If the words environmental, social, and governance (ESG) are not already top of mind, they should be in 2022. Whether you are running a Fortune 500 company or obtaining funding for your start up, running a successful business increasingly requires a focused ESG strategy.
The ESG revolution involves a recognition that a corporation’s value, reputation, and prospects depend on how it approaches critical ESG issues that matter to investors, customers, employees, lenders, and regulators.
As we begin 2022, ESG issues present significant opportunities for the public benefit as well as the corporate bottom line. To achieve those rewards, however, companies will need to manage attendant risks. Reviewing your ESG strategy should be part of your New Year’s resolutions.
These four action items are a good place to start.
1. Prioritize ESG
Investing in ESG is not a check-the-box exercise. Rather it means making environmental concern, social awareness, and purposeful corporate governance part of your company’s core principles. This includes: (1) setting and communicating clear goals and expectations internally and investing in the people and resources necessary to achieve those goals; (2) integrating ESG into your compliance trainings and program evaluations; and (3) ensuring that ESG is a board-level priority and that meaningful data is collected and shared with senior leaders regularly.
2. Conduct an ESG Assessment
Whether you have been an industry leader or are just contemplating your first steps, the time to conduct an objective assessment of your company’s ESG impacts and achievements is now. A critical first step is to identify the kind of risks your company faces.
An assessment can help you identify ESG red flags that are specific to your operations (e.g., do your operations involve potential environmental harms such as greenhouse gas emissions; does your supply chain extend to countries known for unacceptable labor practices; does your lending or investment activity benefit bad actors?). By quantifying those risks, a systematic assessment provides a foundation to develop targeted controls to mitigate exposure to ESG-related litigation claims, regulatory actions, and reputational risks for any missteps.
This is particularly important in the context of any ESG-specific regulatory obligations, reporting or public statements. An ESG assessment can also identify valuable corporate opportunities such as increasing corporate resilience, lowering costs of capital and enabling your business to stand out among your competitors.
Don’t be afraid to create a baseline, to set goals, and to find out what you don’t know or where you may be falling short. For potentially sensitive subject matters, you can consider relying on outside counsel to conduct a privileged assessment for the purpose of providing legal advice.
3. Implement ESG Reporting and Monitoring Controls
While making an assessment and establishing ESG goals is an important first step, it is critical to put your business in a position to follow through with commitments and expectations. Although some companies have been preparing sustainability and corporate social responsibility reports for years, target audiences today increasingly expect such reports to be keyed to appropriate metrics, backed by data, and subject to ongoing assessment.
Reporting should both be sensitive to these concerns and anticipate the increasing amount of publicly available ESG data. As but one example, projects like MethaneSAT are poised to make near real-time methane emissions information publicly available by deploying satellites that will identify such emissions almost anywhere on Earth.
No company wants to have “greenwashing” associated with its name, and regulators appear poised to make an example of any company that mistakenly approaches ESG or the impacts of climate change as a mere marketing exercise. Faulty implementation of ESG objectives can easily lead to pitfalls including actionable misleading statements or material omissions.
4. Leverage Current Compliance Infrastructure
Effective ESG compliance need not involve a costly new layer of corporate bureaucracy. Key elements of existing compliance infrastructure can instead be leveraged to address ESG risks and opportunities.
Compliance reporting to senior leadership, periodic risk assessments and auditing/testing procedures, for example, can be expanded to incorporate relevant ESG metrics. Likewise, a company’s current training program can be enhanced to target ESG-related issues. Existing internal controls—such as third-party diligence procedures—can also incorporate ESG considerations, including review of supplier environmental and labor-related safeguards.
Statements on these topics can be incorporated into compliance certifications. Staff can be trained to identify ESG red flags in counterparty screening (e.g., high-risk regions for forced labor; ESG-related allegations). Rather than reinventing the wheel, many companies will benefit from thoughtfully mapping ESG controls onto their current compliance infrastructure.
The Future Is Now
The public has heightened expectations for corporate social responsibility and is increasingly taking companies to task for perceived failures. Stakeholders are becoming ever more sophisticated in their analysis and demanding of results.
Getting ESG right can not only benefit your company’s bottom line, it can create valuable public benefits as well. Now is the time to act for companies planning to be winners in this rapidly changing environment.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Kevin Feldis is a partner at Perkins Coie with a global practice responding to government enforcement actions, conducting internal investigations, managing crisis response, litigating business disputes and white- collar cases, and counseling ESG and a wide range of corporate compliance issues. He served as a federal prosecutor for 18 years prior to joining the firm.
David Daniels is partner in the Securities Litigation group of Perkins Coie LLP. He represents private equity funds, hedge funds, multilateral development banks, and other financial institutions in business disputes involving securities law, corporate governance, creditor rights and related complex commercial issues.
Jamie Schafer is a partner in the White Collar & Investigations practice with Perkins Coie LLP. She represents both corporations and individuals in complex criminal and regulatory matters, including matters involving the Foreign Corrupt Practices Act, anti-money laundering laws and regulations, and embargoes administered by the U.S. Department of Treasury, Office of Foreign Assets Control.