ESG Programme Principles & Greenwashing
Overview of the 7 Principles of ESG Programme Management:
As a reminder from the previous article, the 7 ESG Programme Management Principles have been created to help organisations go from their currently ineffective, volatile and chaotic ESG Programmes to a more optimisable, scaleable and effective ESG Programme that delivers value and sustainable outcomes.
By adopting the 7 ESG Programme Management Principles, you will be able to start integrating the commercial proposition into your regulatory change initiatives so to ensure a reduction in greenwashing through negligence. As previously mentioned, these 7 principles adapt the (Managing Successful Programmes) methodology in to an approach for Sustainability and thus underpinned by a global best practice framework. Please take a moment to read the principles on the right.
1. STRATEGIC ALIGNMENT
2. LEADING THE GLOBAL AGENDA
3. COMMUNICATE THE 2030 VISION
4. PROFILING ESG BENEFITS AND THREATS
5. ELEVATE THE VALUE PROPOSITION
6. CAPABILITY AND CAPACITY BUILDING
7. CONTINUOUS IMPROVEMENT
Drill down into the 7 Principles of ESG Programme Management
For the small/medium cap financial institutions who are still in the early stages of their sustainability journey, there should be an initiative to establish an ESG / Sustainability function reporting into a Chief Sustainability Officer. This function should then be supported by a regulatory change service and maybe a centre of excellence within the organisation. This is also true for larger financial institutions too although they are already set up on their sustainability road map agenda. I make no apologies when I say that the problem with current ESG / Sustainability functions is that that they were established with a shareholder lens, rather than a sustainability lens. So, rather than establish a new sustainability function with a lens of sustainable outcomes and architecture; the organisation ends up shaping their relatively new function (called ESG/Sustainability) by using pre-existing archaic in policies, culture, technology & procedures. I believe the risk here is that you begin to rely on your regulatory change function to deliver your ESG compliance obligations. Regulatory change functions are not expected to be acquainted with sustainable outcomes like the business sponsor so, it ends up becoming a box-ticking facade. This leads to a disorientated communications and war between the business, legal and regulatory change functions. Then it gets worse where regulatory change continue to plough through the mandatory tick-box and as a result, accountability becomes fickle. At the end of it, the business have to patch up the commercial proposition in the shadow of being compliant and that patch up is the birth of your greenwashing.
The solution here is to build a top down ESG / Sustainability Function. Such a function would be able to monitor, control and coordinate the integration of the commercial proposition into the ESG Programme by using the 7 core principles. The illustration below will give a more detailed level understanding on how the principles are utilised throughout the programme life-cycle.
Applying the principles in the Goldman Sachs Asset Management (GSAM) case.
Background context: The SEC’s Division of Enforcement’s Climate and ESG Task Force was formed in March 2021. Among other things, it analyses disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies. (More information about the Task Force can be found here.) The reason I mention this is a side note on potential for your organisations to encounter retrospective investigations.
On 22 November 2022 the SEC fined Goldman Sachs Asset Management (GSAM) $4 million for several failings regarding their ESG Product’s Policies & Procedures (between April 2017 and February 2020). In one example, GSAM’s policies & procedures required staff to complete an ESG questionnaire for every company prior to selecting it for an investment portfolio. However, many of the ESG questionnaires were completed after a company had already been selected using previous ESG research. This previous ESG research was often conducted in a different manner than what was stipulated in the policies & procedures. GSAM was therefore in breach of Rule 206(4)-7 of the Investment Advisers Act 1940 which would loosely map into the EU’s SFDR L2 Article 7, 8, 35, 41 & 48 requirements. The reason I mention is this is because I personally believe that many more examples will emerge from US banks from breaching this rule alone.
Although GSAM received a relatively small fine which was settled without denial or admission, we have to remember that a lot has changed between 2017 and 2022, and ESG regulation today has a very strong demand on policy & procedures - so it really isn’t a small thing. The 7 core principles of ESG Programme Management also offers a diagnostic approach to develop and test assumptions on what could have gone wrong for GSAM. Whilst it is possible that GSAM had failings across all principles, the biggest misalignment is likely to have come from Principle number 6 - Capability and Capacity Building.
Integrating policies & procedures:
Further to the call for evidence on greenwashing, three European Supervisory Authorities (EBA, EIOPA and ESMA - also known as ESA’s) state that one of the core features of greenwashing is “intention”. This core feature can authorise the question as to whether GSAM had willingly circumvented it’s own policies or unintentionally neglected to enforce them. Assuming the latter; i.e. that this was unintentional negligence, then this begs the next question as to whether GSAM adopted any such programme management principles at all. In such a situation the blueprint was either absent or totally deficient; there was no management of change implementation and there was certainly no way the policies & procedures could be optimised to the dynamic nature of ESG factors. Had there been a post-transition forum dedicated to aligning with the blueprint, then GSAM’s adoption/utilisation of their policies & procedures would have been effective. Of course, all these things cost money but still a lot less than say $4m.
The creation of a blueprint future-state will complement the modelling/mapping of organisational benefits. i.e. The organisational benefits will qualify the validity of the blueprint and in return, the blueprint will optimise those modelled benefits. Active forums, rooted into the 7 principles will help keep momentum through uncertainty and maintain a very precise level of activity with measurable value. This avoids talking-shops on “next-steps”.
So, once a the blueprint has been created, then the project output (i.e. designing a policy/procedure) needs to mapped to the final corporate objective through the pathway illustrated below. The process flow below illustrates how GSAM could have modelled and understood the components which deliver the organisational benefits.
Conclusion:
As we saw in the example of GSAM, they contravened Rule 206(4)-7 of the Investment Advisers Act 1940 despite, once upon a time, ticking that box for compliance purposes. We will inevitably see many more such cases from the USA and eventually globally. What good was the box tick if it couldn’t be enforced effectively? In the example above, had GSAM adopted an approach that was anchored in (what could have been) the 7 principles, then they would mitigate a major risk to greenwashing, reputation and competitive advantage.
Things happen along the journey - people leave, external events force change, new information emerges and so on. As a result, all programmes are prone to losing their way as the fog becomes thick. This is no different for ESG Programmes, however the exception here is that sustainability legislation has such wide/deep impacts across the business, these programmes usually get off to a terrible start. It doesn’t matter how clearly we understand the destination, the journey will have blind spots and fog which will slow you down. The 7 principles of ESG Programme Management act as an anchor to the destination. Therefore by adopting them, your ESG Programmes will have visibility and momentum in the thickest of fog.
If you would like to talk through your current ESG initiatives, please do not hesitate to reach me by completing the form below. I look forward to meeting you.