By Dylan Tokar
Companies looking to show investors their commitment to sustainability are relying more on the work of their chief compliance officers.
The role played by compliance in ensuring that employees act ethically has a natural place in corporate efforts to attract sustainability-minded investors, these companies say.
Some compliance executives also have been tapped to help manage social or environmental goals that go well beyond their role's traditional remit, as companies look to put muscle behind the pledges they make on such issues and address legal risks that can be involved.
"A compliance officer is viewed as a leader in ethics, in good corporate practices," said Taylor Pullins, a former sustainability director for Houston-based oil-and-gas producer Noble Energy Inc. "Right there, they have a role in disclosing internally to employees and to the market about why they are a responsible corporation."
In years past, some companies' social responsibility efforts were often more limited, and public- and investor-relations teams were tasked with spreading the word on things like corporate philanthropy. But with many companies now setting broader environmental, social and governance goals, compliance officers have taken on a bigger role. Corporate governance experts expect that involvement to continue, in part due to the legal risks associated with such commitments.
Regulators in the U.S. and Europe have taken steps to protect investors from ESG claims that could be viewed as deceptive -- a practice sometimes called greenwashing.
"Over the last couple of years, [ESG] has become a mountaintop of risk," said Dave Curran, who leads the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP's sustainability practice. "Lawyers and compliance executives are getting more and more involved in everything from pressure-testing disclosures, to analyzing processes and procedures, to tracking, measuring and monitoring these programs."
Western Union Co. -- whose largest shareholder is BlackRock Inc., an investment firm that has made sustainability a core goal -- released its first ESG report in 2019. Last year, it retained a consultant to further refine its ESG strategy, a process that involved assessing which issues were most important to stakeholders and the company's long-term business success.
The company has a smaller environmental footprint than many others, so it chose to focus on themes such as doing business ethically and financial inclusion, said Caroline Tsai, who leads Western Union's legal, compliance and enterprise risk group. That meant spotlighting the work done by compliance to prevent money-laundering and report other potentially nefarious financial transactions, she said.
The legal and compliance function also was instrumental in developing Western Union's ESG strategy more broadly, including by advising on metrics to track the company's progress toward meeting its sustainability commitments, Ms. Tsai said.
"It's a cross-functional effort," she said. "But the lens we brought to bear in building out a global compliance program -- many of those learnings and best practices are absolutely applicable to ESG."
Even at companies that place a bigger emphasis on their environmental impact, compliance officers are contributing data about how the company complies with laws and regulations -- information that experts view as falling into the governance bucket of ESG performance. They sometimes also are asked to chip in on commitments that fall more into the environmental and social categories.
Dell Technologies Inc.'s ESG program has four main pillars: sustainability, diversity and inclusion, social philanthropy, and ethics and privacy. Chief Ethics and Compliance Officer Michael McLaughlin is responsible for ethics and privacy.
As Dell's strategy has evolved, Mr. McLaughlin said the compliance function has gone from primarily being a lawyer for the company's ESG efforts to taking on its own ethics and privacy targets. By 2030, for example, the company hopes to fully automate its data control processes to make it easier for customers to control their personal data. "My feet are held to the fire just like everyone else's," he said.
The function also has become involved in helping promote values from other pillars of the program. This year, the company added a course on diversity and inclusion to its annual training program, which is overseen by compliance, Mr. McLaughlin said.
Pushing environmental and social practices down through supply chains is a challenge for companies looking to meet specific emissions or diversity targets. It is also an area where compliance, which regularly vets third parties for legal risks such as corruption, can help.
Intel has a dedicated supply-chain function that partners with compliance and others at the company to screen suppliers on a range of conduct, from emissions and chemicals, to human rights, conflict minerals and supplier diversity. At companies with less complex supply chains, such a task can fall more directly on compliance.
Joe Rodgers, the chief ethics and compliance officer of power-management company Eaton Corp., said his function has started screening its agents and distributors for emerging ESG-related issues such as human rights, alongside compliance risks like bribery and corruption. The company also incorporates ESG expectations into its supplier code of conduct, which includes provision on health and safety, the environment, and labor and human rights, he said.
Some compliance officers and corporate governance experts think there is room for compliance to take on an even greater role in ESG as the function's responsibility for managing nonfinancial risks of all kinds grows.
With companies taking on more ambitious targets, they need a way to prove they are actually carrying them out. A robust compliance team will have a system for embedding controls throughout the business, and for tracking progress on complying with certain standards -- whether legal or aspirational.
"It starts with disclosure, but once you've made the disclosure, you have to demonstrate your compliance with that disclosure," said Bruce Karpati, the chief compliance officer of the private-equity firm KKR & Co.
Dieter Holger contributed to this article.
Write to Dylan Tokar at firstname.lastname@example.org
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May 04, 2021 10:14 ET (14:14 GMT)Copyright (c) 2021 Dow Jones & Company, Inc.