ESG Roundtable: Exploring ESG’s Compliance and Ethical Landscapes
November 22nd, 2021
Risk & Resilience Magazine sat down with Lisa Beth Lentini Walker, Mary Shirley, and Alison Taylor to discuss the ethics and compliance considerations behind Environmental, Social, Governance (ESG) initiatives. The below roundtable originally appeared in the inaugural issue of R&R published in September of 2021.
How has ESG become a top-of-mind topic for each of you? What has that journey looked like?
Lisa Beth Lentini Walker (LBLW): I started out my career with the Securities and Exchange Commission, working for the Division of Corporation Finance. One of the amazing opportunities that I had was to work on shareholder proposals. Shareholders have the opportunity to submit proposals for inclusion in a company’s proxy statement which can potentially result in a vote of the shareholders at an annual meeting. I got to see the things that shareholders were interested in and cared about… Governance has always been a very hot topic because shareholders are often concerned about how the company is run and who’s making decisions. The environmental and social elements have been gaining strength over time. If you look back 10, 15, 20 years ago, there absolutely were proposals that would fit into the ESG space. Shareholders have been talking about these topics for a long time.
Alison Taylor (AT): I started working in ESG and around 2015 we started to see a huge rise in momentum. I would say there was a real tipping point with Larry Fink’s letter to CEOs in January 2018, where he said that he expects companies he invests in not only to make a good profit for shareholders but also to show how they made a positive contribution to society. That was a really big sea change. Another huge step up in terms of mainstream media debate in August 2019 was the Business Roundtable. This was a similar statement in that they believe businesses should provide value to all stakeholders. And I think the third tipping point was the pandemic, combined with the reckoning over racial justice in the US which ramped up concern over the social responsibility of businesses to take care of their workers.
Mary Shirley (MS): ESG has become one of the hottest topics in the compliance world. Hiring for ESG-specific roles has ramped up- there has simply been a lot of buzz about the subject. At my company, we have dedicated ESG staff members that sit outside of compliance, but compliance often has responsibility for Code of Conduct training so content such as ESG needs to be something staff members in that position have a basic understanding of.
What are some of the challenges you’ve seen companies face when they consider implementing ESG?
AT: I think one of the big challenges is coming up with where to focus. You can’t do everything… coming up with focus priorities- where you can make a difference out of all this external pressure is very challenging. Second- you can’t just delegate this to one team or department. You need to think about the business as a whole. That requires thinking and organizing in a different way… so there’s a need for education and confidence.
MS: At the moment there is competing demand for experienced ESG resources. Staffing an ESG function with experienced and knowledgeable staff in this area can prove to be challenging. Then comes the question of where to house relevant ESG staff. Should they form a new arm of compliance, should compliance or other staff be given the ESG hat to wear, or should there be a new and dedicated ESG function? Much of the decision-making around this will depend on the size and profile of the company, as well as the existing skillset and interests of colleagues.
What does the relationship between ESG and compliance teams look like? How are they related in companies that are doing it well?
LBLW: Every company that I have seen is handling ESG a little differently. Some of this comes down to what are the skills and talents that you have within your organization and which groups of people within your organization are best suited to connecting with people, working cross-functionally, and leading the charge. Compliance professionals in general have an innate understanding of how to set proper foundations and work cross-functionally. These are really valuable skills, particularly as ESG programs mature… So, there’s a lot of opportunities to bring the best out in each other.
MS: I work in a large organization that has ESG focus areas operating outside of compliance. We’ve had a collaborative approach whereby ESG colleagues have appointed compliance team members as stakeholders that they consult with regularly. I think this model makes a lot of sense. As I’ve learned in a compliance role, unilaterally pushing out initiatives, even if you’re a subject matter expert in the area, is not the best way to roll out a program. It’s important to get feedback and input early and often from key stakeholders.
Speaking of compliance, what does the regulatory landscape look like for ESG? How do you see it evolving?
LBLW: I don’t know that there is one unified, agreed-upon definition for what is included or not included within this concept of ESG. I think that we are working towards having a more common understanding, but right now there isn’t agreement about what standards to use for reporting. I think that there will be more clarity within the next few months around some of the expectations in Europe. There’s already clarity around the types of disclosures for certain entities using the TCFD standard, and there’s a pending rulemaking coming up in the fall from the SEC. And if I had a nickel for every time that SEC commissioners or staff members mentioned ESG I would be very wealthy indeed. But the bottom line is that this is a rapidly evolving area. And one of the things that I think we will see in the very near term is a defined approach in terms of disclosures and other requirements that will help companies align to standards with that in mind.
Related to that, how do we work to ensure that companies see ESG as an ethical consideration, rather than just checking a box?
AT: With the rise of ESG investment, we’ve obviously seen a lot of checklists, taxonomies, questionnaires, and debate over whether ESG is financially beneficial or not… There is a business case, but it’s very much a big-picture business case about your values and how you exchange perceptions with society. And I think that misses the bigger opportunity to build public trust and a better reputation, attract and motivate young people, and become better at anticipating collective risks like climate change.
If a company was getting started with ESG, what recommendations would you give to help them off the ground?
AT: Getting Board buy-in is very important. The world has changed very dramatically- there is far more transparency and social media exposure, which means that you have social and environmental impacts. These can’t be treated as externalities that you can ignore anymore, and your impacts are likely to kick back and become your risks… I would frame all of this in terms of being more resilient and more innovative to future changes. This is about staying competitive and staying in business. So, I would say that paying attention to these issues is about having some regard for what’s going on in society and a good way to anticipate the changes that are yet to come.
LBLW: The first thing I always say is when you’re looking at how to solve any challenge in front of you, the most important thing to do is to stop digging. If you’re in a hole, you stop digging. When we’re talking about ESG, taking just a moment to pause and understand who your stakeholders are. Companies get this wrong many times because they consider stakeholders to be synonymous with shareholders, and that’s not the case with ESG impact… Understand the landscape first, know who your audiences are, and understand as an organization where you are most likely to have an impact. Every company is a little bit different with different geographic footprints, products, services, et cetera. Once you understand these factors you can start gathering information about what are you doing, where you may have easy wins, and where you can have longer-term goals that you need to put in place to be able to make a difference.
If we were to look into our crystal ball, what will the ESG landscape look like five years from now?
AT: I think in five years we’ll see more professionalization about the kind of metrics and the things that companies are required to report on… and I think there will be far more scrutiny about the relationship between business and governments. We saw this a little bit after January 6 with people looking not just at what companies say about their ESG commitments, but whether that is reflected in their political spending. And I think you’ll see a lot more pressure on things like tax and CEO pay. This means not just having a bunch of greenwashing initiatives and glossy brochures, but what the company is doing to be responsible in terms of wider society. I think we’ll see this conversation evolve very quickly.
MS: As standards and best practices are developed, I think we can expect to see more meaning being given to ESG commitments, similar to what we saw in the evolution of compliance programs and functions. That will involve questions such as, are we making more than just check the box efforts? How effective are our ESG initiatives? How can we monitor, measure, and evaluate? Relatedly, regulators and other stakeholders setting ESG reporting standards and shareholders are likely to take further interest in the accuracy of the reporting.
LBLW: I also believe that there will be a standard that people are aligning their programs to that’s relatively well accepted, and I think that there are going to be ESG programs for both public and private companies. Public companies will have obligations to gather data from their suppliers, which will be included in contracts. So, I think there’s going to be a lot more transparency about the impact on ESG, whether you are private or public. And I think that we will see a continuing trend towards investors and consumers to make more thoughtful decisions based on their own values when it comes to supporting or not supporting organizations based on their alignment to ESG strategy.
Are there any final words of ESG wisdom you would like to convey to readers?
AT: I would really want to emphasize is that ESG is a really great career opportunity if you’re in compliance. It’s not just about regulations, it’s a real opportunity to position yourself in a more strategic role over ethics, to get more traction with senior leadership, and really to think about these issues in the context of a healthier organizational culture.
LBLW: I think one of the most important things for people to know is that ESG is something that everyone needs to learn about and make part of their vocabulary. You don’t have to be an environmental scientist or have a Ph.D. to understand some of the basics around ESG. As human beings on this planet and as consumers we can’t have any situations where people are just putting their heads in the sand. We need to understand what ESG means for our generation and for future generations.
Lisa Beth Lentini Walker is the CEO and Founder of Lumen Worldwide Endeavors, which helps to guide companies with sophisticated, innovative solutions to their most difficult decisions. Lisa Beth is a legal and compliance leader who has found success in public and private companies by connecting, advising, and educating diverse populations while aligning them with a common purpose, furthering the enterprise vision.
Mary Shirley is an international Ethics and Compliance generalist, currently working at a multi-national healthcare company. She holds 16 years of experience with in-house with government regulators and in compliance consultancies. Mary is co-host of the podcast, Great Women in Compliance which amplifies the voices of women in the field, covers in-depth topics, and seeks to empower women in Risk, Compliance, Ethics, Privacy, and Cybersecurity fields.
Alison Taylor is the Executive Director of Ethical Systems, a research collaboration based at the NYU Stern School of Business between leading academics working on behavioral science, systems thinking, and organizational psychology. In addition, Alison is an Adjunct Professor at NYU Stern School of Business, and she holds Senior Advisor roles at BSR and Wallbrook. Alison is currently writing a book for HBR Press on how companies can build a more holistic, and considered approach to corporate integrity beyond functional silos.
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