The Red Flag Group®

Why ESG compliance can’t be ignored

Why ESG compliance can’t be ignored

The compliance landscape is becoming even more complex resulting from increased pressure for companies to publicly prove their commitment and disclose how they are addressing environmental, social and governance (ESG) risks and compliance in their business operations.

Some regulators now require companies to disclose how they are handling ESG risks, and how they are complying to set standards. For instance, the United States, United Kingdom and Australia have enacted legislation encouraging companies to commit and declare that the raw materials they use are not by-products of modern slavery or gross environmental mismanagement. 

There’s outpouring concern that companies, especially those in industries like mining, textile, agriculture, fisheries and manufacturing, are not fully complying with prescribed ESG standards due to leaky regulations and scrutiny. ESG advocates, the media and consumers are ever-increasingly exerting pressure on companies to be more transparent by disclosing ESG related information as a form of ethical business practice and part of their compliance culture. Green groups and other social justice campaigners are widely known to influence customers to boycott companies that engage in unorthodox means to obtain raw materials from conflict-prone countries in Africa, Latin America, Middle East and Southeast Asia.  

Issues related to ESG, modern slavery, forced labour, human trafficking, employee rights, bonded labour and human rights abuse, are constantly flagged by ESG watchdogs and the media - a feat that has caused mass product boycotts, recalls and reputational damage for many known multinational companies.

Thus, it’s important for companies to consider the following to ensure proper ESG compliance.

  • Establish and implement a clear ESG framework and cascade it across your supply chain. This is because most environmental and social risks occur and commonly reside in your supply chains and emerging markets you do business.
  • Have your leadership commit and endorse applicable local and international ESG regulations. Leadership commitment shows that your company cares about ESG compliance and takes such issues seriously.
  • Get certified by an external certification agency. Being certified shows a commitment to compliance and integrity and supports a level of independent audit to your programme. Additionally, certified companies are more likely to prevent issues and are able to handle issues more efficiently when issues arise.
  • Verify and certify that your partners are ESG-compliant to ensure proper oversight and monitoring. This also puts at rest customers’ concerns about your company’s governance culture and management transparency.
  • Publicly issue periodic declarations showcasing your ESG initiatives. This promotes further transparency and exemplifies a commitment to good business practices. Communicate timely any updates that your company subscribes to.
  • Be open and transparent. It will help you minimise boycotts and recalls, which are costly and could lead to significant financial losses. This also helps you to adequately answer demands from your customers regarding your commitment to ESG compliance and risks.
  • Allow periodic independent review of your ESG policies and procedures. Having an independent review of your policies helps you to identify weak links and cultivates trust among your customers. External-driven audits and reviews have no vested conflict of interest; thus, they should be considered.

As we continue to see growing interest towards ESG compliance, its incumbent upon you to prove to your key stakeholders and customers that your commitment to sustainable business practices is beyond written documentation but through practical actions. Your commitment to ESG must be seen through your company’s actions, not through documents only. ESG issues are hot global topics that have ruined reputations, destroyed brands and have led to significant financial losses. Formulate and implement a comprehensive ESG framework as part of your compliance programme.