Bloomberg Law
Oct. 18, 2022, 8:00 AM

ESG Compliance Strategy Must Align With Regulation

Katy  Forsstrom
Katy Forsstrom
Hogan Lovells
Stephanie   Yonekura
Stephanie Yonekura
Hogan Lovells

Global companies are in various stages of developing programs focused on environmental, social, and governance compliance, while concerns in the US around ESG compliance are picking up as well. Though ESG legislation has yet to become commonplace, compliance officers are aware that their organizations face ethical, legal, and reputational risks relating to ESG factors.

Those factors include violating environmental regulations, human rights abuses, and corruption concerns. With developing legislation and changing expectations from stakeholders, more organizations are considering how to incorporate ESG into existing compliance programs.

Global Organizational Priority

In a recent survey of 600 compliance leaders across the UK, US, France, Germany, Asia (China, Singapore, and Japan), and Brazil, the vast majority of companies identified ESG risk management as a priority for their organizations. For example, 88% of US compliance leaders reported that ESG is becoming a priority.

Hogan Lovells’ recent survey tracks the thinking of compliance professionals seeking to integrate ESG concerns into existing compliance programs, including challenges they face and areas of risk that need to be addressed. Survey participants represented viewpoints across numerous sectors, including tech and telecoms, lifestyle and consumer, diversified industrials, energy, automotive/transportation, and life sciences.

As regulators increasingly shine a spotlight on ESG, US companies are taking notice. For instance, the Securities and Exchange Commission recently announced the formation of a Climate and ESG Task Force and proposed ESG disclosure requirements. In this context, it’s understandable that US compliance leaders are garnering in-house support for their efforts. In fact, this survey indicated that, in comparison with their counterparts in other regions, US compliance leaders were the least likely to cite a lack of internal engagement as an obstacle to ESG risk management efforts.

Our data shows that a deeper focus in the US on ESG compliance is already happening, but compliance officers face significant challenges embedding ESG concerns into existing programs. They cited the following concerns: 78% said ESG was not sufficiently embedded in existing risk practices, 71% reported concerns over lack of ESG knowledge and skills, and 76% cited concerns over the countries in which they or third parties operate.

Third-Party Risks to ESG Compliance

As compliance officers shift their focus to ESG, the risks posed by third parties should be at the forefront of companies’ compliance strategies. We found that only 29% of companies surveyed across regions reported concerns about ESG risks posed by third parties.

Strikingly, just 1% perceived third-party relationships as posing a great deal of ESG compliance risk to their businesses right now. However, 22% of leaders saw third-party risk increasing in the next 12 months, and 34% in the next 18 months.

As economic concerns take center stage, those overseeing compliance globally face additional challenges, including the deepening supply chain crisis, which has companies reassessing supplier relationships. 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. For example, if a company relies on a third party to source certain goods, the company needs to ensure that it includes in its contract and oversight requirements that those goods are manufactured in compliance with anti-slavery and other human rights provisions.

Boost Compliance Through Existing Programs

Companies have an opportunity to boost their ESG compliance by embedding their efforts into their existing anti-bribery and corruption compliance programs. Globally, corruption in all its forms is one of the biggest challenges of ESG compliance and a material problem for investors, especially in times of crisis.

According to respondents across regions, 74% cited the countries where they or third parties operate, and associated corruption risk, as a major concern with respect to ESG compliance. (“Companies wanting to prioritize ESG compliance face headwinds ...”) Yet 62% said there is a failure to appreciate the links between AB&C violations and ESG abuses.

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

Ignoring ESG risks and responsibilities due to such hurdles as a lack of resources or knowledge, presence in certain jurisdictions, or reliance on third-party relationships is dangerous for businesses. In the US, organizations face federal and state obligations—in addition to the SEC’s potential ESG disclosure requirements, states also are requiring ESG-related climate disclosures.

Companies with global operations also must navigate both existing and anticipated ESG regulations in other countries. And while ESG regulation in Europe, for example, is more developed than in the US, the landscape is changing there as well.

Companies can be sure that the regulations will keep coming, compounding reputational, financial, and legal risks. Tracking all of these regimes has become an imperative business necessity.

Now is the time for organizations to embrace these challenges. With increasing public pressure from internal and external stakeholders and regulatory risks increasing, organizations should examine business decisions through an ESG lens to reinforce the company’s standards to proactively mitigate ESG risks.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Stephanie Yonekura is global head of Hogan Lovells’ Investigations, White Collar, and Fraud practice, and a partner in the firm’s Los Angeles office. Prior to joining the firm, she was a prosecutor for more than 14 years, including serving as acting US attorney in Los Angeles.

Katy Forsstrom is a senior associate in the firm’s Denver office and a member of the firm’s IWCF practice.

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