Integrating ESG and Compliance for Corporate Sustainability

Posted on Oct 28, 2025 in Business Administration and Management (BAM)

Foundational Concepts of Sustainability

UN Definition of Sustainability

“Meet the needs of the present without compromising the ability of future generations to meet their needs.”

Responsibilities of a Business (Carroll’s Pyramid)

  1. Economic Responsibilities: Being profitable.
  2. Legal Responsibilities: Obeying all national and international rules.
  3. Ethical Responsibilities: Being just, moral, and fair. The business must avoid causing harm.
  4. Philanthropic Responsibilities: Improving the quality of life in the community.

Definition of Corporate Social Responsibility (CSR)

“The social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time.” (Archie Carroll)

Defining ESG Factors

  • E – Environment: Protecting the planet.
  • S – Social: Doing right for people.
  • G – Governance: Corporate guardrails and oversight.

Detailed ESG Criteria

Corporate Governance

  • Board Quality: Independence, skills and qualifications, diversity, refreshment, and board leadership.
  • Management Incentives: Pay-for-performance alignment, ownership requirements, metrics and goals, severance, CIC payouts, and claw-back provisions.
  • Shareholders’ Rights: Board accountability to shareholders, voting rights, and shareholders’ ability to act.

Environmental Criteria

  • Climate Change: Carbon emissions, 1-degree alignment, fossil fuel reserves, energy efficiency, and renewable energy.
  • Resource Management: Water management, raw materials, and energy sources.
  • Environmental Impact: Air quality, ecological impacts, waste management, critical incident response, and plastics usage.

Social Criteria

  • Workforce & Human Capital: Inclusion and diversity, supply chain labor, workplace health and safety, and gender pay gap.
  • Value Chain: Product health and safety, data privacy, and data security.
  • Society and Communities: Community relations, economic impacts, human rights, anti-corruption measures, and political activities.

CSR Versus ESG: Key Differences

1. Corporate Social Responsibility (CSR)

  • A business model that impacts a company’s internal processes and culture.
  • Encompasses the activities a company undertakes to have a greater global impact.
  • Needs to be a priority, as consumers are increasingly demanding it.
  • Focuses on building accountability.
  • Can be used for good but also to mislead (e.g., greenwashing).

2. Environmental, Social, and Governance (ESG)

  • A measurable sustainability assessment, popular with investors.
  • Has become a set of criteria for sustainability assessment.
  • Financial performance is a key purpose of ESG valuation.
  • Focuses on quantifying existing accountability.
  • Can be used for good but also to mislead.

Why ESG is Important for International Corporations

Benefits of Integrating ESG:

  1. Trust: Builds confidence with investors and fosters long-term relationships.
  2. Better Decisions: Adds fairness and control to management processes.
  3. Stronger Partnerships: Stakeholders feel heard and included.
  4. Competitive Edge: Encourages innovation and responsibility.
  5. Good Reputation: Builds credibility and public trust.
  6. Talent & Productivity: Attracts and retains top employees.
  7. Risk Management: Improves control over legal and social risks.
  8. Supports SDGs: Helps achieve the UN Sustainable Development Goals.
  9. Access to Funding: ESG matters to investors and governments.
  10. Better Results: Boosts income or lowers costs through responsible practices.

ESG and Corporate Compliance

ESG and Compliance Summary

  • ESG + Compliance = Operating ethically and responsibly, following laws, and protecting long-term sustainability.
  • It is about obeying laws and also adapting to future challenges.
  • Governance (the “G” in ESG) includes a compliance program.
  • Compliance helps make ESG efforts real and trustworthy, avoiding greenwashing.

Compliance Program Goals in Global Companies

The triple purpose of a compliance program:

  1. Prevention: Identify and reduce risks before they happen.
  2. Control: Check that everything works properly in all countries.
  3. Correction: Fix problems by doing audits and making improvement plans.

Compliance Program Elements

  1. Risk Assessment: Identify legal, financial, and reputational risks, especially in ESG areas:
    • Environmental: Pollution, waste, emissions.
    • Social: Diversity, labor rights.
    • Governance: Corruption, taxes, board structure.

    Steps: assess, validate, prioritize, analyze gaps, and give recommendations.

  2. Internal Rules & Processes:
    • Code of Conduct: Expected behavior and company values.
    • Gift & Entertainment Rules: Avoid bribery and unfair influence.
    • Conflict of Interest: Manage situations where personal interests interfere with decisions.
    • Third-Party Due Diligence: Review partners to avoid compliance risks (screening, questionnaires, reports).
    • Personal Data Policy: Protect sensitive information (salary, health, identity).
  3. Controls & Audits:
    • Internal controls reduce risks and help meet company goals.
    • Can be: Preventive or detective; Manual or automated.
    • Keep operations efficient, compliant, and secure.
  4. Reporting: Track issues and improvements; document actions and findings.
  5. KPIs (Key Performance Indicators): Use measurable metrics to track progress and improve decisions.
  6. Training:
    • Teach employees compliance rules (anti-corruption, ESG, data protection, etc.).
    • Mandatory and must be documented.
    • Includes all employees, especially managers and new hires.

Global Climate and Sustainability Frameworks

The Paris Agreement (2015)

Emphasizes keeping global temperature rise below 1.5°C, requiring:

  • Systemic socioeconomic change.
  • Major reductions in greenhouse gas emissions.
  • Strong adaptation and sustainability efforts.

EU Agenda 2030

Adopted in 2015, with the SDGs and Paris Agreement as the foundation.

EU Action Dimensions

  • Economic
  • Social
  • Environmental
  • Governance

Progress (as of 2023)

  • Some success in decent work and poverty reduction.
  • Slowed down by COVID-19 and the war in Ukraine.

Main SDG Challenges

  • SDG 13 (Climate Action): 30% GHG reduction so far, but the goal is 55% by 2030.
  • SDG 15 (Life on Land): Needs better ecosystem protection and sustainable supply chains.
  • SDG 17 (Partnerships): Weak progress; needs more global cooperation and digital access.

The EU is unlikely to meet all 2030 goals, even with plans like the Green Deal, Fit for 55, and REPowerEU. The EU must start planning for long-term goals up to 2050, in line with the Paris Agreement.

Environmental Challenges and Decarbonization

Main Environmental Challenges

The environment faces urgent challenges, including:

  • Climate change and global warming.
  • Deforestation and biodiversity loss.
  • Air, water, and soil pollution.
  • Overconsumption and waste production.

These issues threaten ecosystems, human health, and future development. Businesses must play an active role in reducing their environmental footprint.

Climate Change: Introduction, Causes, Effects, and Goals

Introduction

  • Climate change is the long-term alteration of temperature and weather patterns on Earth.
  • It is driven by human activities, primarily the emission of greenhouse gases (GHGs) like CO₂, CH₄, and N₂O.
  • The greenhouse effect traps heat in the atmosphere, causing the planet to warm.

Main Causes

  1. Power generation using fossil fuels.
  2. Industrial activities like manufacturing and mining.
  3. Deforestation, reducing carbon absorption.
  4. Transportation powered by petrol and diesel.
  5. Food production, which emits CO₂ and methane.
  6. Energy use in buildings (residential/commercial).
  7. Overconsumption and waste, especially in high-income societies.

Effects

  1. Rising global temperatures.
  2. More frequent and intense storms.
  3. Prolonged droughts.
  4. Warming and rising sea levels.
  5. Extinction of animal and plant species.
  6. Threats to food security.
  7. Increased health risks (e.g., disease, heat stress).
  8. Poverty and displacement due to environmental instability.

Climate Change Goals

Paris Climate Agreement (2015) – Key Objectives

  1. Limit global warming to well below 2°C, ideally 1.5°C above pre-industrial levels.
  2. Regularly assess global progress toward these goals.
  3. Support developing countries through climate finance, capacity building, and technology transfer for emission reduction, climate resilience, and adaptation to climate change impacts.

EU Climate Goals for 2030–2035

  • Greenhouse Gas Emissions: Cut GHG emissions by at least 55% compared to 1990 levels.
  • Transport: 55% reduction in car emissions; 50% reduction in van emissions; achieve zero emissions from new cars.
  • Industry: 40% of net-zero technologies must be EU-produced annually.
  • Energy: 42.5% renewable energy target (aiming for 45%); 11.7% improvement in energy efficiency.

EU Long-Term Vision for 2050

  • Become climate neutral by 2050.
  • Achieve net-zero GHG emissions across the EU.
  • Main strategies: Reduce emissions drastically, invest in green technologies, and protect and restore the natural environment.

Challenging Barriers to Decarbonizing a Business

According to KPMG/Eversheds Sutherland, the main barriers include:

  • Lack of clear regulatory guidance.
  • Limited access to low-carbon technologies.
  • High costs of transition.
  • Uncertainty in return on green investments.
  • Internal resistance to organizational change.
  • Complexity of global supply chains.

Greenwashing and Other Non-Sustainable Practices

Types of Misleading Practices:

  1. Greenwashing: Making false or exaggerated claims about sustainability.
  2. Tokenism: Symbolic environmental actions that lack real impact.
  3. Single-Issue Focus: Highlighting one green initiative while neglecting other negative impacts.
  4. Offset-Based Excuses: Justifying unsustainable actions by paying for carbon offsets.
  5. Lack of Transparency: Withholding verifiable sustainability data.
  6. Short-Term Strategies: Sacrificing long-term sustainability for quick wins.
  7. Social Injustice: Ignoring labor rights or exploiting vulnerable communities.

Green Bonds and Blue Bonds

Green Bonds are financial instruments issued by public or private entities to fund climate and environmental projects, such as:

  • Renewable energy.
  • Energy efficiency.
  • Clean transportation.
  • Sustainable waste management.

Key features:

  • Funds must be exclusively used for environmentally beneficial projects.
  • Require transparent reporting and external validation.
  • Green Bond Principles guide best practices (transparency, disclosure, reporting).

Blue Bonds are a similar concept, focused on protecting marine and ocean ecosystems.

Implementing Sustainability and Compliance

Requirements for a Compliance Program

Three things are required to implement a Compliance Program:

  1. Tone at the Top: Refers to the ethical climate, culture, and values set by an organization’s senior leadership, especially the board of directors and executive management. It represents how seriously top leaders take issues like integrity, compliance, accountability, and ethical behavior, and how these values are communicated and enforced throughout the organization.
  2. FTEs (Full-Time Equivalents): A unit of measure that indicates the number of full-time employees required to perform a specific amount of work. It is used to standardize employee workloads and allows for combining part-time and full-time staff into a single, comparable metric.
  3. Economic Resources.

ESG Implementation Steps

  • Team and Resources: Appoint a manager or a team to coordinate the Sustainability or ESG efforts, establish a Sustainability Plan, oversee implementation and monitoring, and prepare the non-financial report. This team must be provided with a budget, just like any other area of the organization.
  • Materiality Analysis: To prepare the Sustainability Plan, it is necessary to prioritize the important aspects for the organization through materiality analysis. This process identifies the relevant ESG aspects based on the sector of activity or global trends, allowing the company to set specific ESG objectives.
  • Technology: Technology solutions allow for an ESG performance tracking and measurement system to measure progress and make informed decisions for continuous improvement.

The Corporate Sustainability Model

1. What is a Sustainability Model?

A sustainability model defines how a company creates and delivers value while protecting and regenerating natural, social, and economic capital. It goes beyond financial returns to include ESG aspects.

2. Key Components of a Sustainability Model

  • Identification of Impacts, Risks, and Opportunities (IROs): Analyze both positive and negative effects, risks, and opportunities.
  • Sustainability Strategy: Define ESG objectives with KPIs and assign roles.
  • Governance Model: Ensure integration across departments through a structure adapted to the company.
  • Monitoring and Reporting: Track KPIs and assess alignment with reporting standards.
  • Performance Evaluation: Regular reviews to improve effectiveness.

3. Implementing a Sustainability Model in a Company

  • Top Management Commitment: Sustainability must be endorsed at the highest level.
  • Assigning Responsibilities: Define who is responsible—either a dedicated team or existing departments.
  • Leadership and Coordination: Develop strategy and engage stakeholders.
  • Employee Training: Align staff through relevant education.
  • Planning and Control: Review strategies periodically.
  • Communication: Communicate results internally and externally.

4. Overcoming Internal Resistance

  • Leadership Commitment (Top-Down Approach): Ensure that the commitment to sustainability starts at the highest levels of the organization. Must be visible and consistent.
  • Employee Engagement: Involve employees in decision-making and strategy development.
  • Clear Communication: Transparency in goals and progress (with regular updates).
  • Incentives and Recognition: Reward systems to incentivize sustainable behavior.

5. Overcoming External Resistance

  • Stakeholder Engagement: Dialogue, collaboration, and partnerships with customers, communities, etc.
  • Customer Education: Transparent communication of sustainability benefits and awareness campaigns.
  • Supplier Collaboration:
    • Develop a Supplier Code of Conduct.
    • Conduct assessments and audits.
    • Provide training and resources.
    • Promote joint initiatives.
    • Use KPIs and reporting systems.
    • Encourage continuous improvement and use technology (e.g., blockchain) for transparency.
  • Regulatory Compliance and Advocacy: Proactive compliance and participation in industry advocacy efforts.

6. Specific Challenges

  • Involving Employees: Training programs, workshops, decision-making inclusion, and feedback mechanisms. Clear communication, recognition, and integration into daily operations (e.g., green teams). Continuous improvement and regular check-ins. Promote collaboration and team-building.
  • Ensuring Supplier Compliance: Clear sustainability criteria in contracts (Supplier Code of Conduct and contractual obligations). Conduct thorough supplier assessments (pre-qualification assessments and regular audits and inspections). Provide training and support, as well as foster open communication and collaboration. Regular monitoring and reporting systems. Use of software and technologies to track performance and ensure accountability.

The Social Criteria in ESG

Understanding the ‘S’ in ESG

The “S” in ESG stands for Social, which centers around human rights, equity, and an organization’s relationship with people. This includes internal (employees) and external (society, stakeholders) groups and reflects how a company’s operations affect individuals and communities.

Key questions addressed:

  • How does a company manage relations with its workforce, local communities, and political environments?

Social factors influence both profitability and corporate responsibility, including trends in labor and politics.