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How Can Compliance Steer Companies to Deliver on ESG Goals?

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With less than ten years left for the implementation of the 2030 Agenda for sustainable development, only 21% of world-class CEOs are convinced that businesses are playing a critical role in contributing to the Sustainable Development Goals (SDGs). Companies embraced enthusiastically the SDGs but they are not delivering real progress on those goals at a desired pace. In this chapter we discuss the reasons for the yet modest outcome of business contribution and aim at identifying the main issues that companies should map and address when building a robust sustainability governance framework.

We start by looking at the main features of the sustainability legal framework in Europe—including some paradigmatic laws at national level—with a focus on the debate between the merits of a harder stance of the sustainability rules vis-à-vis a softer approach.

We then examine the topic from the companies’ perspective as law-takers, in particular how corporates’ response to sustainability rules is influenced by their compliance maturity.

In conclusion, we propose mechanisms for strategically and sustainability-driven compliance programs seeking to help companies navigate the sustainability shifting waters.

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    The concept of world’s “social foundation” as a minimum for certain dimensions (water, food, health, education, income & work, peace & justice, political voice, social equity, housing, networks, and energy), below which the humanity is in deprivation, is explored in the “Doughnut Theory”, created by K. Raworth. For more information about this see, “A Safe and Just Space for Humanity: Can We Live within the Doughnut?” (2012) Oxfam Discussion Papers.

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    The terms “sustainability”, “environmental, social and governance” (ESG), “non-financial” or “corporate social responsibility” (CSR) are all used interchangeably in this chapter.

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    Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.

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    Said EU regulation includes the conflict minerals regulation (Regulation (EU) 2017/821 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 May 2017 laying down the supply chain due diligence obligations of Union importers of minerals or metals), the timber regulation (Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market), and voluntary approaches with third countries such as the staff working document (2017) regarding sustainable garment value chains and the Trade for Decent Work Project.

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    Law stipulates the right thing to do.

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    The term was first used by Richard H. Thaler and Cass R. Sunstein, in “Nudge: Improving Decisions About Health, Wealth, and Happiness”, 2009 Print.

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    See Richard Locke, Fei Qin, and Alberto Brause, “Does Monitoring Improve Labor Standards?: Lessons from Nike”, MIT Sloan Working Paper No. 4612-06, July 2006 for a discussion on how monitoring efforts shall be combined with other interventions focused on tackling the root causes of poor working conditions.

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    ESG risks were once considered “Black Swans”, rare and unpredictable outlier events that may cause extreme impacts as first defined by NASSIM NICHOLAS TALEB, in “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” (2001). These risks are more common today but still advance rapidly. They are commonly inherent to the nature of the services or products and object of particular interest from media or society in general what amplifies the reputational consequences of their materialisation.

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    The Committee of Sponsoring Organizations of the Treadway Commission (COSO) and World Business Council for Sustainable Development (WBCSD), “Enterprise Risk Management: Applying Enterprise Risk Management to Environmental, Social and Governance-Related Risks” (2018).

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    See European Banking Authority, “EBA Discussion Paper on Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”, of 30 October 2020 (EBA/DP/2020/03), p. 28.

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    WBCSD is a global, CEO-led organization of over 200 leading businesses working together to accelerate the transition to a sustainable world.

  77. 77.

    See latest 2019 United Nations Global Compact—Accenture Strategy CEO Study on Sustainability, “The Decade to Deliver: A Call to Business Action”.

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Reis, L. (2022). How Can Compliance Steer Companies to Deliver on ESG Goals?. In: Câmara, P., Morais, F. (eds) The Palgrave Handbook of ESG and Corporate Governance. Palgrave Macmillan, Cham.

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