ESG’s Role in Anti-Bribery and Corruption: Burden or Benefit?

Accelerating concerns on sustainability, inequality and responsible corporate behavior toward workers, other stakeholders and society have driven corporate players to pursue increasingly ambitious environmental, social and governance (ESG) goals while ensuring compliance. As investors are becoming increasingly aware of the shortcomings of standard metrics in capturing the multifaceted reality of ESG regulations ¹–which are subject to regional legal frameworks and often incommensurable country-specific requirements–efforts to recalibrate corporate risk analysis to include certain aspects of ESG compliance have grown in parallel. Although the debate is still ongoing over benchmarking, measuring and standardizing ESG as a whole, much progress has been made in 2022 and the tides appear to be shifting.

Forty-eight percent of the respondents in 2022 reaffirmed the importance of incorporating ESG into their ABC program on a global scale, in line with the trajectory observed last year. In 2021, 60% of the respondents stated their companies had implemented ESG compliance as part of their ABC programs. The 2022 Kroll Anti-Bribery and Corruption Benchmarking Report gained depth as we targeted a greater number of respondents and expanded the survey’s regional basis, thus providing a more leveled view on how ABC perception has evolved over the past year.

Companies in the U.S. and Canada and the Middle East appear to be lagging, with only 43% and 38% of respondents, respectively, indicating that a review of ESG metrics is part of their anti-bribery and corruption compliance compared to a higher average of 57% in Asia Pacific and 52% in Europe and Latin America. This positive trend feeds off a comparable sentiment regarding the relevance of ESG compliance as part of ABC programs in 2021, with respondents claiming widespread appreciation for opportunities created by ESG factors to capitalize on good governance, transparency and a growing awareness that understanding ESG-related corruption risks and anti-corruption efforts is critical. 

Respondents indicated that over the past year their firms have boosted their ABC programs with greater consideration for all the key aspects of the ‘E,’ ‘S’ and ‘G’ of ESG compliance. 

Of increased importance were factors related to air and water pollution, which, along with labor rights, became a more systematic feature of ESG risk analysis–especially for Asia Pacific respondents’ firms in 2022.

Our survey highlighted that compliance centering on labor right protections and climate change mitigation measures have been significantly more important for European respondents in 2022 compared to 2021, with an increase by 17% and 15% respectively.

Latin American and U.S. and Canadian respondents suggested renewed attention to human rights abuses, including modern slavery and human trafficking in the broader Americas region–16% higher than in 2021, according to respondents based in the U.S., Canada, Mexico and Brazil).

Finally, the data breakdown points to increasing attention to diversity, equity and inclusion (DEI) matters in U.S. and Canadian firms in 2022, with a 13% increase compared to the previous year. 

The evolving landscape of ESG regulatory frameworks in 2022 and the expanding legal compliance requirements they entail could have triggered a more systematic adoption of ESG due diligence into ABC programs with regards to the areas highlighted, as reflected by our data. For example, in March 2022, the U.S. Securities and Exchange Commission (SEC) unveiled its much-anticipated proposal, which would potentially require public companies in the U.S. to disclose climate-related risk and greenhouse gas emissions information–a step further than the standard risk information currently disclosed in SEC filings.

The proposed rule would not only define climate-related metrics and impose relevant disclosure requirements, but it would also require companies to disclose how they incorporate climate risks and opportunities into their governance and corporate strategies, along with other substantial quantitative and qualitative information. However, due to the lack of standardization across the nuances of ESG factors and companies’ understanding, the integration and reporting of climate risks is likely to diverge, adding increased compliance costs and/or liability concerns.

Another piece of good news is the establishment of the International Sustainability Standards Board (ISSB), an independent, private sector organization launched by the International Financial Reporting Standards (IFRS) Foundation, a sustainability-focused non-profit, with the goal of developing a global baseline of sustainability disclosure standard to meet investors’ needs. In March 2022, the ISSB announced two proposed standards for general sustainability and climate-related disclosure requirements to set unified rules for companies globally.

Despite the ever-growing importance of ESG, 2022 respondents also mirrored the sentiment captured by 2021 data regarding ESG challenges potentially exceeding benefits for the compliance function. From a global perspective, 59% of the respondents either agreed (34%) or strongly agreed (25%) about this unbalance. Figures in 2021 were just below, with 31% of respondents agreeing and 21% strongly agreeing that ESG creates more challenges than benefits for compliance. This could be reflective of the ongoing struggle with the implementation of ESG programs, in part due to the lack of standardization and coherence of ESG criteria. While this was a key topic of the 26th United Nations (UN) Climate Change Conference of the Parties, the proposed development of a comprehensive global baseline of sustainability disclosure standard will take time to take shape, and it is too early to predict and measure its impact. The lack of standardization, transparency, regulation and costs of ESG due diligence–as well as limited data–were the main challenges envisioned by respondents in 2022, who shared a higher concern on the matters than in 2021. These issues are naturally interconnected as the difficulty to quantify some ESG factors hampers more clear data disclosure and systematic data gathering. Furthermore, the multiple areas of ESG compliance and their specific benchmarks complicate potential comparative analyses, thereby affecting transparency. 

Although the burdens of ESG compliance are still significant, the regulatory developments in 2021 should be saluted as a step in the right direction. The growing appreciation that risks specifically tied to ESG areas could pose serious operational and reputational concerns for corporate players is also encouraging. The hope is that soon, international and national regulators will start to coordinate on long-awaited initiatives to mitigate hurdles and costs, while more companies advance their ABC programs to incorporate systematic and broader ESG compliance and embrace a stronger ESG proposition and culture for themselves and their organizations. 

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¹ https://www.wealthprofessional.ca/investments/socially-responsible-investing/why-do-esg-funds-buy-russian-oil-rather-than-canadian-crude/365336