Beyond the Green: The ‘G’ in ESG Is Key to Fighting Corruption

When discussing ESG, the emphasis often falls on the “E” (Environmental) and occasionally on the “S” (Social), while the “G” (Governance) aspect seldom receives the attention it deserves. However, this oversight is significant because corruption, a key governance issue, poses substantial risks to companies. Directors and companies face significant liabilities if they fail to prevent or address corrupt activities, making proactive governance essential.

Examples abound of companies that have been levied heavy fines for engaging in corrupt activity. Recent examples include Glencore Plc, a commodity trading and mining company that was fined $700 million ($428 million fine and forfeiture of $272 million) in 2023 for foreign bribery and corruption activities that occurred over the span of a decade across various African countries.

Similarly, software firm, SAP, was fined $220 million for among other things, bribing government officials in Indonesia and South Africa. Directors must therefore exercise caution and utilize all tools at their disposal to proactively mitigate and effectively address bribery and corruption risks that arise in the course of doing business.

The ‘G’ Component of ESG Reporting Frameworks

One such tool is ESG reporting. Various ESG reporting frameworks and standards have been established to guide organizations in their governance practices, especially in their efforts to combat bribery and corruption. These guidelines outline the specific topics to be reported, the metrics to be utilized, and the frequency and format for sharing this information. By using these frameworks, companies can communicate their efforts and commitments toward anti-bribery and corruption.

The United Nations Global Compact, recognized as the world's largest sustainability initiative, is one example. It encourages companies to adopt zero-tolerance policies towards bribery and corruption, conduct thorough risk assessments, and implement comprehensive anti-corruption programs to ensure ethical business practices. The Global Compact especially emphasizes the importance of communicating progress on the implementation of these programs to stakeholders.

The SASB Standards also emphasize the importance of anti-corruption measures across different industries. For example, the Oil & Gas – Exploration & Production Standard mandates that companies disclose the percentage of their net proved and probable reserves situated in countries with low rankings on Transparency International’s Corruption Perception Index. It also requires detailed information about their management systems and due diligence procedures for assessing and mitigating corruption and bribery risks.

In addition, companies are required to disclose information on employee awareness programs, internal mechanisms for reporting and following up on suspected violations, anti-corruption policies, and the application of the Extractive Industry Transparency Initiative Standard.

Another significant framework is the GRI Standards, which provides for extensive anti-corruption disclosures. This includes reporting on risk assessment procedures, conflict of interest management, and ensuring charitable donations are not disguised as bribery. Companies must also disclose details on tailored communication and training programs for anti-corruption, participation in collective actions against corruption, and statistics on operations assessed for corruption risks.

Additionally, they need to report on anti-corruption training for governance bodies and employees, public legal cases related to corruption, sector-specific disclosures like payments to governments, and supply chain corruption management. GRI 2 also mandates descriptions of whistleblowing systems for seeking advice and raising concerns about business conduct.

The European Sustainability Reporting Standards (ESRS) which came into effect in January, requires companies that fall under the Corporate Sustainability Reporting Directive to utilize the double materiality concept to determine reporting topics and include value chain information. They are required to disclose how they incorporate sustainability topics and manage related impacts, risks, and opportunities.

Specifically, ESRS G1 covers transparent and sustainable business practices, including corporate culture, supplier relationships, anti-corruption measures, lobbying, whistleblower protections, and responsible payment practices. Companies must detail their anti-corruption systems, training programs, investigator independence, and any confirmed corruption incidents during the reporting period.

Key Elements of an Anti-Corruption ESG System

Drawing on the ESG frameworks mentioned above, a number of elements are key in establishing a robust and effective anti-bribery and corruption system. These elements include the following:

1. Effective Due Diligence: Conducting thorough due diligence before engaging with suppliers and contractors can identify potential corruption risks, ensuring that companies avoid partnerships with entities involved in corrupt practices.
2. Anti-Bribery Risk Assessments: Evaluating corruption risks within the organization helps prioritize efforts and allocate resources effectively to high-risk areas, particularly in sectors with significant government interaction.
3. Tone at the Top: Senior management must lead by example, embodying anti-corruption principles in their actions and decisions. Publicly endorsing the anti-corruption strategy and participating in training programs reinforces the company’s commitment.
4. Shareholder Engagement: Transparent disclosure of anti-corruption efforts allows stakeholders to provide feedback, which can be integrated into corporate strategies to improve anti-corruption initiatives.
5. Training Programs: Regular, customized anti-corruption training for employees and suppliers ensures awareness and preparedness to prevent bribery and corruption.
6. Whistleblowing Hotlines: Confidential reporting mechanisms allow employees and stakeholders to report corrupt activities safely, ensuring issues are addressed promptly.
7. Investigation and Disciplinary Actions: A robust investigative framework ensures thorough examination of reported corruption, with findings used to strengthen anti-corruption measures.
8. Compensation for Compliance: Rewarding employees for adherence to anti-corruption policies reinforces the importance of ethical behavior and encourages a culture of integrity.
9. Remedial Actions: Proactively addressing incidents of corruption and compensating affected parties demonstrates a company's commitment to ethical practices.
10. Disclosure and Assurance: Transparent reporting of anti-corruption efforts and third-party assurance of ESG reports enhance credibility and stakeholder trust.

While these elements are not exhaustive, they serve as a starting point for companies to develop their anti-bribery and corruption strategies tailored to their specific needs. By building upon this foundation, companies can cultivate a culture of integrity, strengthen trust with stakeholders and ultimately make significant progress in combating bribery and corruption in their operations.

 

This article was written by Oludolapo Makinde from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.