ESG Programme Management
…”Watchdog bans HSBC climate ads in fresh blow to bank’s green credentials”
…”Deutsche Bank raided in $1tn greenwashing inquiry”
…”Goldman Sachs fined $4m after misleading customers about ethical investments”
….”<enter name of institution> investigated for misleading customers about sustainable product offering”
In this article I will be talking about the issue around box-ticking ESG compliance and associated Greenwashing risks. I will also use be referring to an example of a real engagement where I recently supported a gated review for an ESG Programme. This particular client is an asset manager with regulatory obligations in the EU, CH, UK, AU, and USA and therefore in scope for SDR, SFDR, TCFD, MiFID II, SBA regulations and also SEC proposals.
The Global Head of Sustainability had raised concerns on the long term commercial impacts and she summarised her concerns in a few key words - “We so happen to be running a business too……”. The key commercial impacts in scope for this client were the impacts on their future product shelf a competitive positioning.
Key takeaways:
Compliance to ESG Regulation should not come at the cost of your commercial proposition.
ESG Regulation can be leveraged as a mechanism to develop the business vision for a sustainable future.
Sustainable outcomes are driven by the commercial proposition and not solely by achieving compliance.
If core ESG programme principles are deficient or absent, the business outcomes will deviate away from delivering client/shareholder value and gear towards appeasing senior stakeholders and regulators.
The dynamic nature of materiality and evolving regulatory landscape for measurement/reporting will require ESG Programmes to be able to scale with agility.
As a senior sponsor, you should have full transparency on the key benefit profiles and their corresponding commercial impacts. If you are not tracking this, then your value proposition becomes constrained and at risk.
Tunnel vision and tick-box compliance:
In this next section I will cover ESG Regulatory compliance: My client had temporarily halted their ESG Programme on low confidence and I was hired as part of a team to review/score the extent to which the programme was aligned to commercial outputs. My specific remit was around programme assurance and a review of the commercial impacts when becoming compliant.
Let’s go back a few steps….
“We do more than just box-ticking exercises, we deliver real sustainability” <———-This comment right here seems to be the tag-line in the world of sustainability consulting. Everyone seems to be offering a service that “goes beyond box ticking”. But what is this mystical value that lies “beyond box-ticking” because at the end of the day - regulatory compliance is just that - a box-ticking exercise! Meeting a sustainability standard is just that - a box-ticking exercise! Furthermore, regulators have already consulted with the market participants, advisors and academics (all experts) in how proposed regulation will create sustainable outcomes. After such consultations, the regulators then create robust guidance/regulations as an intervention mechanism to deliver sustainable outcomes. How then do you go beyond box-ticking compliance to achieve sustainable outcomes because, ipso facto regulations are designed to lead to sustainable outcomes. My argument for this is that going beyond box-ticking engages and integrates the commercial proposition.
The Global Head of Sustainable Investing had only been in her role for about 5 months. What made her different was that she had both the industry expertise and a strong education in environmental sciences. The ESG programme was halted with a RAG status of Green. Over the first round of coffee we spoke about why there was low confidence in the ESG Programme - So we both broke it down together - Concerns around the programme quality, the genuine aspects of sustainability, the commercial viability going forward, the blurry vision for scale, the board incentives/motivations and it continued to around 10 key issues. We then discussed the compliance and the commercial impacts over the next round of coffees.
Powerpoint graveyard:
Naturally, my first stop would be to speak with the ESG Programme Manager. He was contractor, an ex-branded consultant, sharp tie, cufflinks, Rolex and a perfectly stencilled beard. I asked the Programme Manager talk me through the programme files/structure and found a somewhat haunting power point graveyard. There wasn’t really anything that resembled governance let alone any structure because PMO regulation was superficial. This was not an ESG Programme; it was an ESG tick list. He was able to say the right things, always appearing to be busy, back-to-back diaries etc, but it was all fluff with no real structured direction other than a focus on achieving compliance. ok - so what? His remit was to achieve compliance and he was doing his job - albeit with a facade and poor structure. However, although there wasn’t a major compliance risk, there was a definite commercial risk. This is a key point to the whole article because, like we saw with the SEC’s recent $4m penalty against Goldman Sachs Asset Management (GSAM), an organisation can have your compliance box ticked, but develop a breach through BAU in the years to come. More of this in the next article…
Why ESG Programmes might fail to deliver sustainable outcomes:
Not enough substance is given to the fact that your organisation can be compliant to ESG regulation and still be heavily exposed to greenwashing. This happens when organisations shoehorn their commercial proposition into the regulation rather than integrating them both by adopting core ESG programme principles. Regulation, by its very nature, forces an organisation to manoeuvre its approach to conducting business. It creates new restrictions for leaders who must now pivot their commercial proposition. However, the effectiveness by which the organisation reacts and pivots its commercial proposition has a dotted line into the quality of their ESG Programme Management and the communication channels into the board.
In the diagram below, we have two large financial institutions (My client was in a similar position to Company but halted the programme in time). You can see that both companies meet regulatory obligations. Company A however will have inevitable negative commercial impacts and poor sustainable outcomes. They had a task-ticker running their ESG programme in a chaotic manner. Whereas Company B also achieves compliance but they do so with both a positive commercial impact and legitimate sustainable outcomes. Company A decide to maintain their competitive advantage, so they continue to sell their pre-regulated product shelf, because the leadership teams couldn’t enable product innovation - Company A is liable to either 1. a loss of market share or 2. Greenwashing raid/headlines should they continue.
With the current strategic direction and programme structures, my client was very similar to Company A. My expectation is that they will begin to emerge like Company B and thus anchored into a set of ESG programme principles. Company B did not wait for the regulatory change function to deliver compliance and then sit at the tail end of delivery to begin innovating. Their board promoted an innovation culture that could work dynamically with the regulation. Today, it is fair to say that many financial institutions are running like Company A. They will achieve compliance and then wait for their competitors next move in game theory 101. Compliance doesn't precede your commercial road-map, so without such integration you have a board level risk.
Your journey to being like Company B.
The one key difference between both Company A and Company B is that, whilst they both achieve regulatory compliance, company B integrates a commercial agenda into the ESG Regulatory Compliance Programme. They adopt a core set of ESG Principles to help them achieve this integration. There is no need for me to reinvent core programme principles, so to remain consistent with established programme management framework standards I will be using 7 principles which have been adapted from the (Managing Successful Programmes) methodology. These have been tailored for ESG purposes so rest assured, they are underpinned by a global best practice framework.
In the diagram below where the wheel on the left illustrates what happens when compliance dictates your commercial strategy and eventual (if at any!) sustainable outcomes. Your ESG Programme Managers end up leading a volatile, chaotic and ineffective delivery - but of course, it may still achieve compliance. The wheel on the right illustrates what happens when your commercial strategy/proposition is integrated into your ESG Compliance programmes leading to genuinely sustainable outcomes.
The 7 ESG Programme Principles act as a bridge to take your organisation from a chaotic greenwashing risk (left) to a more safer, mature and predictable sustainable outcomes (right). Regardless of whether you are an Asset Manager, Bank or Corporate; your organisations will benefit from anchoring its ESG Programmes into the 7 core ESG Programme Principles.
As a smaller asset manager, my client was already in a prime position to innovate with agility and sweep up the market share bigger asset managers might have to drop products. However, they were still behind the curve in terms of delivery mechanisms. Here were some of the telling signs that had they not halted their programme, there could have been a future risk of greenwashing or just ineffective outcomes unhinged from sustainability.
The organisation did not enforce effective programme delivery mechanisms and relied solely on a regulatory change function to deliver compliance.
The ESG Programme had no concept of aligning ESG Programme outputs with both sustainable outcomes and commercial interests. There was no forum established for this.
The was no profiles for benefits tracking nor any plans to commercialise outputs into the business.
The business sponsor had never raised a concern on the lack of benefits tracking.
Key stakeholders had been making statements like - “let’s wait to see what our competitors do…”, “let’s select pause access to certain products”, “let’s just keep selling and innovate in the background”.
All of the above points are telling signs. Greenwashing is a symptom of poor regulatory change mechanisms. The 7 principles described in part two of this article can be adopted as a starting point for genuinely effective integration of the commercial agenda.