Companies face several challenges when implementing Environmental, Social, and Governance (ESG) programs. These can vary by region but tend to include three issues: A lack of certainty in the regulatory environment, the expense of compliance, and multiple operational challenges to reaching success. To boards and executives, creating an ESG program may appear to be a very tough row to hoe. Let’s survey these 3 challenges to ESG program success.
A Lack of Certainty
There is a lack of certainty in ESG regulations and where they are headed. In the U.S., the regulatory landscape for ESG is still evolving. ESG goals are lofty and continue to evolve, The U.S. Securities Exchange Commission published its final ESG disclosure rules in March this year in an 866-page document but those are on hold while the inevitable litigation plays out. In Canada, there are some regional mandates, like climate-related disclosures, but no nationwide uniform ESG regulatory framework. The European Union (EU) has been more proactive with regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy. However, these rules are complex and require significant resources to ensure compliance, especially for non-EU companies doing business in Europe.
Hentie Dirker, the Chief ESG and Integrity Officer for AtkinsRéalis, explains that this uncertainty is a layered challenge. “There is a lot of uncertainty in companies and in the world about what ESG really is,” he says. Regional differences are another layer of the regulatory onion. Dirker confirms this point: “Staying on top of all the various reporting frameworks and requirements is also quite challenging since its fast moving and dependent on the breadth and size of an organizations footprint globally it could have profound implications in how data needs to be collected, reports be filed, etc.” In this way the uncertainty of what is required of companies complicates the operational challenges.
The Expense
Implementing an ESG program requires significant upfront investment in infrastructure, staffing, and technology. For smaller companies and those with low margins, these costs can be prohibitive. It is challenging to align long-term ESG goals with short-term business objectives, such as profitability. This is especially true for publicly traded companies that are driven by quarterly results. Complying with stringent regulations in Europe is costly, requiring companies to upgrade their operations, hire additional personnel, and license systems to meet climate and sustainability reporting obligations. Companies may struggle to justify these costs when the financial return on investment for ESG initiatives isn’t always clear or tends to be long- not short-term.
The Operational Challenges
Implementing an ESG program is an operational struggle. Jon Drimmer, a partner with Paul Hastings and previously the Chief Compliance Officer of Barrick Gold, notes that the biggest challenge for clients in implementing an ESG program is scope as companies “may be impacted by product, geography, program maturity and other factors. Addressing those risks across the globe is hugely challenging.”
Data Collection and Reporting: Gathering reliable, standardized, and comparable ESG data across different regions is one of the highest hurdles. Many companies lack the necessary tools, systems, or frameworks to collect and report on ESG metrics effectively. The various reporting frameworks such as the GRI (Global Reporting Initiative), the ISSB (International Sustainability Standards Board) reporting framework, and the European Corporate Sustainability Reporting Directive (CSRD) make it challenging to align global operations, particularly for multinational corporations. Hentie Dirker of AtkinsRéalis confirms that success in this area is an intensive effort that requires cross-functional support. He notes that “Separately standing up a control environment around everything that needs to be disclosed is also quite a lot of work and support from the finance group is needed to get this done.”
Measurement of ESG Impact: CEOs want to know what success looks like but quantifying the impact of ESG initiatives, particularly in the short term, can be tricky. Companies often struggle to link ESG metrics to financial performance, which can lead to skepticism about the business case for ESG. This is exacerbated when ESG ratings from different providers conflict due to varying methodologies used, leading to confusion over how a company's ESG performance is assessed.
Global Supply Chain Issues: Companies with complex global supply chains face difficulties in ensuring that ESG principles are upheld at every level. Under the new EU Supply Chain Due Diligence Directive (SC3D), large companies operating in the EU are required to identify and address both adverse human rights and environmental impacts in the company’s operations, its subsidiaries, and their business partners. Some companies will struggle with implementing the SC3D, especially those in industries such as fashion, electronics, or agricultural industries, where oversight of labor practices, environmental impact, and ethical sourcing can be challenging.
Integrating ESG into Business Strategy: Companies may struggle to fully integrate ESG into their core business operations especially when ESG programs are siloed into separate departments like corporate social responsibility (CSR), sustainability, ethics & compliance, or human resources, rather than being woven into overall corporate strategy and decision-making.
Greenwashing Risks: As ESG gains more attention, companies face increasing scrutiny for potentially overstating their environmental or social achievements (greenwashing). A misstep in communication or transparency can harm a company’s reputation and reduce investor trust. The lack of universal standards exacerbates this risk, as companies may inadvertently engage in misleading claims while trying to navigate the complex regulatory landscape.
Expertise Gap: Finding leadership to manage an ESG program is also an issue as ESG is a relatively new field there are few professionals with a trifecta of expertise in sustainability, human rights, and governance. This can slow the development and implementation of effective an ESG program.
Stakeholder Expectations and Pressures: Companies are facing pressures from a wide range of stakeholders, including investors, customers, and employees, to adopt ESG programs. These stakeholders often have conflicting priorities. For example, investors might prioritize climate change, while employees may focus on DEI (diversity, equity and inclusion) principles.
Cultural and Regional Differences: Attitudes toward ESG can vary widely between regions, making it hard for multinational companies to implement uniform policies. Issue bias is reflected in a region’s regulations. For instance, European firms may be more focused on sustainability and climate goals due to stringent EU regulations, while U.S. companies may emphasize governance or DEI principles.
Conclusion
Implementing an ESG program requires all hands on deck to navigate the complex regulatory landscape, manage stakeholder expectations, and integrate ESG principles into company day-to-day operations. In spite these challenges, Hentie Dirker of AtkinsRéalis is positive and advises that by aligning ESG strategies to focus on the areas which will have the most meaningful impact, companies can implement as ESG program that will realize benefits both for their business and long-term sustainability. It’s a tough row indeed but as Nelson Mandela said, “It always seems impossible until it’s done.”
General Counsel
Sometimes, there is just no honor amongst thieves.
While it is always risky to give or authorize bribes, that risk may sometimes manifest from unexpected sources.
For RTX (formerly Raytheon Technologies), which entered into agreements with the DOJ and SEC last week to resolve charges related to the FCPA and government procurement laws, it was someone they appear to have been working closely with.
RTX used a consulting firm to funnel about $1.9 million to payoffs to relatives of the country’s emir. Curiously, it was an owner of that very firm who brought the case to light – he filed a commercial lawsuit in 2019 for unpaid fees on a related matter, and made the corruption allegations in the process.
This may have caused the SEC to investigate. Indeed, many of the findings in the DOJ and SEC orders, including the conclusion that the consultant reports were actually written by Raytheon, reflect the allegations and documents attached to that lawsuit.
The owner is not the only middleman in the aerospace and defense industry who has tried to enforce dubious arrangements and, in the process, exposed more than he may have intended.
The French firm Thales, for instance, was sued by Sanjay Bhandari, a self-described “well-known commercial intermediary” who facilitated a meeting between the fighter jet maker and a senior Indian defense official. He was paid €9 million, but claimed to be owed €11 million more – and reportedly triggered an investigation by French authorities as a result. The case is still ongoing.
(For Thales, this may be starting to feel like Groundhog Day. They were a joint-venture partner with Raytheon in the Qatar deals.)
Similarly, around 2017, a middleman in Indonesia reportedly sued to enforce the sale of a helicopter to the Indonesian air force for €44 million. The helicopter was ostensibly for search and rescue operations, but was fitted with luxury appointments and lacked a side door that would facilitate the entry and exit of stretchers. The middleman was eventually sentenced to a 10-year prison term.
And in 2007, a third party threatened to sue German industrial service provider Ferrostaal for unpaid commissions in connection with submarine sales to Greece, even though that could expose both entities to corruption-related prosecution. Ferrostaal decided to pay the company EUR 11 million, leading its lawyers in a later compliance review to conclude that “the net effect was to ‘whitewash’ a highly irregular set of facts with clear compliance red flags.” The company was eventually caught anyway, and fined about $183 million by a Munich court near the end of 2011.
Perhaps it is not surprising that individuals connected to bribery and corruption would continue to make questionable decisions. The lesson for businesses should be clear – a leopard can’t change its spots.
Author’s note: The RTX case includes very unusual circumstances, such the involvement of some of the most prominent officials in Qatar, and resulted in more than $950 million in penalties and disgorgement, as well as a deferred prosecution agreement and the imposition of an independent monitor. While those circumstances are also noteworthy, the point above was highlighted for its relevance to most compliance programs. RTX refers to both the holding company and its subsidiary.
FCPA Compliance Consultant
Gamification can take on many forms within online training, and can often be a great way to incentivize your audience to complete a course. While “gaming” can evoke images of a complex video game that would detract from the training subject matter, gamification has actually proven to create more engagement for learners.
Gamification uses strategic elements of a game to draw a learner to want to interact with training content, but does not necessarily require that a full revamp of all training courses to include gaming features. Simple steps like creating a rewards system for completing tasks or courses is enough to draw interest to training.
Consider these “easy” steps to start your journey into gamification, which you can offer within the TRACE LMS platform, and likely most training platforms currently available:
Design custom social media badges that learners earn when completing a course, and can share their accomplishments online
Create friendly contests among learners to see who can complete the most courses
Develop a Leaderboard in which your top scorers for training are listed within the training homepage whenever logging into the site
A few other things to consider, if access to online gamification functionality is limited, could be creating competitions between departments to see who can complete all of their training in the least amount of time. Winners can receive small prizes, like free coffee, or a company t-shirt or water bottle.
Simple elements like these can draw attention to learning, and keep learners interested in completing their required training. Creating competitions around scoring will keep your learning audience focused on the information they are consuming to be sure that they answer questions around the content correctly and appropriately.
It is also proven that social interaction while learning increases retention of that learning by 50%. Allowing your learners to engage in a friendly competition, or even a simple discussion and communication about the training that they all must complete helps them to learn together and reinforce your message.
Ready to get started? Please reach out to training@TRACEinternational.org and we can help you develop gamification through badges, and even content development! Happy gaming!
Associate Director, Compliance Training, TRACE
This post is part of our “Ask an Expert” series where we take questions submitted by readers and ask an expert in the compliance field to provide insight. If you have a question you would like answered, please submit here. |