Anti-bribery compliance in ESG frameworks

A recent look at ISS ESG analysis reveals that governance, and corruption specifically, fall to the bottom of the corporate environmental, social, and governance (ESG) engagement pile. Justifiably, climate change and human rights are among the top issues that investors and standard-setting organisations focus on when it comes to ESG strategies and frameworks. However, corruption poses a significant risk for companies and investors alike. It can lead to reputational damage, legal and financial penalties, and the erosion of public trust. 

Furthermore, corruption often enables environmentally and socially corrosive corporate behaviour, such as bribery to bypass environmental regulations or exploitation of workers in unsafe conditions, highlighting the interrelation between the three pillars of ESG.

corruption fallout

Last year it was ruled that Glencore Energy UK Ltd would pay £280,965,092.95 million (over 400 million USD) after an SFO investigation revealed it paid US $29 million in bribes to gain preferential access to oil in Africa. In terms of US Foreign Corrupt Practices Act (FCPA) cases over the last ten years, this sum is relatively paltry. As of mid 2022, the top 10 biggest FCPA cases of all time, in terms of financial penalties and disgorgement, escalated to $3.3 billion. 

Even more dramatically, in 2001 Enron, an energy trading company, was revealed to have engaged in widespread accounting fraud, including hiding debt and inflating profits. The scandal led to the company’s bankruptcy and the loss of over 5,000 jobs. Enron’s shareholders lost billions of dollars, and the scandal also damaged the reputations of accounting firm Arthur Andersen, which was found guilty of obstruction of justice, and several executives who were convicted of fraud.

Avoiding and assessing risk

Transparency is key when it comes to addressing corruption risk. When a company achieves high performance based on a corrupt foundation, thanks to the rapid technological advances, it is just a matter of time before this truth is exposed.

Investors must have access to information about a company’s anti-corruption policies and procedures, as well as any past incidents of corruption. This information should be readily available and regularly updated to allow investors to make informed decisions.

It is also essential to embed corruption risks into ESG reporting and rating frameworks. Many ESG frameworks already incorporate anti-corruption measures, but they need to be significantly more prominent and robust. The lack of attention to corruption risks can be attributed to several factors, such as the focus on short-term profit maximisation and the challenges involved in developing accurate corruption risk indicators.

The EU SFDR mandates the disclosure of 18 core indicators, including two indicators that indirectly relate to corruption risks – non-compliance with the UN Global Compact principles and the OECD Guidelines for Multinational Enterprises. However, the more direct indicators of corruption risks, such as metrics related to anti-corruption and anti-bribery policies, responses to policy breaches, and convictions for violations of anti-corruption laws, are optional. While corruption risks may be covered under both the mandatory and optional reporting requirements, the inconsistency in framing them as optional may lead investors, rating agencies, and corporate investees to treat them as a secondary consideration. This could potentially hinder the effective management of corruption risks in the investment decision-making process. Investors must be able to identify companies with a high risk of corruption, and ESG ratings should reflect this risk appropriately.

Investors should work together to place integrity at the heart of ESG. This means collaborating with companies to promote anti-corruption measures, and encouraging standard-setting organisations to prioritise corruption risks in their ESG frameworks. Investors can also use their influence as shareholders to push for greater transparency and accountability.

Investors must not overlook corruption as part of any ESG strategy and framework – when corruption distorts markets, regulatory enforcement, and legislative progress, both the planet and people suffer. While climate change and human rights issues are undoubtedly important, corruption can enable environmentally and socially corrosive behaviour and pose significant risks to companies and investors.

Transparency, embedding corruption risks into ESG reporting and rating frameworks, and working together to place integrity at the heart of ESG are crucial steps to addressing corruption risks and promoting sustainable investment practices.

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