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ESG: The alphabet soup giving compliance officers indigestion

There is perhaps no topic in compliance that causes more frustration and angst than ESG. How did we get here and where is it all going? Here are the big dilemmas with ESG as told by compliance pros.

One of the most persistent issues with ESG — Environmental, Social, and Corporate Governance — has always been, “Where do you start?” From a Goldman Sachs article on the topic:

In addition to determining which ESG factors to focus on, investors need to determine how to measure the relative value of a given ESG metric.

That sums up the ESG problem nicely, albeit from an investor’s point of view but the same applies to compliance. First, you need to figure out what you want to measure. Second, you have to figure out a way to measure it. Third, you must decide what those measurements mean and their importance.

There isn’t any “real” ESG legislation in the United States. You can piecemeal it into a blurry vision if you combine the laws from compliance, human rights, employee safety, environmental, etc., but those laws have long been disclosure minefields for investors. For example, companies don’t always need to disclose open and active FCPA investigations.

There has even been so-called “anti-ESG” legislation, where States bar funds from being directed exclusively to pro-ESG companies.

One issue is that ESG has multiple meanings. Taking a straw poll from my non-compliance industry friends, when they hear “ESG,” they think of finance, investing, and greenwashing. Compliance folks approach it from, well, a compliance angle. And without legislation or regulation to drive disclosure, compliance departments are put squarely between a rock and a hard place.

Here are four issues that have consistently been raised and (I’m told) are being actively discussed in the FCPA Blog’s 1-2-1 program:

Too many tools and standards. It feels like an overwhelming chorus of different opinions and proposed solutions. This tracks with what the FT said a couple of years ago:

The problem for ESG investors is not a lack of data but an oversupply of tools and frameworks.

Some of the standards create philosophical problems, such as whistleblowing hotlines. Is more use of the hotline good, or does that indicate that a company has massive cultural issues? Is less use of the hotline good, or does that suggest that the employees might fear retaliation?

A quick search turned up that there are at least fifteen major ESG rating providers that all use different methodologies.

Too much data. So much data is being collected from different perspectives that it’s nearly impossible to figure out what is relevant or useful in understanding how the organization works.

Inability to measure meaningfully. Companies are measuring, but the data produced by the measuring is wildly inconsistent or otherwise unreliable.

Non-measurable data. Some things simply can’t be measured. The compliance world has faced this issue for years with topics like ethics and culture. Since some ESG metrics can’t be measured, many companies have come out strongly claiming (immeasurable) success, leaving consumers and investors skeptical and compliance pros burned out.


In my discussions about ESG, I’ve found that within the compliance industry, we’re not in step with each other. One compliance chief told me that ESG will be the most significant thing ever in our industry. A week later, another CCO told me it was a fad we must suffer through.

Which one will it be?

I don’t know, but I believe the fact that the compliance community is pulling out its hair and trying to figure it out says a lot. In a way, ESG represents the ideals of a society. It’s optimistic and hopeful. Environmental protection, inclusion, diversity, anti-bribery, anti-slavery — these are excellent things we should all aim for.

But in the present ESG uncertainty, let’s hope it doesn’t get crushed under the weight of its own idealism.

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