When it comes to ESG, governance is perhaps the least visible of the three standards.
“Business behaviour in this context refers to ethics and transparency, competitive and anti-corruption practices, and regulatory compliance,” says Paola Piña, Partner, Head of ESG at RSM Chile. “Additional issues such as executive pay, board diversity, transparent accounting practices, conflicts of interest within the board, shareholder rights, audit, compliance, and risk management also fall within this category.”
Naturally, the thought of shining a light in an organisation’s darkest corners would make any business leader nervous, but that is precisely the point. In the past, governance was easily addressed with a press release or a strategically-timed marketing campaign. However, businesses of today are under a much bigger microscope. In the age of social media and 24-hour information cycles, it is unwise for companies to present a false front.
In April 2022, for example, HSBC was publicly warned by the UK regulator the Advertising Standards Authority (ASA) for ‘using adverts to greenwash its reputation’. Adverts HSBC commissioned promoted the bank’s commitment to supporting a global transition to net-zero emissions, omitting the fact that it still ranks among the ten biggest financers of fossil fuels in the world.
Avoiding a fine, the global bank was ordered to be more transparent about its contribution to climate change, in a ruling that could have wide implications for financial sector marketing around the world. This warning follows a similar case from September 2021 in that the ASA announced it was toughening its rules on environmental claims in adverts, and it is expected that many other global regulators will follow this strict approach to greenwashing in marketing.
“In a first conversation with a client, we always mention that there are no canned solutions to implement ESG or regenerative models,” says Juan Pablo Montero, Consulting Partner at RSM Argentina. “We talk about the importance of being realistic and not promising achievements or objectives that are not true or achievable: Greenwashing, or the marketing of an illusory ESG practice, is a temptation that, sooner or later, you will pay dearly for.”
The level of accountability has seeped all the way through into the supply chain. Until recently, many companies did not consider their supply chain part of their ESG requirements. As the public learns more about the ESG impacts of production, shipping, and the delivery of goods, their awareness has led to a demand for action. Every step of the entire value chain must now be examined, audited, and, if necessary, upgraded or replaced. Errant suppliers and partners are just as accountable as the parent company or brand.
“It is not enough for a company to have policies, standards and procedures that meet ESG expectations,’ says Marcelo Conti, Consulting Partner at RSM Brazil. “It is also essential that its suppliers follow the same path. These are just a few examples of how regulations are being changed in Brazil to meet ESG requirements.”
With strong moves being made towards more organisational transparency, it is critical for businesses to build in strong and sustainable governance into their everyday practices. Words and promises will not cut it; to enact real, positive change, businesses need to take action, setting new standards for themselves, their partners, and their suppliers as they begin to traverse a new era in business.