Kroll Institute Newsletter – May Edition

The Kroll Institute newsletter opens the lens of Kroll Institute Fellows on topics related risk mitigation, good governance and transparency. Here’s what our Fellows think you should be paying attention to this month.

Cyberattack Triggers Policymakers While American Jobs Plan Counteroffers Continue

Chris Campbell, Chief Strategist

• The CDC recently issued new guidance on COVID-19, stating that those who are fully vaccinated no longer need to wear masks or practice social distancing. While this is a major milestone in the country’s response to the pandemic, the announcement came just two weeks after the CDC issued much more cautious guidance and received fairly broad criticism for what many considered to be overly conservative messaging. Others now argue the agency’s communications on the new guidance went too far in the opposite direction. 
• The cyberattack on Colonial Pipeline has triggered a significant response from federal policymakers. Following the attack, President Biden issued an executive order requiring all software sold to federal agencies meet baseline cyber security standards. In Congress, members from both parties have called for legislation to require critical companies to inform the federal government when they’ve been attacked. The incident has also raised the profile of sections in the Biden infrastructure plan that aim to bolster cyber security.
• Bipartisan talks on the American Jobs Plan continue, with Republican senators reportedly planning to present the White House with another counteroffer this week. Some GOP members have suggested the counter may be as big $800-$900 billion. However, even if the two sides could reach a deal on infrastructure spending—which would likely mean that Democrats would move other parts of the package on a later vehicle—the two parties remain far apart on paying for the package, with Republicans still united in opposition to raising taxes and Democrats largely opposed to increasing the gas tax or “user fees.”

The Post-Pandemic Future of ESG: Asia-Pacific

Richard Dailly, Kroll Institute Fellow, Managing Director, Forensic Investigations and Intelligence

In a recent event co-hosted with the Center for International Private Enterprise (CIPE), we sought to address how the pandemic has or has not impacted ESG in Asia-Pacific. Some key takeaways include:

• The region has been a slower adopter of ESG, but the pandemic has increased the focus on and efforts around environment, climate change and sustainability initiatives. The travel ban led to a decrease in air pollutants, and more businesses and consumers are realizing the importance of living in a sustainable environment. Strong governance, compliance and regulatory regimes are part and parcel of ESG and have been used for years as part of the global fight against corruption. It is encouraging that such regimes relating to sustainability, environmental impact and climate change are gaining traction. But these are issues which are, by definition, measurable and empirical. It is far more difficult to regulate and govern social issues; the case of Modern Slavery exemplifies this, where although legislation exists, in the most recent major pieces of legislation in the UK and Australia, there is no financial sanction. Worse, there have been cases where some countries have used accusations of modern slavery to damage the reputation of certain companies. In Thailand, modern slavery issues were used as reason to sanction some Thai companies, when in fact it later emerged that the real reason for the sanctions against the companies related to Thailand’s balance of trade with the U.S. Further, how can it be possible for governments in developed nations to sanction companies for not treating all citizens of the country equally, when so many countries in Asia have historic, cultural and legal hurdles built in to the fabric of society to deliberately enhance and improve the life chances of one sector of the population?
  • For these reasons, regulatory and compliance regimes relating to the environmental and governance elements of ESG post-COVID-19 could well continue to strengthen and become globally accepted, the same may not be true of the Social elements of ESG. There remains the possibility therefore that ESG as we currently know it, could become fragmented, where Social issues are too sensitive, too culturally embedded and too radical to challenge and regulate.
• Policymakers in some countries have been looking more closely at the social element of ESG, focusing on labor standards and working conditions, but the pandemic has caused many governments and countries to cut their margins, leading to poorer working conditions, and this may not be addressed until post-pandemic recovery is achieved. However, many governments in the region are using COVID-19 as an excuse to introduce a new authoritarianism; this essentially started with mandatory contact tracing apps. Even now recording every movement is mandatory in many countries. Populations have bought into this tracking given the circumstances, but the gathering of personal data of this kind goes very much against the spirit of ESG, part of which should advocate and encourage individual’s personal freedom and human rights.

European Fund Regime – Focus on Ireland

Alan Keating, Contributor, Managing Director, Compliance and Regulatory Consulting

• Ireland is the domicile for 5.9% of world-wide investment funds assets, making it the third largest global center and the second largest in Europe. Net assets in Irish domiciled funds rose to €3.32 trillion in 2020, with the highest level of net sales in Europe. Ireland is the domicile of choice for many UK and U.S. managers looking to raise capital in the EU market with 1,027 fund managers from 54 countries using Ireland (28% of these from the U.S. and 37% from the UK).
• Governance: In October 2020, the Central Bank of Ireland (CBI) published the outcome of a thematic review of the effectiveness of fund management companies (FMC’s). The requirements were introduced in 2017, after an iterative period of consultation which commenced in 2015. These requirements are commonly referred to within the industry as CP86. The review found that a significant number of firms have not implemented a governance framework to the standard set out by CP86. The CBI has warned that follow ups with firms where shortcomings were identified will be conducted and that this is not a one-off review. All FMC’s are required to critically assess their operations against the requirements, while considering the findings of the review, and implement the necessary changes to ensure full adherence to CP86. This assessment should be completed, and an action plan discussed and approved by the board by the end of Q1 2021. The use of third-party FMC’s will likely increase significantly as a result.
• A new, flexible investment partnership vehicle came into effect in February 2021. The ILP Act is designed to meet the needs of investment funds and their investors, and its objective is to modernize Ireland’s regulatory framework for investment limited partnerships (ILPs). With the new ILP structure, Ireland has a flexible partnership vehicle that is suited to the needs of promoters of private funds such as private equity, real estate, infrastructure and sustainable investment funds. There is expected to be significant interest from US and UK managers in the Irish ILP product.