The ESG team – where best should it be located in a firm?
- Environmental, Social, Governance – three words that are easy to use and have meaning. They can stand by themselves or be neatly bundled together into a catchy acronym; ESG. So far, so good. Taking these three words and placing an ESG function within an entity’s organisational chart, is where it becomes more challenging.
- ESG is arguably at 2G from a generational perspective. Its lifecycle is only going to see increased sophistication and wider appreciation for what these three letters can bring to benefit not only an organisation, but society and our planet. It’s a colossal topic to process and as far as any one acronym attracting other acronyms, ESG is out front as an acronym magnet.
- Some people embrace ESG, some shy away from it and some have still not heard of it. Financial institutions (FIs) are no different. If the senior leadership team get it, then as night follows day, it usually, and rightly, takes a prominent place in their ‘shop window’ and highlighting their organisation’s respect for ESG standards. That said, there are some FI leaders who look at ESG as a cost today that can be kicked down the proverbial road a little while longer. They are arguably and somewhat shortsightedly, ignoring the thinking of not only Gen Ys, but Gen Xs and Baby Boomers. They know that the buck can ultimately be passed, for now anyway, with the fog of ESG helping to cover tracks. A weak and inward-looking leader of today will always store challenges upstream for those who follow. Poor ESG controls in place today, offer tomorrow’s leaders no end of headaches and sleepless nights as they navigate, confront and defuse, the wealth of ticking ESG time-bombs left behind by clumsy predecessors. Prior planning and preparation, and all that.
- With this context in mind, where should an ESG team sit overall within a FI’s org charts? This is an area of healthy debate. Some argue that it should be within the Compliance function, after all, regulation is coming and COP26 should focus some minds. Others say ESG belongs firmly in Risk. Legal departments see mitigating ESG risk as playing to their strengths. Or is ESG for the business to manage directly? Should there be entirely separate and stand-alone Sustainability and ESG functions? Many larger FIs have seized the initiative and are now growing their ESG team, albeit, whilst still considering where best to place it. Numerous FIs of all sizes, still postulate, gaze at their navels, and apply sticking plaster solutions to matters ESG, meaning that the upstream ESG risk only increases.
- Should Compliance be considered the function to take the ESG baton and champion it across a firm? Today’s Compliance teams are full of ambitious and forward-looking SMEs who are moving up the FI regulatory career ladder. ESG is all about looking ahead and seizing an opportunity to making things better for all of us. It is a huge topic that generates much chatter and indeed vote seeking. Yet, there appears a lack of consistency across FIs as to where their ESG teams should be homed. Regulation and supervision will ultimately remove ESG self-certification which is currently open to manipulation and abuse. Should it be over to Compliance to lead and build an ESG-aligned culture across a firm or somewhere else?
At Eiger Regulatory Partners we work with our financial services clients to provide specialist regulatory consulting advice and human capital to minimise their risks and assist with strategy.