Fostering a strong corporate culture and how to adhere to human rights regulations?

Why is corporate culture fundamental to ESG (Environmental, Social, and Governance) compliance and how does it set the tone for ethical behavior and responsible business practices? We spoke to Anthony Smith-Meyer, Executive Director at the Institute for Financial Integrity, and Sustainability (IFIS) who provided insight and five useful tips for our readers.

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1. Anthony, when it comes to governance and compliance, what key topics are associated with ESG?

The" Environment" and "Social" elements of ESG relate to the "intended objectives and impact" referred to previously. A good decision is not measured by profit alone. The aim is to deliver the value promised to clients, thus generating profits. The impact of the "E" and "S" relate to the footprint the organisation wishes to leave in doing so. It should be discussed as a strategic matter by the board and incorporated into a policy framework that decision takers must take into account in their deliberations.

Governance is about decision-making. A good governance framework will ensure:

that the right questions are identified and presented to the right people,
that all possible answers to those questions are adequately explored,
that decision takers have access to all necessary information needed to align solutions with intended objectives and impact,
that tasks are delegated to individuals with the means to execute the decision,
that there is a monitoring and reporting system in place that allows control of outcomes, revisions if necessary, and accountability.

This final point is where compliance joins the picture. Regulators want their objectives incorporated in the organisation's policy framework and supported by robust monitoring and information flow to management, the board, and eventually investors.

2. Is there a relation between board composition and diversity within companies that want to focus on ESG?

Many believe that a homogeneous board is more efficient, and in terms of time and discussion, it will be. With the same background and similar experience, everyone will most likely and rather quickly agree on a course of action. However, the more complex the question, the less effective such efficiency will likely be. We need a diversity of competencies, experiences, perspectives, and mentalities to ensure that we have a proper and thorough discussion of the strategic choices before us. For example, what happens to a typical group of even well-intentioned Baby Boomer men if we introduce female stakeholders from Generation Z or Millenials in the decision-making group? Their focus and input will most likely differ significantly from the former in regard to environmental impact, social equity and justice issues. I have no doubt that this new group will make a totally different choice.

3. What does stakeholder engagement mean in terms of ESG? What does it imply?

We want stakeholders in the company to be invested in what we do. EU regulations encourage shareholders to be more involved in the firm's direction of travel, its integrity, and its effectiveness regarding ESG. Some investors like the Norwegian Government Pension Fund Global are vocal in what they expect from the companies they invest in, others prefer simply to vote with their feet, selling and buying shares reactively instead. Dedicating time and effort to engage with shareholders is important and ensures that both sides' expectations are understood and met.

Many stakeholders impact long-term success. Employee engagement leads to higher productivity and loyalty. Engaged suppliers and distributors help form more stable and reliable partnerships. Finally, perhaps the most important is understanding the expectations of, and winning loyalty amongst, customers. Attracting and retaining customers is why marketing is increasingly focused on “stories” that explain how the company, its products and activities impact the environment and its social surroundings.

Unfortunately, some firms believe that creating "illusions" of ESG-friendly impact is enough. In the medium to long-term, a lack of authenticity will evidence itself, and the effect on reputation and customer loyalty will be dire – especially concerning the younger segment of the firm's "Super-consumers" going forward.

4. How do Luxembourgish banks compare to the rest of the world when it comes to fostering a strong corporate culture and why is it such a fundamental component of compliance in ESG?

Managing corporate culture is a critical strategic objective. The larger the company, the more intricate the challenge; while the smaller the company, the less common it is that culture is given a strategic importance. The aim is to have a culture that serves the firm's strategic objectives. For instance, what degree of risk appetite or experimentation is acceptable?

In a bank group, you cannot have subsidiaries adhering to different cultures – managing, maintaining oversight, and ensuring compliance would be impossible. Consequently, strategic culture is determined by the parent company. Every behaviour and performance, including the organization's dedication to ESG, is influenced by culture. In Luxembourg, most banks are affiliated with foreign ownership. Spuerkeess and Banque Raiffeisen are significant exceptions. Consequently, for most banks in Luxembourg, managing culture means focusing on compliance with a strategic culture and policy framework decided upon elsewhere. The boards of foreign-owned banks have a role in promoting and protecting the culture that best serves its Luxembourg entity but have minimal room for manoeuvre.

Spuerkeess is in a particular situation. Government-owned, it must safeguard its independence from political influence, yet maintain its own high sense of responsibility for its social impact in Luxembourg. It is an AA+ institution and Luxembourg's premier savings bank, requiring integrity and predictability. In this way, it will distinguish itself from other banks.

5 useful tips To ensure that an employer is adhering to labour standards and human rights regulations:

Observe the treatment of work colleagues and speak up if there is any indication of negligence relative to employee well-being.
Verify if there are policies regarding employee well-being or human rights, and observe if they are ever raised during decision-making, and if not speak up.
If the culture allows, raise questions and concerns on adherence to stated ESG objectives.
Keep an eye on the news. There is no such thing as “it couldn’t happen here”, so when things go wrong elsewhere look at your own institution.
Keep your eyes on the horizon and stay alert for changes in ethical expectations occurring elsewhere to stay ahead of the curve.

About the blog:

There is an urgent need for rapid transition to global sustainability. Business and industry have enormous social and environmental impacts. "Why does it matter?" is a bi-monthly blog that aims to elucidate this important topic through the eyes of our experts.

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