Across the globe, businesses in all sectors are looking at their impact on the world around them, with ESG (environmental, social and governance) considerations moving rapidly up the agenda.

Whilst in recent years there has been an understandable focus on environmental concerns – particularly those connected to the climate crisis – it is important not to lose sight of the impact of social and governance issues. Corruption, human rights abuses and unethical conduct are not only damaging to businesses and society in their own right, but can in turn create and impact ESG risk on a host of other related issues.
Today, organizations face the challenge of navigating increasingly heightened ESG expectations, with the reputational and financial cost of failure becoming more severe. For years, ESG has been viewed as a form of ‘soft’ law. Nowadays, it has become a source of potential litigation, with recent legislation passed on a national level and under discussion at a transnational level. An EU directive currently under discussion would compel EU and non-EU companies to identify, prevent and mitigate actual and potential human rights and environmental adverse impacts. This extends to cover the business operations conducted by their subsidiaries as well as along their value chain.

The question we explore in this report is the extent to which more mature anti-bribery and corruption (AB&C) compliance measures can assist ESG risk management. We surveyed 600 compliance leaders based in the UK, USA, France, Germany, Asia (China, Singapore and Japan) and Brazil. A wide range of sectors were also covered within the research including tech and telecoms, lifestyle and consumer, manufacturing and industrials, energy, transportation and life sciences.
AB&C compliance – with its aim of identifying and preventing unethical and illegal behavior – has long focused on risk assessment, transparency, and good governance. These measures might also be applied to ESG risk management within a holistic strategy; the two issues are inextricably linked and organizations do not need to, and should not, prioritize one to the detriment of the other.

Third-party risk is a prime example, and one that is being critically underestimated. In Navigating deep waters, we consider the importance of third-party ESG risk and how this interacts with familiar AB&C concepts. Our findings highlight the advantages of aligning AB&C and ESG compliance, rather than viewing them as competing priorities. To do that, organizations need to look holistically at their risks and controls. Doing so is not always straightforward.

Navigating deep waters reveals the current shortcomings in third-party ESG risk measures, the headwinds businesses face in implementing effective measures, and the potentially significant costs of failing to do so.

Stephanie Yonekura

Partner and Global Head of Investigations, White Collar & Fraud
Hogan Lovells