Current trends in ethics and compliance
The start of 2023 has been overshadowed by significant economic fallout from the Ukraine war and the continuing impacts on supply-chains from China’s slow opening up, political concerns about China, the lingering impacts of Covid and, for us in the UK, Brexit.
For ethics and compliance officers there is so much going on that it is hard to distil it into a few trends in ethics and compliance, however, the top six seem to be: –
1. The rise of ESG reporting
ESG reporting continues to evolve at pace, despite the economic slowdown. In the past, ESG reporting was the preserve of corporate HQ, investor relations and communications teams, what we are now witnessing is a shift to the in-trays of Ethics and Compliance officers.
As ESG commitments are made and as sophistication increases, corporates are having to respond not just with reports, but verifiable assurances that commitments and supporting data are true. This requires auditing statements that are published and while this is by no means a new activity, for ESG data this is rapidly evolving. Where this is getting interesting, is that more operational people are being pulled into the activity and factors such as data storage and reliability are coming more to the fore.
For ethics and compliance teams ‘green-washing’ is fast becoming a key area where work is needed. Teams need to ensure that a) commitments are real and achievable and b) that measurement and reporting are robust and avoid the risk of material misstatement. Across many areas of ESG, the investor community is coming to realise that a ‘metric’ is not much use unless it speaks to underlying good performance. Ethics and compliance professionals should be involved in the debate about what metrics are chosen and how they are reported.
2. The prioritisation of human rights management
Human rights and the UN Guiding Principles are starting to have a real impact on corporate life. After a decade of slow roll-out we are now seeing a wave of legislation – France’s Devoir de Vigilance, the UK’s Modern Slavery Act, the German Supply Chain Act, Norwegian Transparency Act and the upcoming EU Corporate Sustainability Due Diligence Directive etc – which requires a robust response. For too long corporates have considered human rights to be a soft subject that could be managed lightly. However, this wave of legislation will force all large organisations to start to take human rights topics seriously.
In 2023 we anticipate a significant rise in the number of large corporates conducting meaningful human rights assessments of their supply chains. The best of these will focus on the organisation’s own operations and first tier suppliers where they can have a significant positive impact on people’s lives by reviewing core labour standards. This contrasts with the current position which is dominated by 1-2 day factory audits of labour standards in the retail sector, which are widely criticised as lacking rigour. At the other end of the scale we already see some of the larger oil/gas and extractive companies conducting much more serious human rights impact assessments.
We forecast that there will be a lot of experimentation in terms of approach and the number of companies offering services will dramatically increase. What will hopefully emerge is a more serious assessment, which focuses on the issues where corporates have real leverage to make meaningful improvements and quickly on the lives of workers and people in the community. The risk is that companies will do the minimum to look like they are assessing human rights impacts, without taking the findings seriously.
3. A greater push for corporate transparency
Transparency is driving change in the corporate world. We have seen this trend over the last two decades, but it is starting to matter more and more. The EU Whistleblowing Directive is an important aspect of this and clients are already investing in better systems for raising concerns and protecting whistleblowers. This will be accompanied by a greater effort to push these systems outwards to contractors, suppliers and other third parties to help corporates to find out what is going on and to help spot problems before they become serious. One consequence of this will be more information getting into the public domain, continuing the trend in the corporate world that ’secret’ activities do not stay, or cannot reliably stay, ’secret’ for very long. This is welcome and will drive improvements in corporate behaviour that will benefit societies more generally.
4. Greater tax transparency
The OECD’s slow but steady drive to tackle tax evasion will also push the best corporates into actively reducing what could be perceived as aggressive tax avoidance. Before too long, we are also likely to see organisations taking a more active stance and refusing to work with corporates that are legally domiciled in tax havens. This will come from the fear of ‘facilitating tax evasion’ and the increasing pressures from the OECD to move against countries and territories that have no minimum corporate tax rate. The register of beneficial ownership of property in the UK is another interesting example of the direction of travel. It is striking that immediate compliance is low, however the pressure will grow on opaque ownership structures to become transparent. This will help societies in the fight against money laundering and will also benefit corporates that have already moved towards simplified tax structures that accurately mirror the underlying economic activity of the corporate.
5. Complex change in supply chains
The changing attitudes to China and sanctions resulting from the war in Ukraine war are also driving rapid and complex change in supply-chains. Companies are responding in a wide range of ways, depending of course on the sector and the national origin of the company. Some are taking a compliance-led approach to ensure they are legally covered in what they do. Some of our clients, however, are already going further and thinking about an ethics dimension to doing business in Russia and China. Some are quitting operations in Russia altogether, even though there is no law requiring them to do so. Others are reviewing the negative publicity about doing business in China and thinking of cutting back investment and going elsewhere. These shifting global patterns are driving changes to supply chain locations and leading to new waves of investment in countries such as Indonesia, Vietnam and Mexico as well as some degree of onshoring. As such, 2023 is likely to see significant supply chain disruption which may present new corruption, human rights and wider code of conduct risks that may not have been foreseen even as recently as 2020.
6. Climate changes everything
The last key trend is so obvious and so ubiquitous it almost goes by unremarked. There is a rapid transition away from fossil fuels and towards renewable energies across the globe. This is keenly felt in our oil/gas and renewables clients, but it is also impacting almost every sector. In 2023 we are likely to see an even stronger focus on the environment and energy transition.
The high energy prices resulting from the Ukraine war have prioritised the need for energy independence and in particular renewables. The UK has benefitted from its windy climate, relatively benign shallow coastal shelf and, relatively good corporate governance, to produce 26 percent of its energy from wind in 2022, a percentage that is set to grow significantly this year. However, about one third of the world’s electricity production still relies on coal. Corporates will be under intense scrutiny to understand their role in the energy transition and to report on it clearly and transparently. We expect to see more active concern from NGOs, employees and governments forcing change inside companies.