Sustainability Controller - A Board’s BFF

Internal controls are simply described as policies, procedures, and technical safeguards constituted by directors and supervised by principal executives that protect an organization by preventing errors and inappropriate actions that could jeopardize its license to operate.?

Two big real reasons to expand internal controls to include sustainability?

1. Increasing level of scrutiny on sustainability claims

2. Shifting capital flows to entities who can demonstrate their ‘Social and environmental license to operate

According to Antonio Bottillo, Mentor & Coach, ex-Executive Managing Director Natixis Investment Manager,

"ESG in not marketing, I see it happening in just one way, impact and for me means from maximizing shareholder value to value for stakeholders, we still are far too focused on value extraction (finance for example) and poor in value creation."

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Legislators globally are issuing a spate of new rules and guidance requiring adverse environment, human rights or governance issues to be considered, disclosed, and even mitigated by organizations. Yes, the EU is the front runner and it’s already established rules for EU-linked global value chain sustainability requirements pretty much for every sector.?

Every element of a sustainability strategy - net zero goals, engaging with the value chain among others need to be supported by rigorous internal controls and the effectiveness of these controls starts with strong governance and equally strong assurance.?

Questions Boards of companies should be asking themselves:

1. Given the various standards, a company is a signatory to, what is its “As-is” situation - where are those gaps?

2. Does the organization have guardrails in place to ensure the integrity of its sustainability data, performance, and resources?

3. Defining downside - are there systems, and practices to detect and correct? Escalation procedures? Capital reserves for lax practices in internal controls??

Manoj Jayachandran, ex-CEO AW Rostamani Lumina believes that across the MiddleEast and North Africa "Sustainability governance and control environment must quickly mature in order for boards to navigate rising ESG scrutiny especially in real economy sectors where the board needs to show higher commitment and intent during policy deployment"

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Credible internal controls in the area of sustainability for an organization need to align with three categories of objectives:

1. Operations and value chain objectives i.e. EU- PAI disclosures as well as scope 1,2 and 3 targets

2. Reporting Objectives - adherence with regulations and standards like ISSB, GRI, TCFD and various industry specific coalitions principles i.e. PRI, ICMM, IMO etc?

3. Compliance Objectives (i.e., regional, national, state emissions trading system, or local pollution laws and land and labor permits etc.).

The cost of failure?

Bloomberg’s Jan 2023 article is an understatement when it says, In-house counsel all over the world are bracing for a green washing lawsuit tsunami amid tougher disclosure requirements.?

According to Grantham Research Institute there are more than 2000 lawsuits worldwide focused on ESG. The primary risk being reputational and operational as opposed to financial.?

Given the growing consensus around ESG performance tied to company value, boards have a great deal to consider. With so much riding on the company’s successful implementation and governance of ESG, boards will benefit greatly from an ESG 3-line Défense approach as they carry out their oversight responsibilities.

It's really a binary call - either hire a good ESG controller and get authentic on their ESG agenda or pay for fines and litigations along with losing their license to operate.