Revisiting ESG Terminology
Building on the lessons I have learnt from the previous post, I am compelled to revisit each question posed by the original LinkedIn post and at least confirm whether my understanding of these terms are sufficient. Here is what my research led to.
What is IUCN?
The IUCN also known as the International Union for Conservation of Nature is a network of 1,300 organizational members and 15,000+ specialists, established in 1948 to coordinate and support conservation efforts internationally. IUCN pioneered ‘nature-based solutions’ in the 2000s and played a major role in advising the Taskforce for Nature-related Financial Disclosures (TNFD) as one of its knowledge partners.
IUCN manages a number of useful tools for helping scientists and organizations globally track and manage biodiversity. The IUCN’s Red List of Threatened Species, for example, is the ‘world’s most comprehensive information source on the global extinction risk status of animal, fungus and plant species’. It provides ‘information about range, population size, habitat and ecology, use and/or trade, threats, and conservation actions that will help inform necessary conservation decisions’. Another useful resource is the PANORAMA, a database of case studies that documents methods and impacts of various sustainable development solutions, ranging from local research projects by citizen scientists to corporate led heritage conservation initiatives. Check out the IUCN website for more tools in offer including a database named ECOLEX offering free access to various environmental legislation and treaties.
How do companies calculate scope 3 emissions?
There is no simple answer. Worthy of a stand alone post.
Do you evaluate companies for human rights?
The corporate responsibility of upholding human rights originated from the UN guiding Principles on Business and Human Rights (UN Guiding Principles) and the OECD’s Guidelines for Multinational Enterprises and Due Diligence Guidance for Responsible Business Conduct. The former was adopted unanimously by the UN Human Rights Council in 2011 and ‘require companies to undertake due diligence to identify, prevent, mitigate and account for any human rights harms they may cause, contribute to, or be linked to’. (See Marti Flack’s brief for more). These principles are widely adopted voluntarily by governments and corporates including the UN Principles for Responsible Investment.
With the absence of legally binding legislation, efforts to improve companies’ human rights practices remain limited. This will, however, likely change in the next few years with the EU’s newly released draft mandatory human rights and environment due diligence directive. Under the proposed legislation, major EU companies and non-EU companies with operations within the region are required to conduct human rights and environmental due diligence to identify existing and potential violations within their business operations and amongst their suppliers. They will be required to adopt codes of conduct, establish internal compliance procedures and provide remediation to any abuses found against individuals and communities. Though as Flack noted, the proposed EU law only directly applies to roughly 1% of EU-registered companies, which in turn are expected to cascade further contractual limitations to its business affiliates and suppliers to ensure they in turn prevent human right abuses.
What is the age definition for child labour in factories act of India ?
India’s factories act of 1948 and constitution prohibits the employment of children below the age of 14 years in any factory or any hazardous occupation. The Child Labour (prohibition and regulation) Amendment Act in 2016 was later passed to extend the prohibition to non-hazardous occupations, with an exemption granted to the family or family enterprises given work was conducted after the child’s school hours or during vacation. Read here for more.
Upon closer inspection, one would inadvertently conclude that the precise definition of child labour differs between legal regimes.
Nonetheless, there is still broad global agreement on the two key International Labour Organization Conventions on child labour, which are namely Convention №138 on Minimum Age and Convention №182 on the Worst Forms of Child Labour. These Conventions are “fundamental” conventions which all ILO member states must respect, promote and realize even if the Conventions are not ratified by respective countries. Under Convention №138, countries are required to (i) establish a minimum age for entry into work or employment; and (ii) establish national policies for the elimination of child labour. Whereas Convention №182 states that countries must take immediate measures to eliminate the worst forms of child labour (e.g. hazardous work which exposes children to physical, psychological or sexual abuse).
As such, any meaningful discussion of child labour abuses must take into account of the specific legal definitions of respective jurisdictions as well as the principles enshrined under the ILO Conventions.
Why the chairperson role should separate from CEO/MD?
This question is problematic as it presupposes the need for such separation. There is NO definite approach as the management structure should be designed in a way that best optimizes the needs of the business and take into account of the unique dynamics of the company’s culture. Here are some of the most common arguments for and against.
Reasons for Separating Board Chair and CEO
- Increase the board’s independence from management and oversight, by preventing conflict of interest between the CEO’s role of managing the company and the chair’s role of presiding decisions on hiring, auditing, compensation and replacement of management (based on agency theory)
Reasons for Combining Board Chair and CEO
- Establishing a centralized state of authority leads to effective management and enables management and the board to respond swiftly to changing environments (based on stewardship / administrative theory)
- Prevents unnecessary distractions from power struggles
- The function of the separate chair position varies between organizations
- Separate chairs don’t necessarily mean the chair is seen to be independent
Quantitative studies of the statistical relationship between independence and firm performance have also been inconclusive.
Rather than focusing on the issue of board independence, Tonello suggests that board effectiveness is a more important factor to consider. According to research, board effectiveness is a result of its ability to manage dissent, generate productive group discussions and having a positive board culture. These are all underpinned by board director’s ability, willingness and openness towards disagreement and asking tough questions.
Moreover, research found that nonexecutive chairs are not necessarily more effective. Rather, the effectiveness of independent chairpersons depend on (i) industry knowledge (ii) leadership skills and (iii) attention to the board process. One’s ability to reframe/redirect discussions, coach the CEO and establish effective board dynamics (e.g. knowing when to push towards consensus) are equally important factors to consider.
The above is a brief summary of the key points covered by Tonello’s concise study for the Harvard Law School Forum on Corporates Governance.
What is a clawback policy?
Under the Dodd-Frank Act of 2010, all listed companies in the US are required to implement a clawback policy, which enables the company to recoup incentive-based compensation paid to executive officers. In the event of fraud, financial figure restatements or other special instances, the clawback policy will be enforced. This ensures risk alignment between executive officers and the companies they serve.
This matters because ‘compensation practices at large financial institutions were a key contributing factor to the global financial crisis’ as explained by the International Financial Stability Board (FSB). A set of Principles for Sound Compensation Practices and their Implementation Standards were subsequently developed by the FSB to realign compensation with management behavior. Clawbacks, malus and non financial KPIs are amongst some of the compensation tools used. ‘The use of clawback, however, is not widespread due to ongoing legal and practical constraints’. In addition, the downside of claw backs is that such provisions would often increase CEO pay instead. Some have suggested using disgorgement of earnings as an alternative to clawback policies.