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Peter Milders (Voxius), May 2021

“In recent years, as we’ve placed legal professionals in compliance roles within the business world, we’ve seen a significant expansion of that role. The seminars we regularly organize for compliance department managers also reflect this trend. This expansion is the result of pressure on companies from stakeholders to provide greater transparency regarding their approach to issues such as the environment and climate, social matters like working conditions and terms of employment, human rights, and diversity; investors, employees, consumers, and NGOs are demanding transparency on these so-called ESG factors (Environmental, Social, Governance). On the one hand, transparency provides insight into the extent to which a company operates in a socially responsible manner; on the other hand, it offers a clearer picture of the company’s (financial) risks.

The compliance department ensures that the company operates in accordance with applicable laws and regulations and any codes—whether internal or external—to which it has committed. However, laws and regulations governing ESG reporting are limited. While large companies (with 500 or more employees) in the EU are required under the Non-Financial Reporting Directive to describe their policies regarding ESG issues, the directive does not provide a standard. The directive also allows companies to choose to apply other (international) reporting guidelines, such as the United Nations’ Sustainable Development Goals (SDGs).

ESG reporting standards primarily originate from the private sector. Of the hundreds of initiatives aimed at establishing standards, it is primarily the frameworks developed by the nonprofit organizations Sustainable Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) that are being applied. The SASB has developed detailed (industry-specific) reporting standards designed to provide insight into the financial implications of sustainability for a company. GRI has developed complementary standards; while SASB focuses on the world’s impact on the company, GRI focuses on the company’s impact on the world—that is, on the economic, social, environmental, and climate effects of its business operations. Multinational companies such as ArcelorMittal, Diageo, Nike, DSM, Heineken, and many others report in accordance with these standards. This can result in dozens of pages of detailed information about their approach to ESG issues.

It is clear that reporting on ESG requires the collection, verification, and processing of a large amount of data. What role do compliance departments play in this context, now that traditional legal compliance is being expanded to include ESG reporting? We see a wide range of approaches, ranging from a coordinating role for the compliance department and responsibilities assigned to various business units to an ESG director with ultimate responsibility.

ESG reporting has so far been limited to large, often publicly traded companies. It is inevitable that smaller companies will also have to grapple with this. For example, as part of its EverGreen climate program, Heineken aims to achieve a climate-neutral supply chain within twenty years. This means the company will also set requirements for its suppliers, who will likewise have to demonstrate how their operations are conducted. Add to this the pressure from employees, consumers, and NGOs to operate in a socially responsible manner, and it becomes clear that these companies, too, will have to communicate information about their business operations—not only to their business partners but also to the public. And last but not least, this information provides management with a tool to establish a future-proof policy and to gain a better understanding of the company’s risks.”

English

“With the hiring of lawyers for compliance roles in the corporate world, we have seen a dramatic expansion of that role in recent years. The seminars we regularly organize for managers of compliance departments also reflect this trend. This expansion stems from pressure on companies from stakeholders to be more open about their approach to issues such as the environment and climate, social matters like terms and conditions of employment, human rights, and diversity; investors, employees, consumers, and NGOs are pushing companies to be transparent about these so-called ESGs (Environmental, Social, Governance). On the one hand, transparency provides insight into the extent to which a company operates in a socially responsible manner; on the other hand, it offers a clearer picture of the (financial) business risks.

The compliance department ensures that the company operates in accordance with applicable laws and regulations and any codes to which it is committed, whether internal or external. However, laws and regulations governing ESG reporting are limited. Although large companies (with 500 or more employees) in the EU must disclose their ESG policies in accordance with the Non-Financial Reporting Directive, the Directive does not provide a standard. According to the guideline, it is also possible to opt to apply other (international) reporting guidelines, such as the United Nations Sustainable Development Goals (SDGs).

Standards for ESG reporting primarily come from private sources. Of the hundreds of initiatives to develop standards, it is mainly the guidelines of the nonprofit organizations Sustainable Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) that are used. The SASB has developed detailed (industry-specific) reporting standards designed to provide insight into the financial implications of sustainability for a company. GRI has developed standards that complement these; while SASB focuses on the impact of the world on the company, GRI focuses on the impact of the company on the world—that is, on the economic, social, environmental, and climate effects of business operations. Multinational companies such as ArcelorMittal, Diageo, Nike, DSM, Heineken, and many others report in accordance with these standards. This can result in dozens of pages of detailed information about their approach to ESG issues.

It is clear that ESG reporting requires a large amount of data to be collected, verified, and processed. What role do compliance departments play in this now that traditional legal compliance is being expanded to include ESG reporting? We see a wide range of approaches, ranging from a coordinating role for the compliance department, to responsibility assigned to various business units, to an ESG director who bears ultimate responsibility.

ESG reporting has so far been limited to large, often publicly traded companies. It is inevitable that smaller companies will also have to address this issue. For example, as part of its EverGreen climate program, Heineken is working toward a climate-neutral production chain within twenty years. This means the company will also impose requirements on suppliers, who will have to disclose details about their business operations. Add to this the pressure from employees, consumers, and NGOs to operate in a socially responsible manner, and it is clear that these companies, too, will have to share information about their business operations—not only with their business partners but also with the public. And last but not least: this information provides management with a tool to establish a future-proof policy and to gain a better understanding of business risks.”