  4. Verification and monitoring – ensuring the data you put out is accurate and that you’re delivering on your mission.
  5. Response and enhancement – making refinements over time to improve the program.

 

 
The Future of ESG
Stephen has seen compliance evolve into the robust infrastructure it is today. Tom asks him what he envisions as the future of ESG. “We’re very much at the early stages of ESG and CSR,” Stephen replies, “but I’m very excited because this is going to be a game-changer on having corporations do more than just make money… You want to have strong economics, you want to have capitalism-driving things. But I think you really can be an organization that cares about the broader areas than just money; and more importantly, the companies that do it the right way, that really embrace this, can really maximize the performance of the entity in all ways.”
 
Resources
Stephen Martin on LinkedIn | Email
StoneTurn.com
 

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Mythbusting ESG & FAQs Part 1

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SFDR Level 2 RTS Delays and Latest Developments

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The Mood of Compliance

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Governance, Reporting and Compliance in ESG


In this episode of The ESG report, Tom Fox is talking about why Compliance Professionals should be leading the way when it comes to ESG initiatives – they’re uniquely suited to do it! From the importance of governance and transparency to the increasing value shareholders and investors are placing on it, to new tools and strategies for reporting and communicating returns and concerns, ESG should be top of mind.
 
Exxon Gets Called Out Carbon Neutrality
Governance doesn’t often get as much attention as the Environmental and Sustainability part of ESG – but its impact shouldn’t be overlooked. Just ask Exxon Mobile, who says several board members were soundly defeated by a shareholder nominated slate, citing the importance of carbon neutrality. Exxon forgot a fundamental law of capitalism – shareholders are the owner of the company – not the managers. As the Bank of America determined through a poll of executives and leaders, governance can be seen as transparency, and that is how shareholders are made aware of and can make changes to the actions of companies.
A Change in the Air
Exxon was already seen as a leader of the opposition when it comes to action on climate change, but if the corporate culture is willing to listen, it could mean a massive change to organizational priorities and actions. The shareholders who voted against the board members did so at the cost of short-term financial gain in the interest of a longer-term play – not something you usually see!
ESG and the Biden Administration
SEC Chair Gary Gensler has made it clear that ESG reporting is going to be a priority for the Biden administration, and the commission announced the creation of a Climate and ESG task force in the Division of Enforcement. This means that there are going to be more tools and resources available for identifying ESG misconduct. Institutional investors are equally committed, identifying ESG as a key metric. A strategy recommended for communicating ESG initiatives is a quarterly earnings call.
This process  includes:

  • Laying the groundwork
  • Adapting the earnings call schedule
  • Reporting on and explaining the return on the ESG investment
  • Developing cross-functional collaborations
  • Treating the earnings call as theater.

Being thorough and above all, engaging about ESG goals and progress towards them will “…ensure that the ESG story is told in a way that animates and informs everyone present,” say the authors of the recommendation. 
Why Compliance Is Critical to the ESG Effort.
The elements of ESG are directly within the wheelhouse of compliance. Compliance sets up frameworks and allows you to measure against them – exactly what you need in ESG initiatives. The DOJ laid out how to think through your compliance program – risk assessment, manage the risk and monitor the risk management strategy, so you can improve it as you see gaps and problems. This framework works extraordinarily well for ESG as well – assess the materiality, map the materiality, and put systems in place so you can monitor it. Environmental programs, diversity and inclusion initiatives, and transparency – these are all areas where compliance professionals can lead the way, and make huge, beneficial impacts on an organization.