Harry Truman famously said: “It is amazing what you can accomplish if you don’t care who gets the credit.” It is also amazing what you will fail to accomplish without leadership and the right team. This is especially true when it comes to the Environmental, Social, and Governance (ESG) movement, where failure is not an option for boards and CEOs.
ESG has arrived on the corporate shores as the perfect evolving storm of disruption – social issues, public sentiment, disclosure requirements, regulations, legislation, court rulings, shareholder activism, institutional investors, and employee activism. Such disruption presents risk and opportunity.
For many companies, ESG will be all-consuming effort, a new normal. Thus, no one or two corporate functions are sufficient to tackle ESG requirements. Although heads of risk, finance, audit, and sustainability could take the lead on ESG; all things considered, they are not best suited to accomplish the task. Instead, there are two C-Suite members that stand out, as a tag team and individually: General Counsels and Chief Ethics & Compliance Officers.
General Counsels and Chief Ethics & Compliance Officers are uniquely situated when it comes to understanding legal and regulatory requirements, evaluating risk, collaborating across corporate functions, issue spotting, acting as an arbiter, and acting in the best interest of the company. Unlike other corporate functions, GCs/CECOs already deal with many aspects of ESG, including corporate governance, policies, investigations, training, due diligence, and environmental, safety, and labor and employment laws.
The first step towards success for ESG compliance is to ensure that leadership “gets it” and actively supports a plan to be compliant. The GC/CECO have the duty and standing to educate and advise the board and CEO of the legal requirements, industry standards, and legal and reputational risks associated with ESG in the context of the company’s industry. Public company boards have exposure regarding their duty of care in connection with ESG.
At its core, ESG is about compliance with laws and an organization’s policies and proclamations. This is the natural domain of the GC/CECO. However, the traditional Legal and Ethics & Compliance framework is insufficient to meet the new world that comes with ESG. The Big Four accounting firms are investing significantly in building capability for ESG advisory services. Likewise, GCs/CECOs should be investing, particularly when it comes to human capital.
The success of GCs/CECOs will depend on whether they have the right team in place, including subject matter experts and bandwidth to manage the workstreams. There are a few key players that the GC/CECO should have in place that may not be obvious, namely a CECO in the C-suite, a privacy lawyer, a diversity, equity and inclusion specialist, a sustainability lead, and a legal operations point.
The CECO is already responsible for many of the social and governance aspects of ESG. The CECO has oversight over the company’s code of conduct and policies. The CECO is responsible for the anonymous hotline, investigations, conflicts of interest issues, due diligence, risk analysis, anti-corruption, fraud prevention, human rights, and education. It is noteworthy that the framework for setting up an Ethics & Compliance program maps nicely with setting up an ESG program. The core of the CECO’s responsibility is to ensure the company acts responsibly and ethically, which is the purpose of ESG. The role of the CECO becomes more important with ESG.
The second key function to help with the social part of ESG is a data privacy lawyer. Companies’ ability to use personal information is becoming more limiting and requiring more transparency. That trend will continue especially with digital transformation, artificial intelligence, big data, surveillance, and biometrics. Globally, privacy is becoming more of a human right. Specific legal expertise and leadership is required to navigate these privacy and security paths.
Diversity, Equity, and Inclusion is another key aspect of ESG, for both the social and governance aspects. DE&I is reflected in the governance of the company, namely with the C-suite and board, and also among employees and partners. As such, companies should make a concerted effort to address systemic bias, racial/gender inequality; income inequality; and gaps in education and skills. This requires expertise and a dedicated driver within the company. That person may not sit within Legal or Ethics & Compliance, but the GC/CECO should champion the effort to ensure that DE&I is a priority.
Environmental seems to get much of the attention when it comes to ESG and for good reason. Climate change is a pending humanitarian crisis and existential threat to our financial markets. Companies need internal expertise on climate risk, carbon footprint, energy efficiency, and preventing waste. This expertise can sit in Legal or Ethics & Compliance or outside those functions. Regardless, Sustainability and the GC/CECO must collaborate closely, particularly in public companies where issues of materiality in connection with reporting are critical. The monitoring of sustainability is also important from a legal perspective when it comes to marketing and promotional materials and statements.
For many companies, ESG is a herculean task. Someone must manage the day-to-day and coordinate efforts. A dedicated legal operations specialist would manage the program and risk by tracking and measuring the workstreams related to ESG and the corporate functions. Legal operations would also monitor and track industry standards, new laws and regulations, the company’s public commitments, and contracts as they relate to ESG compliance.
With GCs/CECOs taking the lead and ensuring the right players are on the team, it should be amazing what is accomplished when it comes to ESG regardless of who gets the credit. For many GCs/CECOs, these insights are old news. For others, this should be a heads-up that it is time to educate and advise the C-suite and board regarding the legal and reputational risks at stake and human capital resources that are needed to face the challenge. This present disruption presents great opportunity for GCs/CECOs.