Like never before, companies face demands for robust corporate social responsibility (CSR) and sustainability programs. These programs are typically based on benchmarking against environmental, social, and governance (ESG) criteria, utilizing the Global Reporting Initiative’s core option.
As companies are increasingly called upon to not only invest in but also report on the depth of their CSR programs, including detailed CSR reports and often public ESG disclosures, they now face requests for third-party verification of their programs’ achievements.
These requests come from a host of stakeholders, including consumers, investors, financing sources, and supply chain buyers. And we are seeing an unprecedented increase in the creation and growth of “social impact funds” that require detailed data from third-party vendors.
Obtaining verification can be expensive and time consuming, but when managed strategically it may offer significant benefits to corporate culture and profitability.
What are the risks and benefits of third-party verification? Options for third-party consultation? Best practices?
Surveys suggest that 80% of consumers show a preference for products that have been certified as sustainable. This includes products with certification “seals” (such as the EPA Energy Star program) but also those with third-party certifications online.
In the business-to-business world, sellers face sustainability requirements that increasingly require submission of third-party audits (e.g., government contractors who have long been required to provide outside party certification under the ISO system).
Increasingly, companies (public and private) are subject to third-party CSR evaluations — whether they know it or not. A host of ESG database analyses are publicly available from Bloomberg, Moody’s, RobecoSAM, Sustainalytics, ISS, the Carbon Disclosure Project, and others.
These databases offer a CSR-based “ranking” relative to public peer companies based not just on public disclosures but also on a host of other factors.
For example, companies may be evaluated on conformance to environmental benchmarks (carbon footprint, energy efficiency, emissions, and waste reduction), social issues (diversity of workforce and leadership, lost time incident rate, unionization and wage/working conditions claims) and governance/ethics (percentage of independent directors, frequency of meetings, and special committees to cover ESG issues).
These online rankings vis-à-vis a company’s competitors may present an incorrect picture of a company’s actual CSR commitment. Third-party verification may, in this situation, present an opportunity for a company to provide a more accurate picture.
Benefits to submitting to a third-party review/verification can include:
- Uncovering collateral exposure that affects profitability (e.g., poor energy efficiency, excessive waste disposal costs, diversion of capital to bribes, or other emoluments).
- Early detection of non-compliance conditions that could otherwise be the subject of government or private-party claims. Many regulatory regimes afford forgiveness or reductions of fines and penalties where such conditions are self-disclosed.
- Qualifying a company for specialty risk insurance, reduced premiums, and fulfillment of commitments to transparent CSR reporting.
Multiple surveys indicate that companies achieving verification out-compete their competition, show better overall legal compliance, and benefit from a higher degree of employee productivity and satisfaction.
What Are the Options?
There is a dizzying array of CSR verifications. More than 450 sustainability “seals” can be found via online services. Research by ISEAL Alliance suggests that stakeholders are sophisticated and look for independence, integrity, reproducibility, clarity, and reasonable engagement with a cross section of stakeholders, including the community, trade groups, and regulators.
And ISEAL itself provides a gateway to a group of verification organizations that meet its criteria.
Online services provide one option for verification, generally involving self-certification to ESG criteria and payment of a fee, often scaled in proportion to a measure of annual profits. These include B Corporation approval, LEED (US Green Buildings Alliance) approvals, EPA/DOE programs (Energy Star, Smartway, Water Sense, Safer Choice) and Sedex.
Some trade groups have committed to a common CSR benchmark, requiring members to undertake a third-party audit by a designated firm. See, for example, Joint Audit Cooperation‘s program for the world’s largest telecom providers.
The ISEAL providers exemplify the most in-depth approach, where a third-party verification provider produces a report customized to the company. Although they may be the most expensive, they also may provide the most meaningful work product, maximizing the above-noted benefits.
In some circumstances, these verifications are critical to business continuity. Loss of third-party verification may effectively close down a supply chain, such as with certifications by the Roundtable for Sustainable Palm Oil and forestry certifications.
Mitigating Third-Party Certification Legal Risks
In considering third-party certification, companies need to be wary of potential liability attached to showcasing a shiny certification seal or professing claims of “green,” “sustainable,” “Made in the USA,” etc.
First, consumer-facing companies should be aware of an active plaintiffs bar that prowls electronic and brick markets for seals, and certifications that might be subject to consumer class actions alleging deceptive practices.
FTC warning letters, enforcement actions, state attorneys general investigations, and consumer class actions are cracking down.
Examples include allegations that chemically processed rayon is not “100% bamboo”; that a seal declaring “non-GMO” is misleading; that latex baby mattresses bearing a “Green Safety shield” are not fully organic; that beverages advertised as “heart and prostate healthy” are not; and that a chemical additive “completely degrades” plastic without appropriate scientific proof. Thousands of cases have been filed attacking the word “natural” on a vast assortment of products.
There are also concerns with the veracity of reproducibility of some sustainability certifications, especially where supply chains are large and diverse (with ESG claims being challenged by consumer groups). Recent examples include bribery and corrupt practices undermining certification in the nut, palm oil, cocoa, tea, and coffee trades, where the supply chain is fed by tens of thousands of small holder producers.
Finally, some ESG terms that are the subject of verification/certification efforts are hampered by lack of poor definition. A prime example is conservation terms like “recyclable,” “biodegradable,” “compostable,” and “made with recycled materials and renewable energy.”
With respect to such terms, the best interpretive information is only at the level of governmental and trade “guidance,” such as the Federal Trade Commission’s Green Guide (2012).
While some courts will recognize, appropriately, that complying with regulatory guidance should provide some protection against liability for deceptive practices, others will not.
Companies are well-advised to anticipate these types of potential complications and have a clear pathway to not only vetting their third-party certification vendors, but having evidence at the ready that would be presented to inform (or refute) claimants and stakeholders.
Third-Party Sustainability Best Practices
A number of financial consulting firms, such as Bloomberg and Barons, provide annual rankings of the most sustainable companies among the Fortune 1000. Below are observations on common practices of the highest-ranked companies:
- The Global Reporting Initiative “Core” Option (most common)
- EPA Energy Star and WaterSense certifications are common across industries; EPA SmartWay is common for transportation/logistics companies
- Greenhouse gas and carbon verification by outside firms (a growing trend). Such firms include CDP, Truecost, and Ruby Canyon Engineering.
- Accounting firms perform sustainability assurance audits.
- Insurance companies provide sustainability assurance audits (e.g., Lloyds and Bureau Veritas).
- Supply chain outside audits are a common feature.
- Some companies have audits by environmental consultants.
- Some financial firms have audits by non-governmental organizations.
- Certification of key products is more common than certification of an overall corporate sustainability program (e.g., outside verification of energy efficiency, low chemical content, and low emissions associated with products).
We are currently witnessing an unprecedented growth of CSR measurement, accountability, and an expectation of full transparency on lofty CSR claims.
From the Blackrock CEO’s January 2018 demand that public companies must not only deliver profits but also make “a positive contribution to society,” to the Business Roundtable’s August 2019 “Statement on the Purpose of a Corporation,” it has never been a more critical time to not only invest in your company’s CSR program, but to examine, measure, and test your program’s promises through carefully managed verification.
The result? A better, more engaged workforce, a better reputation among customers and shareholders, and ultimately a better business outcome.
Eric Rothenberg is a partner at law firm O’Melveny & Myers who leads its environmental practice. Hannah Chanoine, also a partner at O’Melveny, focuses on defending and advising companies in class-action matters. Rochelle Karr is the firm’s director of corporate social responsibility. Cailey Martin is a student at Harvard University and served as an intern at the firm in the summer of 2019.