The rise of Environmental, Social and Governance (ESG)
Consumers, the media and NGOs are increasingly scrutinising business activities and ethics. The recent furore over tax planning in the UK by large multi-nationals, bribery and corruption scandals and activism by the likes of Greenpeace on manufacturing practices in China and emerging economies, provide stark evidence of how reputational and compliance risk factors can impact on business value, performance and investment risk.
Unsurprisingly, therefore, ESG performance, management and reporting issues (whether under the banners of responsible investment, ESG, sustainability, corporate social responsibility, etc.) are appearing higher on the agenda of businesses.
Although prompted in part by developments in the UK, EU and international legislation (including the UK's Bribery Act 2010 and new carbon reporting rules), these changes are largely being driven by institutional investors, shareholders and customers.
In addition, recent case law also points to a harsher, less forgiving approach to enforcement, as well as increasingly substantial fines and damages for regulatory non-compliance and failings in relation to ESG type issues. Notably, the English courts have recently shown a willingness to circumvent the corporate veil and find parent companies liable for the safety breaches of their subsidiaries.
Our recent work providing legal support to members of the UK delegation at the UN's Rio+20 conference demonstrated, if nothing else, that companies will need to be more transparent about how they perform in relation to a range of environmental, climate change, social and governance indicators. Failure to do so may not only damage reputations and give rise to legal liabilities, but also limit funding and investment opportunities. It is also becoming increasingly clear that simply making general and often aspirational policy statements will no longer suffice.
The challenge, however, is developing a strategic and targeted approach to ESG management that is both realistic and appropriate considering the scale of the organisation, its activities, locations and ESG ambitions. Once a strategy has been agreed, robust policies and procedures should be developed and implemented (in particular, in relation to the reporting of performance).
Care will also need to be taken when diligencing investment opportunities as well as ensuring both the funding and equity documents provide sufficient powers and flexibility to allow for the effective management of (and ability to report on) ESG issues.
ESG is not just about risk management and compliance – there is growing evidence linking good ESG management with tangible improvements in business performance.
However, to maximise its value, ESG management must be focussed. Organisations should take the time to fully consider and understand which ESG issues are material to them before developing an approach. It is all too easy to invest significant time and money developing a detailed ESG strategy only to find it is unfocussed, or worse, 'gold plated' and only achievable through the investment of considerable time and money.
Taking the right advice at the outset will allow you to improve your ESG performance, without wasting time and money on over ambitious or disproportionate programmes.