A practical approach to addressing ESG challenges

September 2021 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

September 2021 Issue

Tackling the imperative to get their business’ environmental, social and corporate governance (ESG) approach right – ensuring legal and regulatory compliance and embedding sustainability and responsibility in the ethos, operations and reputation of the business – is one of the biggest challenges facing board members and in-house counsel today.

However, there are practical steps businesses can take to ensure they are able to thrive in a business world where ESG performance is an existential challenge.

In recent years, there has been an unmistakeable cultural shift toward a global community with an increasing social and environmental conscience. National and international laws, regulations, policies, politics and wide-ranging commercial pressures are all motivating businesses to address the ESG agenda.

Political and societal ESG ambitions have been accelerated in recent years by prominent social justice campaigns, climate change and net zero targets, high-profile data breaches, tax avoidance scandals, and changes to attitudes and working practices brought about by the coronavirus (COVID-19) pandemic.

High-profile litigation relating to climate change and human rights (including, most recently, the Royal Dutch Shell case, in which the energy company was ordered to align its policies and practices with the Paris Agreement) suggests that businesses might owe duties of care in much wider circumstances than previously anticipated, for example in respect of subsidiaries, throughout supply chains, in relation to obligations implied by ‘soft’ laws, such as non-legally binding guidance, policies and charters, and so on.

In addition, an enhanced focus on ESG reporting and disclosures, the commercial imperative of demonstrating ESG credentials, and the ever-expanding legal, regulatory and cultural environment, mean that litigation, enforcement and public relations risks are on the rise.

So, all in all, there is little doubt that the ESG agenda is fundamental to any business’ survival and growth. Getting the approach right is a priority and a significant challenge for those directors, partners, senior managers, in-house lawyers and other colleagues who have to make their business’ ESG goals a reality.

Understand and articulate the challenge

From the outset, a business needs to know what ESG actually encompasses, and to understand specifically which aspects are most relevant to its operations. ‘Environmental’ typically covers all things related to climate change, emissions, waste, pollution and resource depletion. ‘Social’ covers diversity and inclusion, working conditions (including modern slavery, child labour, employee relations, and health and safety), communities (including local and indigenous) and humanitarian issues. ‘Governance’ covers bribery, corruption, executive pay and fair taxing. The business can then define and articulate its ESG strategy and commitments against these criteria.

Outline an approach

A successful, practical approach to addressing ESG requires leadership from the top down, including the right cultural messaging, and provision of dedicated resources and guidance, combined with business-wide data, operational and contract reviews, training and ongoing monitoring.

For example, senior people from across the organisation need to engender an ESG or sustainability ethos. That may involve introducing ESG-related financial incentives for senior leaders, appointing a head of ESG or an ESG committee and ensuring consistent messaging, both internally and externally.

There are then steps that can be taken right across the business, including breaking ESG down into component areas and designating senior responsibility for each; collecting, reviewing and reporting on data in all identified ESG areas; and undertaking contract reviews and considering the use of ESG-friendly contractual clauses where possible or relevant. It will also be important for all businesses to consider the ESG credentials of investors, supply chain components and other stakeholders; to train staff on general and specific ESG issues; to monitor national and international ESG legal, regulatory and assessment developments and to keep accurate and up-to-date records of all such ESG-related efforts and disclosures, statements and reports.

Implement

Specific assignments can then be undertaken in relation to each aspect of the ESG agenda. In relation to ‘environmental’, companies should audit all aspects of the business which have an environmental or climate change impact. Consider the business’ own, as well as its subsidiaries’, investors’ and supply chain third parties’ products, processes and policies. Ask whether and how energy, emissions and waste can be reduced. Investigate what green claims are being made and whether they can be substantiated. Consider whether climate-friendly contract clauses can be used in existing or new relationships. Keep up to speed with legal, regulatory and reporting requirements.

With respect to ‘social’, companies must audit all aspects of the business which have a social impact, be it on the workforce or on any external communities. Again, companies must consider their own products, processes and policies, as well as those of their subsidiaries, investors and supply chain third parties. Companies must review and maintain robust data protection and privacy policies and procedures, as well as inclusivity and diversity policies and procedures. Review and maintain policies and procedures to ensure safe, fair working conditions. Remember to consider the mental and physical health and wellbeing of the workforce. Be clear, consistent, fair, transparent and proactive when communicating with employees and other parties. Be vigilant against modern slavery and human trafficking.

Companies must also maintain up to date legal, regulatory and reporting requirements. Considering governance, companies must be transparent about executive pay and pension contributions. Consider how executive remuneration compares to the rest of the workforce and adjust where necessary. Consider how workforce remuneration compares to the market and make adjustments if necessary. Again, companies must conduct due diligence into their own products, processes and policies as well as those of their subsidiaries, investors and supply chain third parties, in respect of corruption and bribery. Remember that directors have reporting duties and duties under corporate law to act in the best interests of the company in the ESG context. Take specialist advice on fair tax strategies. Again, keep up to date with legal, regulatory and reporting requirements.

Take specialist advice

Businesses should be aware that they do not have to do it all alone. Taking specialist advice at a general or a specific level can help to make the seemingly unmanageable, manageable.

As well as helping with specific practical tasks, such as contract reviews and reviewing and improving policies and procedures, specialist advisers can work alongside businesses to keep them updated and advised as to ESG-related developments that may affect them. They can also help by carrying out ESG due diligence; assisting companies to secure ‘green finance’ or investments based on ESG criteria; delivering low carbon, sustainability and other green projects; and assisting with measuring and reporting of energy, carbon and climate risks.

Advisers can also provide comprehensive, cross-disciplinary advice and transactional assistance, as well as risk management and dispute resolution strategies when ESG queries or concerns arise.

Finally, advisers can provide tailored training to staff at all levels within a business on ESG-related areas or issues.

Gwendoline Davies, Nick McQueen and Ben Sheppard are partners at Walker Morris. Ms Davies can be contacted on +44 (0)113 283 2517 or by email: gwendoline.davies@walkermorris.co.uk. Mr McQueen can be contacted on +44 (0)113 283 4426 or by email: nick.mcqueen@walkermorris.co.uk. Mr Sheppard can be contacted on +44 (0)113 283 2641 or by email: ben.sheppard@walkermorris.co.uk.

Gwendoline Davies, Nick McQueen and Ben Sheppard

Walker Morris