TheCorporateCounsel.net

Netflix’s newest documentary Seaspiracy is all over social media and the news. You may have already watched it, or maybe it’s in your queue for this weekend. The movie looks at wide ranging environmental and social impacts of the seafood industry – it’s hard to watch and there’s a lot to unpack. Some are saying they went too far. But for now, let’s look at one topic with which I have direct experience: ESG claims and assurance systems.

The film’s producer interviews Mark Palmer, Associate Director USA for the Earth Island Institute’s International Marine Mammal Project (IMMP), which operates the “Dolphin Safe Tuna” label program. The “Dolphin Safe” mark is used on canned tuna to indicate dolphins were not killed as bi-catch during tuna fishing.  The interview as presented in the film can be summed up in this exchange:

Producer: You [Dolphin Safe] have observers, but they are rarely there [on the fishing vessels], and they can be bribed and so you can’t guarantee that dolphin safe tuna is dolphin safe.

Palmer: That’s certainly true in terms of how the system works.

Producer: But it’s not guaranteed to be dolphin safe.

Palmer: Nothing can guarantee it’s dolphin safe.

Producer: But if it’s not guaranteed to be dolphin safe, why is it called dolphin safe?

Palmer:  We can pretty well guarantee it’s dolphin safe… it’s not guaranteed in the same way that, uh.. the world is a difficult place sometimes.

To be fair, in the “they’ve gone too far” camp, the IMMP has issued a statement expressing concern about how the film presents the interview.

In the bigger picture, though, there’s some merit to examining these programs – and the “Dolphin Safe” folks certainly aren’t the first responsible sourcing assurance mechanism to be on the hot seat. Another high-profile example is the London Bullion Marketers Association (LBMA) – and their “Good Delivery List” that’s intended to incentivize responsible gold production. Recent developments include NGOs claiming systemic flaws and a major assurance provider acknowledging shortcomings in managing conflict of interest. Many other metals and the mining industry have their own – but very similar – responsible sourcing due diligence mechanisms (the proliferation of these systems is a topic for another day).  Responsible timber due diligence assurance uses the same basic construct, so these issues may not be limited to gold due diligence assurance programs.

Encouragingly, these mechanisms aren’t deaf to the feedback. They are aware of improvements needed and are working to implement changes – but it takes time to develop, field test and launch solutions.

One takeaway for companies who rely on some of these programs is that major investors and financial institutions will soon be looking over your shoulder too. Jamie Dimon, CEO of JPMorganChase, stated in his 66-page Letter to Shareholders (2020):

… we will measure our clients’ carbon performance against sector-based GHG reduction targets that we’re setting for 2030 – with the goal of helping the reduce emissions from their direct operations and, in the case of oil and gas and automotive companies, reduce GHG from the use of their products.

What does this all mean? Basically, it’s reinforcement of companies’ misgivings around ESG assurance and certifications. They don’t offer the impenetrable protection of Captain America’s shield, and you can embrace that and add checks & balances. You never know when the next “Seaspiracy” will attract stakeholder attention – and investors are already developing their own systems to track, verify and question fundamental ESG information.

More on ESG Assurance: Using a Belt & Suspenders

While it’s true that many of the myriad ESG certifications/assurance mechanisms have responded to criticism by making systemic improvements, some have not. And even with improvements, gaps still exist. Either way, they don’t provide blanket protection from liability or business losses. Let’s dive in to how you can use industry assurance and labeling mechanisms in a prudent way.

In my opinion, there are two major elements to the risk:

Becoming a movie star villain. Seaspiracy is only the most recent example of becoming a reluctant movie star. A few years ago, another Netflix documentary brought economic devastation to one of my old consulting clients, and they are still struggling to get back where they were. Before that happened, I brushed off the idea that the film would have such impact. Having now seen it firsthand, I strongly suggest not ignoring it. Who knows what ESG matters – or companies – will be targeted next, and these documentaries have a track record of going viral.

Following the crowd. There are certainly advantages to using industry ESG assurance mechanisms, including the “safety in numbers” philosophy. In my experience, this tends to lead to complacency by individual companies about assurance quality and execution. But as previously discussed, those mechanisms are not perfect and you can essentially become a hostage to their flaws. Continuing to participate in or rely on these programs without doing something more may create more problems than expected.

Once a company recognizes the exposures, it should implement mitigation strategies. As a friend of mine at OECD frequently says: “You can’t outsource due diligence responsibility.” Perhaps the most effective of ways of taking responsibility are actually easy to do:

– Invite your Internal Audit group to learn more about industry assurance programs your company uses. Ask them to do a deep dive into the program’s procedures, practices, standards and auditors/assurance providers.

– Take an active role in shaping the industry assurance program(s) to close gaps or address concerns you or your Internal Audit group identified.

– Do your own monitoring of the assurance program(s) by participating in their audits where possible. Compare your experience and results with the programs’ final results. Where differences are identified, explore those with the program(s).

Finally, while not necessarily easy, it is worth considering augmenting your company’s use of industry programs with your own activities, including further use of Internal Audit to evaluate ESG risks of business partnerships or hiring qualified and screened third party ESG assurance experts.

Will Climate Pledges Outlive the Companies that Make Them?

Forever is a long time, except in corporate timelines. I remember visiting the Hoover Dam in the early 1990s and marveling at a plaque listing the construction contractors. Although construction was completed in 1936, a handful of the companies listed were still operating at the time I was there. But the world has changed in the past century. Companies aren’t really built to last.

Credit Suisse noted in 2017 that “the average lifespan of a S&P500 company is now less than 20 years, from 60 years in the 1950s.” Management is not necessarily stable over the long term. A Harvard Law study showed that CEO tenure has been on a downward trend and, for large cap companies, “the plurality of large-cap CEOs have been in the corner office between one and five years.”

These trends matter for a few reasons, but nothing may be as obvious as corporate climate commitments, especially the oh-so-popular Net-Zero pledge. This article from Canary Media does a fine job of summarizing last month’s analysis by Climate Action 100+ that benchmarked current corporate climate commitments against company actions and schedules (spoiler alert: there are substantial gaps between commitments made public, what those commitments should address and plans for execution).

Yet what I found most compelling is this perspective related to the current trends on company and CEO lifespan:

This shifts the critical question from whether we believe today’s corporate giants genuinely want to make good on these commitments to whether we think they, or their leadership, will even be around at all. Rather than congratulating companies that promise to clean up their act for a tomorrow they may never see, we need to be holding them to account for what they’re doing today.

Given the unprecedented complexity of the climate issue, uncertainty is to be expected. I hope that companies making long term climate pledges will last longer than most celebrity marriages – and it’s heartening to see companies making commitments, while recognizing this is a long term play. But will investors – many of whom already have short-term horizons – see corporate climate action from this perspective and push for nearer term goals/solutions? For companies making climate pledges that face the risk of no longer being a going concern – how will they manage or disclose the risk of failing to meet climate commitments?

This is one reason why it’s probably inappropriate to “shame” companies for favoring annual incentive programs as the vehicle for ESG metrics – it may be an annual program, but if you incentivize the correct year-over-year building blocks, it can lead to lasting change. In the fervor of this push for big change, it is worth considering the risk that a corporate climate pledge may outlive the company itself. Short-term stepping stones are a valuable part of the bridge to the future.

– Lawrence Heim