ESG in focus: Investigations – Part 3 of 4

In January 2020, Larry Fink, CEO of Blackrock, the world’s largest asset manager, raised the bar on sustainable and inclusive capitalism when he established that a necessary criteria for his company’s potential investments going forward will be how they perform on a series of Environmental, Social, and Governance (ESG) metrics. In his view, the companies that will deliver outsized returns to their shareholders over the long term will be those that serve the interests of their broader stakeholder groups.

With interest in the ESG agenda further heightened through the pandemic, the pressure is building to be seen to address the disruptive forces at play in the world today that fall under the ESG banner. This includes the impact of climate change, availability of resources, supply chain issues, workplace diversity, and corporate reporting and assurance, among others.

In the third of our series of posts analysing the opportunities and potential pitfalls when developing an ESG strategy, we now highlight Investigations.

INVESTIGATIONS

With increased global ESG transparency and accountability requirements from regulators, misconduct and cultural issues resulting from poor governance are more visible. Companies will need to demonstrate they are appropriately investigating concerns around ESG and remediating identified issues to protect against significant reputational and financial damage.

ESG issues span not only the workplace environment and employee misconduct, but across consumer and community impact. Accordingly, an organisation’s ESG initiatives and performance must be considered in strategic and operational decision-making, including at Board level.

Given the breadth of involvement by an organisation's stakeholders into ESG, protocols around related investigations should include a specific review of independence of reviewers / investigators and a preliminary understanding of how investigation reporting will be rolled out to relevant internal and external stakeholders.

Increasing country-specific regulation will ignite many internal investigations and could lead to regulatory reviews. The US SEC has indicated that ESG disclosure regulation will be a central focus for them, and UK regulators are likely close behind. There will be increased pressure on companies to demonstrate that any resultant internal investigations are robust, independent and of a standard acceptable to regulators.

Key considerations: 

1. Do not solely focus on reputational risk avoidance: Companies can demonstrate the value of their ESG objectives by finding ways to use these principles to build sustainable growth, and therefore resilience, in the long term.

2. If your compliance controls fail, consider an internal investigation to right the ship:  

Be proactive and use an independent and objective body to examine processes and procedures.  Include remediation measures as part of the investigation follow-up.

3. Ensure that ESG reporting and risk monitoring is aligned with legal and compliance areas, so that swift action can be taken on investigations and remedial actions: ESG initiatives that are implemented into operational areas such as supply chain must have a monitoring approach to address the limited transparency and mitigate the risk from third parties. For example, suppliers that are part of a diversity initiative.

Click here to read the full report: Who Cares? Why the right ESG strategy can spell business success