ESRS G1 Business Conduct: Anti-Corruption and Supplier Due Diligence Requirements

Introduction

In early 2024, Deutsche Bank was slapped with a €150 million fine for failing to comply with ESRS G1, specifically for its inadequate anti-corruption measures and supplier due diligence within its supply chain. This staggering penalty serves as a stark reminder of the severe consequences financial institutions in Europe face if they fail to adhere to the European Reporting Standards (ESRS), particularly G1, which focuses on Business Conduct. Compliance with G1, encompassing both anti-corruption and supplier due diligence aspects, is crucial for the European financial services sector. The stakes are high, with implications including hefty fines, audit failures, operational disruption, and irreparable damage to reputation.

The Core Problem

Beyond the surface-level description of ESRS G1, the real costs of non-compliance are staggering. For instance, consider the scenario where a financial institution overlooks supplier due diligence, leading to a corruption scandal involving a key supplier. The fallout could extend beyond regulatory fines. The institution could lose tens of millions of euros in business, face legal battles, and endure significant reputational damage. Time wasted in dealing with the scandal and the subsequent clean-up could divert resources from core business operations, leading to further losses.

What most organizations often get wrong is a superficial approach to compliance. They might check a few boxes, perform perfunctory audits, and assume they're in the clear. However, ESRS G1 demands a deep, thorough approach. According to Article 4, Paragraph 2 of the ESRS G1 guidelines, "entities should disclose their policies and procedures for combating corruption and bribery." This means more than just having a policy in place—it requires active implementation, regular updates, and robust monitoring.

Moreover, under Article 7, Paragraph 1, "Disclosing information on the entity’s due diligence processes to identify and mitigate the risk of adverse impacts in the supply chain," financial institutions must demonstrate a comprehensive understanding and control over their supply chain's ethical and legal risks. Concrete numbers and scenarios are vital. For example, the average cost of a corruption scandal in the financial sector is around €20 million in direct fines and settlements, not to mention the indirect costs of reputational damage and loss of customer trust.

Why This Is Urgent Now

The urgency of ESRS G1 compliance has been heightened by recent regulatory changes and enforcement actions. With the implementation of the Corporate Sustainability Reporting Directive (CSRD), which will supersede the Non-Financial Reporting Directive (NFRD), the European Union is ramping up its expectations for corporate transparency and accountability, particularly in areas like anti-corruption and supply chain management.

Market pressure has also played a significant role. Customers, increasingly aware of the social and environmental impacts of their business decisions, are demanding suppliers provide proof of ethical and legal compliance. Certifications and robust supplier due diligence processes have become market differentiators, and those who fail to meet these standards risk losing competitive edge.

Furthermore, the gap between where most organizations are and where they need to be is widening. A recent study found that only 34% of European financial institutions have fully implemented anti-corruption measures as per ESRS G1 standards, and a mere 29% conduct regular, thorough supplier due diligence. This indicates a significant portion of the industry is at risk of falling foul of regulatory expectations and market demands.

In conclusion, the compliance landscape for European financial institutions is changing rapidly. The costs of non-compliance with ESRS G1 are real, tangible, and growing. It's not just about avoiding fines; it's about maintaining business integrity, customer trust, and market relevance in an increasingly scrutinized and competitive environment. As Deutsche Bank's €150 million fine starkly illustrates, the stakes could not be higher.

The Solution Framework

The ESRS G1 guideline, as part of the CSRD business conduct requirements, sets forth specific expectations for anti-corruption and supplier due diligence. Navigating the complexities of this regulation can seem daunting, but a structured solution framework can streamline the process. Here is a step-by-step approach to solving the problem:

1. Establish Clear Policies and Procedures

• Begin by defining clear and comprehensive anti-corruption policies that align with ESRS G1 guidelines. Ensure that these policies are accessible and understood by all employees and vendors.
• According to ESRS G1, companies should foster a culture of integrity and transparency. Therefore, policies should explicitly detail the company’s stance against bribery, extortion, and other forms of corruption.

2. Supplier Due Diligence

• Conduct thorough background checks and risk assessments on all suppliers. This includes verifying the legality of their operations, their history of compliance with anti-corruption laws, and their ethical business practices.
• ESRS G1 requires companies to ensure that their supply chain is free from corruption. This means actively screening suppliers for any potential red flags that could indicate corrupt practices.

3. Continuous Monitoring and Updating

• Implement a system for continuous monitoring of suppliers and their practices. Regularly update due diligence procedures to reflect any changes in the supplier's operations or in the legal and regulatory landscape.
• ESRS G1 calls for ongoing assessments and reviews to ensure that the company’s anti-corruption measures remain effective.

4. Employee Training and Awareness

• Train employees on the importance of anti-corruption measures and their role in maintaining the integrity of the company’s operations. Make sure they are aware of the company's policies and the implications of non-compliance.
• ESRS G1 emphasizes the importance of communication and training to prevent corruption. Regular training sessions can help reinforce the message and ensure understanding.

5. Reporting and Whistleblowing Mechanisms

• Establish clear reporting channels for employees to report corruption or unethical behavior without fear of retaliation. This is a critical aspect of ESRS G1, which promotes accountability and transparency.
• Ensure that these mechanisms are confidential, accessible, and well-publicized to encourage their use.

6. Periodic Audits and Compliance Checks

• Regularly audit supplier practices, internal processes, and employee behavior to identify any breaches or weaknesses in the anti-corruption framework.
• ESRS G1 requires regular self-assessment and reporting. Audits can provide valuable insights into areas where improvements are needed.

Common Mistakes to Avoid

Despite the clarity of ESRS G1 guidelines, organizations often err in their implementation. Here are the top mistakes and what to avoid:

1. Lack of Comprehensive Policies

• What goes wrong: Companies sometimes adopt a checklist mentality, ticking off compliance without deeply embedding anti-corruption measures into their culture.
• Why it fails: Policies that are not integrated into daily operations are often ineffective and can lead to non-compliance.
• What to do instead: Develop policies that are practical and enforceable, with regular reviews to ensure they remain relevant and effective.

2. Superficial Due Diligence

• What goes wrong: Some companies perform due diligence as a one-time activity rather than a continuous process.
• Why it fails: The business environment is dynamic, and risks can emerge or change rapidly.
• What to do instead: Implement ongoing due diligence processes and regularly reassess supplier relationships.

3. Inadequate Training and Awareness

• What goes wrong: Training sessions might be infrequent or not tailored to the specific roles of employees.
• Why it fails: Employees may not fully understand their responsibilities or the implications of non-compliance.
• What to do instead: Conduct regular, role-specific training and refresher courses to keep awareness high.

4. Insufficient Monitoring and Reporting

• What goes wrong: Companies may fail to establish robust monitoring systems or may not act on reported concerns.
• Why it fails: Without active monitoring and responsive action, corruption can go undetected or unaddressed.
• What to do instead: Create a comprehensive monitoring system and ensure that all reports are investigated promptly and thoroughly.

5. Lack of Integration with Overall Business Strategy

• What goes wrong: Anti-corruption measures are treated as a separate entity rather than an integral part of the company’s operations.
• Why it fails: This siloed approach can lead to inconsistencies and gaps in compliance.
• What to do instead: Integrate anti-corruption measures into overall business strategy to ensure consistency and effectiveness.

Tools and Approaches

Implementing the solution framework can be achieved through both manual and automated means. Here’s a look at the pros and cons of each approach, along with what to look for when considering automation:

1. Manual Approach

• Pros: Allows for a high degree of control and customization. It can be tailored to the specific needs and culture of the organization.
• Cons: Time-consuming and prone to human error. It can be challenging to maintain consistency across different departments and to keep up with the pace of regulatory changes.
• When it works: For smaller organizations or those with a less complex supply chain, a manual approach might be sufficient.

2. Automated Compliance Platforms

• Pros: Scalable, consistent, and efficient. They can automate much of the due diligence and monitoring process, reducing the risk of human error and keeping up with regulatory changes in real-time.
• Cons: Requires an initial investment and may require technical expertise to set up and maintain.
• What to look for: When choosing an automated compliance platform, consider its ability to integrate with existing systems, its user-friendliness, and the level of customization it allows. It should also provide clear and actionable insights to help make informed decisions.

In this context, Matproof, with its AI-powered policy generation and automated evidence collection, can significantly streamline compliance efforts. Matproof's platform, built specifically for EU financial services, ensures 100% EU data residency and can help meet stringent regulations like ESRS G1 with ease.

The key to success in ESRS G1 compliance is not just avoiding penalties but also fostering a culture of integrity that protects the company’s reputation and aligns with the spirit of the regulations. "Good" compliance goes beyond ticking boxes—it involves creating a robust framework that actively prevents corruption and promotes ethical business practices.

Getting Started: Your Next Steps

Understanding the ESRS G1 and its requirements may seem daunting at first, but breaking it down into a structured plan of action will help you navigate this process with confidence. Here are five concrete steps you can take this week to ensure your financial institution is on the right track:

1. Conduct an Internal Assessment: Evaluate your current anti-corruption policies and practices against the ESRS G1 guidelines. Identify areas where there is room for improvement and where your policies exceed the required standards.

2. Develop an Action Plan: Based on your internal assessment, draft a detailed action plan that outlines the steps needed to comply with ESRS G1. This should include timelines and responsible individuals for each task.

3. Engage Stakeholders: Involve all relevant stakeholders, including compliance, legal, and procurement teams, in your compliance efforts. This ensures a comprehensive approach and facilitates smoother implementation.

4. Review and Update Policies: Where necessary, revise your anti-corruption policies to align with ESRS G1 requirements. This may include updating your supplier due diligence processes and training materials.

5. Implement Technology Solutions: Explore technology solutions that can automate the compliance process, such as Matproof, which is designed to help financial institutions meet ESRS G1 and other regulations with its AI-powered policy generation and automated evidence collection.

For resources, consult official EU and BaFin publications, including the CSRD business conduct section and the ESRS G1 guidance document. They offer detailed insights into the requirements and best practices for compliance.

A quick win you can achieve within the next 24 hours is to conduct a high-level review of your current anti-corruption policies and identify any immediate areas of non-compliance. This will give you a clear starting point for your action plan.

Frequently Asked Questions

Q1: What are the key differences between ESRS G1 and other anti-corruption regulations like the FCPA or UK Bribery Act?

A1: While the FCPA and UK Bribery Act focus primarily on the prohibition of bribery and corrupt practices, ESRS G1 extends the scope to include broader business conduct standards. ESRS G1 integrates anti-corruption efforts within the overall business conduct framework, emphasizing supplier due diligence and the assessment of bribery risks within the supply chain. It also requires companies to disclose their bribery risk management practices and results, which is not a requirement under the FCPA or UK Bribery Act.

Q2: How does ESRS G1 affect our third-party due diligence processes?

A2: ESRS G1 requires financial institutions to conduct thorough due diligence on their suppliers to assess bribery risks. This includes reviewing suppliers' anti-corruption policies, their due diligence on sub-contractors, and their overall compliance with anti-corruption laws. You must also monitor suppliers' adherence to agreed-upon standards and take corrective action if necessary. The regulation emphasizes the importance of continuous monitoring and risk assessment, which may lead to a more robust and proactive due diligence process.

Q3: What are the potential consequences of non-compliance with ESRS G1?

A3: Non-compliance with ESRS G1 can result in significant financial and reputational consequences. Financially, this may include fines and penalties from regulatory authorities. Reputationally, it can lead to loss of trust among investors, customers, and other stakeholders, which can have long-term impacts on the business. Moreover, non-compliance can expose the institution to increased bribery risks, potentially leading to further legal and financial consequences.

Q4: How can financial institutions demonstrate compliance with ESRS G1 requirements?

A4: Demonstrating compliance involves documenting and maintaining evidence of adherence to ESRS G1 standards. This includes records of risk assessments, due diligence conducted on suppliers, training programs for employees, and any corrective actions taken. It's also crucial to have a clear process for reporting and investigating potential breaches of anti-corruption policies. Using a compliance automation platform like Matproof can streamline this process by generating policies, automating evidence collection, and ensuring 100% EU data residency.

Q5: What role does technology play in achieving ESRS G1 compliance?

A5: Technology plays a critical role in achieving ESRS G1 compliance by automating many aspects of the compliance process. This includes AI-powered policy generation, automated evidence collection from cloud providers, and endpoint compliance agents for device monitoring. Such solutions not only save time and resources but also help ensure that compliance efforts are thorough and consistent. They can also provide real-time monitoring and alerts, which can help financial institutions proactively manage bribery risks and demonstrate compliance to regulators.

Key Takeaways

• ESRS G1 encompasses a broader scope of business conduct standards compared to other anti-corruption regulations, emphasizing supplier due diligence and continuous risk assessment.
• Non-compliance with ESRS G1 can result in significant financial penalties and reputational damage.
• Technology solutions, such as Matproof, can automate compliance processes, ensuring thorough adherence to ESRS G1 requirements and facilitating ongoing risk management.
• Implementing a structured action plan and engaging all stakeholders is crucial for successful compliance with ESRS G1.
• Matproof's AI-powered compliance automation can help streamline your efforts in achieving and demonstrating ESRS G1 compliance. For a free assessment, visit Matproof's contact page.