Who should ‘own’ ESG?
It is an important question - one we have received from our customers and readers, and one that is currently being discussed by some leading voices on sustainability, governance risk & compliance, investing, and more.
As the discipline of ESG continues to evolve, it becomes a challenging (and potentially early) task to explicitly state who should and who should not “own” ESG across the business. This is especially true as we look at each businesses unique needs for ESG as it relates to their own internal resources, and the industry in which they operate.
However, recent market developments and a shift in regulatory expectations is driving an integration of ESG throughout the business, and perhaps a heightened convergence between ethics and compliance (E&C) and sustainability operations. These developments also represent new avenues for strategic, value-adding opportunities for those involved with ESG program design and management.
ESG and Corporate Compliance Are Converging
In addition to environmental metrics (greenhouse gas accounting, water use etc.), many companies pursuing an ESG strategy also track data points related to social capital (like human rights and data security), human capital (such as labor practices and diversity and inclusion), and governance (anti-bribery, corruption, and management of the legal/regulatory landscape).
Given this scope, we can identify key areas of existing ownership between ESG and E&C – primarily looking at the “S” and the “G”. This resonates with groups who are just starting an ESG program in the sense that many companies already are collecting this information, they are just doing so separate from a consolidated ESG view.
These areas are also in focus for the SEC as Gary Gensler, SEC Chair, stated at the recent annual London City event:
"I've asked staff to propose recommendations for the commission's consideration on human capital disclosure. This builds on past agency work and could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety,"
The European Union already leads with regulation of ESG reporting laws such as the Non-Financial Reporting Directive (NFRD) and the Sustainability Finance Disclosure Regulation (SFDR) – will the US and specifically the SEC follow suit?
A converging ESG and E&C program does not assume Chief Compliance Officers (CCOs) become subject matter experts or tactical operators in bringing the three pillars of ESG together, but rather that CCOs leverage their existing line-of-sight across key business issues and tap into the experts who have the required information.
As more companies begin to integrate ESG across operations and heightening regulation surrounding ESG disclosure occurs, CCOs become natural leaders for ensuring the scope, integrity, and accountability for a successful ESG program and for ensuring the organization meets the associated regulatory requirements.
Industry Specific Standards and Internal Resources Are Crucial Factors
ESG programs require businesses to account for metrics ranging from water and wastewater management to product quality/safety to anti-competitive behavior. As such, it becomes easy to see how a consumer goods company would have distinct requirements compared to a services or technology company.
For companies to successfully build and report on an ESG program, they need to first understand which factors are material to their industry. To help, groups such as SASB (now the Value Reporting Foundation), break up their financially materiality matrix into 77 different industries. Identification of material ESG factors then naturally leads to definitions of ownership.
At some companies, ESG is a natural strategic partner of the supply chain organization, both of which might roll up to risk management. For more industrialized companies, a Chief Sustainability Officer may head up the strategy and oversee the execution of core facets of ESG but is expecting the CCO to handle the compliance side. Others - who are in the service or software industry - are still inclusive of risk but the people working together may be coming from the strategy, product, and marketing group.
Still, CCOs stand in a unique leadership role for most, if not all these situations. Again, not necessarily as the subject matter expert, but a lead stakeholder of materiality and risk assessments as well as overall accountability. After all, risk assessment has been a foundational element of compliance programs since their inception, and this is a key skill that CCOs bring to ESG oversight and management.
ESG Presents Not Only a Question of Ownership, but of Opportunity
Visionary CCOs will see ESG ownership as an opportunity for more resources, more organizational influence and impact, and a chance to further shape an ethical business culture. CCOs can be the leader, communicator, and coordinator. We have started to see large brands recruit CCOs with significant ESG experience, and have seen others celebrate how their ESG and E&C programs align.
However, this cannot be just an “add-on" responsibility. This ownership must come with the appropriate resources, access to subject matter experts and overall authority to be successful. On the positive side, the right tools and technology exist to centralize and simplify the consolidation of subject matter expertise, benchmarking of goals, and compliance requirements.
CCOs who recognize the significant overlap that already exists between ESG, risk and compliance will be well situated to take their organizations and their careers to the next level as ESG and compliance continue to converge.