Proving the ESG Promise

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Post By: Adam Turteltaub

According to recent news reports the US Securities and Exchange Commission is investigation Deutsche Bank asset manager DWS “over how it used sustainable investing criteria to manage its assets.” The investigation reportedly is looking into whether the firm overpromised on its sustainable investing approach. According to the Wall Street Journal, “…the firm’s former head of sustainability said it overstated how much it used sustainable investing criteria….”

After reading the articles about the investigation, compliance teams, no matter what industry they work in, should pause and ask two key questions:

  • What sustainability and, relatedly, what Environmental, Social & Governance (ESG) promises is our organization making?
  • What policies, procedures and controls are there in place to make sure that we are keeping those promises?

Unless the organization has a chief sustainability or ESG officer, it is quite possible that no one is overseeing all the pieces of the puzzle. Someone is watching governance, someone else the environmental issues, and a third (or even fourth, fifth and sixth) is handling the social end of things. Is there an inventory of all these commitments?

The reality is that every commitment an organization makes creates a new risk. Someone’s bonus is likely tied to it, and that person may be tempted to cheat to make the goals either for personal benefit or what they perceive as the good of the company.

That deception can have consequences for the individual, of course, but it could have a negative impact on the organization. At a minimum there is likely to be significant reputational damage if cheating is found. At worst, it could open up the possibility of shareholder lawsuits and governmental actions, especially if the claim is deemed to be material.

That’s particularly true in areas where there are already laws on the books. But it also applies in other areas as well. If a company claims it will, for example, decrease greenhouse gas emissions by X%, doesn’t and then reports a fake number, that could be a significant issue.

The same compliance controls for other risk areas likely need to be extended to ESG and sustainability efforts. And, at least to my mind, it makes the argument for compliance acting not as the owner of the issue – the business people have to own it and take responsibility – but as an essential control.

Some have argued that compliance should own ESG, since it is tied up so much with a company’s values and willingness to live up to them. I don’t disagree that there is great overlap, but if compliance were to own the issue, it could not act as a control at the same time.

That’s a conflict of interest that would make for an unsustainable sustainability and ESG effort.