Monday, 22 May 2023

The growing prospect of being subjected to an Environmental, Social and Governance (ESG) investigation is creating fresh challenges for organisations and managers.

While in existence for many years, ESG policy remains an evolving field peppered with numerous issues, complexities and nuances. Pressure is mounting on organisations to prove meaningful progress with ESG initiatives. Transparency around the setting and achievement of ESG goals is critical to meet public expectations and regulatory obligations. These added requirements for corporates highlight not only the importance of adequate internal risk management but also that of maintaining robust standards of data collection and storage.

If an adverse ESG-related issue is detected, through proactive risk management or internally reported, company data and records will be crucial to an investigation. The greater the quality of this information, the higher the chances of an investigation producing detailed and relevant facts. For when the opposite occurs the consequences can be dire – from reputational damage and economic loss to class actions by shareholders, all from failing to keep adequate information and, thus, being able to provide satisfactory evidence.

While high-profile media reports have recently shone a light on ESG investigations related to claims about organisations’ environmental credentials, we are also seeing scrutiny increasing around social and governance policy. Immensely broad, the social space alone encompasses all matters to do with business and human rights, health and safety, employment and standards involving diversity and inclusion, native recognition and title and cultural heritage, responsible lending and investment and the management, in general, of all relationships with employees, customers and communities.

As for governance, the list covers all those decisions made at the very top – those which would impact leadership, corporate and data management, executive remuneration, deal with instances of bribery, corruption and any matters involving financial crime, corporate culture and ethics instilled by leaders, management of shareholder’s interests and, importantly, risk and compliance.

In the social space, a perfect storm is developing as employers strive to meet policy expectations across a range of areas, such as striking satisfactory staffing ratios of races, genders, indigenous employees, and so on. The problem is that in the pursuit of such worthy goals, some organisations are consequently experiencing growing incidents of racism, sexual harassment, assault and other egregious abuses of human rights. Indigenous experts are increasingly required to deal with issues after the fact especially in cases that could, or already have, escalated to the level of litigation or criminal inquiry.

To avoid such situations, managers need to consider the vagaries of social behaviour and then address how they will manage stakeholder engagement as well as business risk in the instance of an adverse workplace incident. Decisions should be made around those issues that require disclosure and when such disclosures need to be made, bearing in mind consumer and shareholder expectation.

This focus on social and governance issues means operating within a framework that is more risk-based than most organisations are probably familiar. Nowadays, organisations should not only be trying to shape a balanced and equitable workplace but also examine how in doing so they are creating the potential for unfavourable incidents and risky interactions. For example, should a mining company suddenly introduce a number of female employees to a male-dominated remote workplace but fail to implement sufficient policy around social situations, then risks of incidents occurring will almost certainly multiply. How can such risk be minimised? With, for instance, greater opportunity for fly-in fly-out work (as opposed to extended on-site stays), increased training and raised awareness around topics of acceptable behaviour and speech around colleagues of a different gender or race. It must be made clear that the consequences of what one person perceives as a minor action may result in them and the rest of their team being unable to work for the next several weeks – as it can lead to the closure of a site or a mass walk-out by staff. A criminal investigation is a sure-fire way to put a spanner in any operation’s works, one that could lead to temporary cessation of normal trading and a potentially workless period for all, plus trigger a fall in company value and, ultimately, reputational damage that sticks.

Organisations must also be prepared to effectively manage the human element of any ESG incident or investigation. It is essential for internal responders and investigators to take a trauma-informed approach – recognising and understanding the impacts of the alleged incident on its victim/s. Often, the necessity to expedite investigation steps overshadows the opportunity to build true rapport and trust with a complainant or witness, and this may compromise the ability to extract quality evidence. Added to this is the compounding effect an investigation may have on a person that has suffered a trauma, for example in such investigations surrounding assaults, bullying, discrimination or harassment. Organisations are duty bound to prevent further impacts of an ESG related matter, and awareness and appropriate training are key.

In light of this evolving landscape, the imperative nature of transparency cannot be stressed strongly enough. Organisations can no longer move forward in the belief that it is possible to hide any problem arising from an ESG policy matter within a workplace. ESG investigations, whether proactive or reactive, help organisations enhance accountability and transparency, thereby instilling greater confidence in the organisation and maximising shareholder value. It is essential that data is collected and stored in a robust and appropriate manner to allow organisations and regulators to take commensurate actions, wherever necessary. The ability to conduct trauma-informed responses and investigations into ESG-related matters is also imperative. A risk-based approach is critical to mitigating the chances of an ESG-related incident and minimising the financial and reputational impacts should an incident occur.