ESG raised to the power of TRUST – Integrating a culture of integrity into ESG vision

An ancient wisdom – “Vasudhaiva Kutumbakam” – meaning the whole world is one family and accepting diversity through the lens of inclusivity. Today’s focus on ESG is also ingrained through this wisdom, which provides goals to organisations that go beyond maximising profits, instead add overall stakeholder value. As these organisations embark upon their journey towards a better tomorrow, Environment, Social and Governance (ESG) priorities take the centre stage to help organisations build resilience and long-term value creation.

While the growing demand for ESG is a positive move towards better future, and CEOs today are prepared to walk the extra mile in augmenting their ESG commitments, concern over authenticity of the information presented and the ethical business practices underlying the growth trajectory continue to cripple the efforts made by businesses to achieve sustainable growth. Ample examples are available where investors in high growth portfolio entities have identified the (significant) gaps in governance and thereby, breached TRUST – 86 per cent of US investors’ questions accuracy of companies ESG disclosures.

Regulators across the globe are tightening the sustainability norms and investors are increasingly treating ESG parameter at par, if not higher, with financial parameters. Although businesses are burning the candle at both the ends to make good on their commitments, the gap in available data, talent and technology, coupled with a quest to grab emerging ESG opportunities to stay ahead of the herd, may blur the line between ‘acceptable’ and ‘unacceptable’ practices.

Recognising the threat and understanding the factors that compromise organisations’ efforts in achieving sustainable growth would be the first step towards achieving its aspirations of sustainability with integrity and pride.

Illustrative ESG threats

Building trust through bold ESG programmes

Given the stakes, organisations require a more assertive stand against fraud, corruption, human rights violations, inequality, climate change and social and environmental issues, than merely meeting its regulatory obligations. Ethical and responsible business conduct requires propulsion to the ‘G’overnance aspect in ‘ESG’. A coherent integrity approach and a paradigm shift from a ‘risk-based’ to a holistic ‘value-based’ systems are the drivers of this propulsion.

Key considerations for the way forward

Human behaviour – maker or breaker

Business integrity model has evolved over the years, comprehensively incorporating proactive and reactive measures. Its key components include:

While these models have been successful in removing or stop rolling of ‘bad apples’, systematic fraud and corruption continue to find their way to creep back into organisations with established ethical compliance programmes. Modern times require a more inclusive and holistic approach that inspires individuals/entities to do the right thing. It is synonymous to taking ownership, going above and beyond minimum legal requirements. It requires for successful implementation, a deeper understanding of human behaviour, recognising individual cognitive biases, ethical dilemmas, social and other external factors, and peer pressures that influence individual actions and decisions.

Recommended leadership action for business integrity

It is imperative to elevate the organisation’s integrity functions at par with the business functions to bring independence in decision making, integrate culture of integrity across functions and hold management accountable for delivering on it. Leadership will need to create a foundation based on the following key pillars:

• Commitment to ethics and integrity beyond compliance
• Strong corporate culture and incentives to drive continuous improvement and ethical leadership
• Leveraging innovative technologies to improve data collection, analysis, decision-making, reporting and overall accountability
• Supporting collective action to increase scale and impact.

In conclusion, while the world is already witnessing the impact of purpose-led approach on profitability, a study by NYU showed positive correlation between ESG and financial performance (1.4%-2/7% higher stock returns); 52 per cent of CEOs at high-growth organisations believe that their ESG programmes improve financial performance. Integrating business integrity agenda with ESG priorities will become a strategic differentiator for business growth in the marketplace. It will ensure enhanced impact on environment and the society, reduced leakage of funds and protection of the brand, thereby establishing trust with multiple stakeholders.

Authored by

Suveer Khanna, Partner, Forensic Services, KPMG in India & Dulari Upadhyay, Director, Forensic Services, KPMG in India

Edited by: Queenie Nair