The news last month that German authorities conducted a raid on a company for misleading ESG claims[1] serves as a further wake-up call for Boards of Directors to provide robust oversight in this critical area.
And as Boards struggle to figure out how best to do this, they will be well served to apply learnings from another area. The compliance area has been undergoing considerable change in recent years and yields valuable insights for those overseeing, as well as for those driving, ESG today.
When companies earnestly began recognizing in the early 2000’s that a distinct effort was needed on compliance, many gravitated to an approach focused mainly on rules and controls. Regulators too tended to share this view, and indirectly encouraged this path.
But as institutional governance and compliance failures around the world continued, the need to break through the rules-and-controls model became evident.
This grew to an imperative following the 2008-2009 financial crisis when it was recognized that something deeper needed to be addressed if companies were to meaningfully improve their governance and compliance.
That something deeper was culture, those intangible—often unspoken—traits and practices at any organization that influence how people behave, how they deal with each other, and how business gets done.
In more recent years, it has been recognized that an approach to culture (the “C”) that does not also aim to identify and foster wide agreement within the company on fundamental values (the “V)” is not sustainable. And among these fundamental values are those touching on the very core of what defines integrity or ethics (the “E”). Together, these elements constitute the concept of “CVE”.
Today, Boards will wish to ensure that their companies are not making the same mistakes in ESG as were earlier made in compliance. However laudable a company’s climate or social goals may be, these too need to be—so to speak—probed for probity.
These main topics differ only slightly between small and large companies. Owners who are actively involved in the company’s operations have a good grasp of the relevant information and can quickly assess whether the financial performance is robust and sustainable. But how can Condition-KPIs be made more understandable and tangible for the Board members who are less involved in the company and not operationally active?
In this context, the question is not just whether a company’s proposed advertisement, marketing claim, or public disclosure on ESG complies with laws or regulations. The more probing question is: is it consistent with our company’s CVE?
Further questions a Board might ask of management could be even more to the point:
In summary, Boards will wish to keep the lessons from compliance in mind. For indeed, ESG withoutCVE is incomplete.