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Multi-company and cross-industry collaborations are not new. They typically form when corporations are faced with major business threats. The collaborative efforts can be preemptive (such as lobbying efforts) or to develop cost effective’s solutions for managing systemic problems (like climate risk and supply chain human rights impacts). But there is more to these organizations and activities that companies should know as their number and scope expands in the ESG space. Some have been around for more than a decade while others started only within the past year – but they all share a number of characteristics and downsides.

The Good

Let’s start on a positive note. Collaborations do create benefits. There are many opinions on what the benefits are but from my experience the biggest are that they:

  • Create a level of consistency for multiple companies/industries in solving specific systemic problems;
  • Raise the visibility of the risk/issues;
  • Bring together many viewpoints and ideas from outside individual companies;
  • Develop solutions where costs are shared by members and even beyond;
  • Can influence positive policy development or change;
  • Serve as a starting point for solution development;
  • Establish the organization as a credible player in the topic; and
  • Improve technical subject matter training and competency.

Most – if not all – collaboration organizations have these positive traits and results. These are all valuable and many provide tangible benefits. Most participants tend to focus on the positives and not understand or acknowledge that there are also dark sides with some organizations. Ignoring these can be detrimental to companies that rely on the collaborations.

The Bad

On the other side of the positives are some important counterpoints. Among these are:

  • Companies tend to rely on the collaboration’s solution as “the” solution – essentially outsourcing the ESG risk management or due diligence activities. There is frequently little or no additional company-level screening, validation or internal controls applied to the results – they are blindly relied on (see the story in the link at the end of this article).
  • Collaborations don’t always produce the best possible solution. Getting to an end point is typically a consensus process involving many players of vastly different company sizes and settings. The process is akin to herding cats. Many times the result is the lowest common denominator – or a mid-point at best.
  • Member/participant dynamics can play an outsized role in problem solving. Not only does this refer to personality traits of the people directly involved, but it also refers to the company they represent and the level of monetary commitment given. Large donors/major sponsors are frequently given much more sway in deliberations and final outcomes, even in instances where they represent a minority view on a technical matter or strategy.
  • Solutions are sometimes launched that are underdeveloped, incomplete or untested. Upgrades or changes may have to wait until the next review and update cycle – meaning users are stuck using something that has known bugs, gaps, omissions or other weaknesses. Once a solution is launched, an organization may then turn its attention to the next project in the pipeline rather the fixing issues in solutions already available.
  • Many industry-led ESG solutions are based on auditing. I have expressed concern about social audits for years because of the lack of clear audit criteria, commodity price-driven level of effort, questionable audit practices and auditor competence. There have been improvements over the years and some industry collaborations have been better at pushing for change than others. This remains a weak link for collaborations.

Again, perhaps not every collaborative effort has these negatives, but these are certainly not uncommon. Unfortunately, there is even more to the Dark Side – and potentially the biggest risks.

The Ugly

There is increasing concern that ESG collaborations – especially in the area of climate risk management – violate antitrust US rules. Zach wrote not long ago about comments from former FTC Commissioner Lina Khan and Director of the DOJ’s Antitrust Division Jonathan Kanter. In testimony to the Senate last year, the pair said:

“…  while they were not actively seeking enforcement of antitrust laws based on collaborative ESG efforts, they also would not shy away from legitimate antitrust enforcement because of ESG benefits… Khan stated that the FTC has reminded companies that no antitrust exemption exists for ESG. Kanter agreed with the general sentiment that any anticompetitive activity should be actionable under US law regardless of a company’s intentions. These comments indicate that corporate collaborations to manage ESG risks are not automatically anti-trust violations. However, if these actions cross the line into anti-trust territory, then the good intentions of the companies involved – or ESG benefits to society – will not be a defense against an enforcement action.”

Collaborations usually have various “antitrust agreements” and procedures, but those cover a limited scope of antitrust activities. Zach’s blog discusses other forms of potential antitrust activities that hit at the very heart of these groups themselves. It can be very thin ice, especially now when ESG is a highly charged political risk.

Once established, collaboration organizations can take on a life of their own, moving towards self-interest and away from best interests of the members themselves. Internal politics and agendas can take over, reducing the ability (or desire) to be responsive to members. Complacency may set in with the organization resting on past achievements, ignoring new developments in risks, the market and participant needs. Limitations of the organization’s technical expertise can become apparent as members seek expanded – but related – solutions to new ESG risks. They can be essentially a one-trick pony.

What to Do

No company should blindly rely on collaborative solutions because if something hits the fan, it will hit the individual companies involved. I remember this happening in 2014 to Hewlett-Packard, Ralph Lauren, IBM and others reporting under SEC conflict minerals rule that they used gold from North Korea. Had that been true, those companies would have violated U.S. economic sanctions against the country and the penalties probably severe for them and their customers. In reality, it wasn’t true. The industry program that gathered and distributed the conflict minerals data made an error and had no internal controls in place to flag issues beyond the scope of conflict minerals. Many companies relied on the data without further reviews or in a broader context.

Back in 2021, I provided guidance on how companies could manage their use of/reliance on collaborations that develop, implement and run various ESG audit/assurance mechanisms. That guidance is perhaps even more important today as the threat of antitrust litigation grows, so I update it slightly below:

  • 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).
  • Consult with counsel about how the company views antitrust activities. Ensure they have a complete picture of how the organization operates and how the resulting solution(s) are to be used by your company and others. They should review the organizations processes for addressing antitrust risk in light of the developing litigation threats.
  • Consider augmenting your company’s use of industry programs with your own activities or hiring qualified and screened third party ESG assurance experts.

ESG collaborative efforts can offer meaningful benefits and not every organization suffers from all aspects of the Dark Side. Even so, “trust but verify” is good advice when relying on them.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile