Thu, Jun 10, 2021
The Changing Role of ESG and its Impact on the ABC Landscape
Third-Party Risk Management – How Compliance Officers Have Adapted Their Programs During COVID-19
Jun 10, 2021
- View all articles
While anti-bribery and corruption (ABC) programs have long been a part of many company’s risk analysis and are governed by various countries’ legislation, an increase in investor and shareholder focus on environmental, social and governance (ESG) has further emphasized the link between a robust ABC program and a company’s ESG compliance, because all aspects of an ESG investment can be undermined by instances of bribery and corruption. The Kroll 2021 ABC Survey results indicate that respondents are overwhelmingly in support of ESG as an integral part of ABC programs and acknowledge the positive impact ESG programs can provide, but that this support differs based on the respondents’ geographic location and continues to be constrained by the challenges of implementing a robust ESG program.
Regional Differences in Support of ESG in Compliance Programs
Across the globe, bribery and corruption have existed as a cause for concern of investors and, although various regions may have different ways of addressing the issue, with an increased focus on ESG there may be a reciprocal increased focus on strong ABC programs. According to our 2021 ABC survey results, 65% of respondents agreed or strongly agreed that anti-bribery and corruption risk, relative to ESG, is important. This has resulted in over half of the respondents in Asia-Pacific, Latin America and Europe now including ESG in their ABC programs. The driver of ESG integration in compliance programs appears to be region-specific needs and interests. As we will explore in this article, there may be a correlation between perceived levels of corruption and the demand for ESG, but ESG integration is also driven by regional economic and industrial factors. For example, the push for ESG in Latin America is primarily driven by environmental and social concerns stemming from the extractive industry’s negative impacts, while in the Asia-Pacific region the focus lies on business resilience and employee rights.
Moreover, our survey indicates that even respondents who do not currently have ESG integrated into their ABC compliance programs will likely do so in the future. The survey results indicate that an additional 20% and 22% of respondents in Asia-Pacific and Latin America, respectively, and an additional 10% of European as well as 12% of U.S. and Canadian respondents believe that ESG should be part of compliance programs. Despite the relatively smaller integration and desire for ESG programs in Europe as well as in the U.S. and Canada, it is expected that ESG will grow in these two regions. There has been a focus on regulating and mandating ESG in Europe. For example, the EU Sustainable Finance Disclosure Regulation (SFDR) came into effect on March 10, 2021, and requires some financial sector firms to disclose their ESG investment impact. In the U.S., the recent change in executive and legislative administrative control is expected by many to lead to a reprioritization of environmental and social policies, which may also necessitate changes in ABC policies and compliance priorities at American companies.
ESG Advantages and Opportunities
All aspects of an ESG program, including its ability to have robust environmental, social and corporate governance policies, can be undermined by instances of bribery and corruption, thus reemphasizing ABC in ESG. The percentage of people who believe that ABC programs create opportunities to capitalize on good governance and transparency may be linked to the perceived levels of corruption in the region. As our survey demonstrates, the Asia-Pacific region has the largest percentage of respondents who agree that ABC programs are beneficial for good governance and transparency. This may be due to two factors. One is a 2020 Transparency International survey that found that one out of five persons, equal to 836 million people, who used public services had paid a bribe in the past 12 months. The other is that at least 57% of investors in the Asia-Pacific region have largely incorporated ESG issues into their investment analysis, including corporate governance issues like ABC policies. The Latin American region’s percentage in agreement is also demonstrative of =the fact that, in its 2019 survey, Transparency International found that 53% of Latin American citizen stated that corruption had increased in the region over the past 12 months. For the U.S., Canada and the European regions, the lower reported importance of ABC programs to good corporate governance and transparency is likely tied to the several countries’ pre-existing strong bribery regulations, including the UK Bribery Act 2010, Canada’s Corruption of Foreign Public Officials Act, and the U.S. Foreign Corrupt Practices Act.
ESG Challenges and Concept Ambiguity
Yet, despite the abovementioned overwhelming respondents’ agreement that ESG should be part of compliance programs and the agreement that ABC programs create opportunities for good governance, 54% of respondents also indicated that ESG creates more challenges than benefits for the compliance function. The number of respondents who think that ESG poses challenges to their compliance program, may be higher in the Asia-Pacific and Latin America regions, because the number of respondents who have attempted to implement ESG into their ABC programs is also higher. Similarly, the U.S. and Canada’s limited uptake of ESG in their ABC programs could explain why U.S.- and Canadian-based respondents have faced the lowest number of challenges at 34% so far. Despite ESG becoming a buzzword in recent years, ESG continues to suffer from a lack of standardization, lack of data and lack of transparency regarding its criteria. This ambiguity may lead respondents to believe that (for now) the workload to implement ESG outweighs the rewards of an ESG program.
The results of the survey indicate that, while there is overwhelming support for the integration of ESG into ABC programs, as well as an acknowledgement that understanding ESG relative to bribery and corruption is important, many respondents struggle with the implementation of ESG programs. However, with increasing ESG regulations and the stellar performance of ESG funds , ESG criteria will likely become more standardized and manageable in the future. The growth of ESG is especially evident in the Asia-Pacific and Latin America regions, where respondents answered more positively towards ESG than their European-, U.S.- and Canadian-based counterparts. Because the latter regions are more strongly associated with corruption, a company’s abilities to conform with ESG compliance requirements in these regions especially, will only be successful with a demonstrated ABC program.
Compliance Risk and Diligence
Complying with anti-money laundering and anti-bribery and corruption regulations.
AML Compliance Due Diligence
Kroll helps clients navigate the complexities of today’s regulatory environment through a broad suite of anti-money laundering compliance screening and due diligence offers.
Supply Chain Vendor Screening and Due Diligence Services
Identifying, assessing, mitigating and monitoring third-party risk in modern supply chains
Compliance Program Consulting
Kroll is trusted by companies worldwide to help establish policies and programs aimed toward preventing fraud and complying with anti-money laundering (AML) and anti-bribery and corruption regulations.