The critical role of third parties in ESG strategy

Due to cost optimization requirements, third parties are playing an ever-increasing role in the success of a business. At the same time, a new generation of investors is driving a new model that focuses not just on profitability but also on the Environmental, Social, and Governance (ESG) impact that business makes on the greater society. With this ever-increasing focus by investors, regulators are beginning to focus on greater transparency in the reporting of these key ESG metrics.

This reality has been highlighted by some of the largest financial organizations in the world. In his recent letter to chief executive officers (CEOs), ¹Blackrock CEO Larry Fink stated, “Despite the darkness of the past 12 months, there have been signs of hope, including companies that have worked to serve their stakeholders with courage and conviction. We saw businesses rapidly innovate to keep food and goods flowing during lockdowns. Companies have stepped up to support nonprofits serving those in need.” Further in the letter, Larry went on to write, “As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further.”

Government regulators are not far behind on ensuring proper reporting and measurement of key ESG metrics. The Securities and Exchange Commission announced the creation of an Enforcement Task Force focused on climate and ESG issues. The press release noted, “The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.” ² “Climate risks and sustainability are critical issues for the investing public and our capital markets,” Acting Chair Allison Herren Lee said in the press release. “The task force announced today will play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.”

Leading organizations have met the call for transparency and accuracy by investors and regulators by looking deep within the organizations and driving change with net-zero pledges and internal reviews of current business practices. However, an internal facing review is not enough. Think quickly around environmental factors, specifically greenhouse gas (GhG) emissions. Who are the biggest contributors to GhG for a typical business? Third parties are nearly always the answer in the form of freight, logistics, travel, and real estate. The same could be said of each of the three components of ESG. So how could any strategy be successful without active buy-in and participation by third parties.

The KPMG approach

By combining the KPMG Contract Compliance team with our clients’ outside law firms, we have developed a service that offers a thorough third- party ESG approach. Our clients work with outside law firms to author third-party codes of conduct, ESG commitments, corporate communications, and trainings. KPMG’s then follows through with a risk assessment of current third-party relationships utilizing our knowledge of third-party risk and ESG strategy pitfalls. After which, our approach offers a focused compliance assessment of critical third parties customized based on risk and focused on understanding the third-party environment, assessing compliance requirements, and delivering key risk mitigation strategies.

By offering a wide-ranging third-party methodology, our clients are able to leverage multiple subject matter professionals, create required documentation, review disclosures, enforce ESG policy requirements, and complete remediation plans, all while maintaining a cohesive team with the same key points of contact. This class-leading service drives transparency and puts our clients on the forefront of ESG reporting and compliance.

When dealing with a third party, we understand that cooperation is not always inherent. Third parties can often view this type of activity as a liability. Our reviews, therefore, rely on the contractual basis that our clients have to conduct a review of this type. Our professionals are able to assess compliance and any potential weaknesses that may be improved on through our testing while maintaining our clients’ critical relationships. Our team has built a reputation of fairness and objectiveness that allows us to serve our clients and markets. It is this reputation and our skill of driving transparency while improving third-party relationships that has kept our team in this segment for more than 25 years.

About the KPMG Forensic—Contract Compliance team

For more than 25 years, our Forensic—Contract Compliance team has been in the position of assisting our clients in evaluating their third-party relationships against compliance standards. Our reviews are built off assessing third parties against their contractual obligations with our clients. Our reviews have garnered both financial results in cost recovery and future cost savings and nonfinancial results in highlighting noncompliance with codes of conduct and corporate requirements. Our specialty is bringing needed transparency while maintaining and enhancing the relationship between our clients and their third parties.