The rise of ESG and the importance of compliance

Author: James Whitaker (pictured) and Sam Eastwood, both of those partners at intercontinental law company Mayer Brown

April 6, 2021

The force from stakeholders, be they lawmakers or shareholders, regulators or activists, or in truth society at substantial, on businesses of all dimensions, and throughout all sectors, to recognise, adhere to, make improvements to, measure and report performance from ESG metrics is more and more urgent and compelling.

Why is ESG reporting so important in the small business globe of 2021, and what are the involved dangers? As ever, and recognising the adage that prevention is much better than treatment, figuring out likely troubles early on, and making certain an productive framework is in location to react effectively to developments, is crucial. That is significantly the situation in the age of social media, in which perceived transgressions are immediately and extensively shared.

Whatsoever sector or jurisdiction a enterprise operates in, helpful due diligence of ESG problems and exact reporting of the benefits of that diligence, as nicely as acquiring regard to emerging phone calls for standardised worldwide ESG disclosure, is vital. The US Securities and Trade Commission’s lately declared Local climate & ESG Process Force, within the Division of Enforcement, highlights the expanding target on gaps or misstatements in ESG-similar disclosures.


Environmental targets
The increasing prevalence of, and target on, firm reporting is, even so, only 1 facet of the tale. Recognising and improving upon – in a meaningful, measurable, way – the difficulties that are turning into as essential to assessments of firm efficiency as regular economical metrics is important. Commitments to internet zero carbon emissions and other environmental goals are laudable, but particularly in the absence of a one unified reporting framework, companies’ environmental impacts need to be assessed, and noted, with care. Shortcomings in codes of carry out, human rights and other insurance policies, sustainability reports and press statements are increasingly becoming recognized, scrutinised, and challenged – no matter if in litigation or if not – by stakeholders, such as traders.

As an early action, ensuring that an successful and detailed compliance programme is in spot is important that programme need to have regard to current, and forthcoming, legislative developments such as, for case in point (in respect of EU-domiciled corporations, or individuals with EU-based subsidiaries or functions), the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation or (in regard of British isles-domiciled providers), the Modern-day Slavery Act, and the expected laws signposted not long ago by the British isles Job Power on Local climate-Associated Financial Disclosure, to title just two examples. Equally, the substantially-anticipated company governance reforms in the Uk, declared by British isles Small business Secretary Kwasi Kwarteng MP very last month (February 2021), will effect on ESG, on reporting obligations in this area, and the selling price of failure to comply. The significance of these reforms to enterprise directors, irrespective of whether at board stage or or else, is critical. Internally, these non-standard, non-money, variables will effect choices on government remuneration. Externally, companies’ behaviours in all those parts will be scrutinised and challenged.


Reputational and monetary damage
The importance of human legal rights due diligence simply cannot be overstated, in the context both equally of the corporation itself, but also up and down the supply and benefit chain. Current higher profile scandals – usually resulting in litigation – have discovered the appalling human cost of failing to be certain compliant behaviours, as properly as, of study course, the related reputational and economic injury that inevitably follows. Recognition of, and adherence to, the prerequisites of the several benchmarking regimes, this kind of as the Planet Benchmarking Alliance’s Human Rights Benchmark, is critical to be certain that finest observe is noticed. These benchmarks – which characterize independent assessments of companies’ human legal rights programmes – are practical bases upon which to build and boost methods in this location, ideally, just before challenges arise. Not reporting on these difficulties is not an choice and, as disclosure significantly gets to be obligatory, businesses need to have to ensure that their efficiency will stand up to scrutiny in the light-weight of the switching authorized and regulatory atmosphere.

But ‘hard law’ obligations are only a single ingredient of this speedy-switching landscape. Thing to consider should similarly be provided to the broader societal expectations that are emerging from corporate performance and disclosures of that functionality, not only in the context of environmental influence and human legal rights due diligence (as important as they are), but also in regard of the numerous other troubles falling in the scope of ESG. ‘Soft law’ developments, whether at countrywide, regional or intercontinental level, frequently reflect shifting societal norms the UN Guiding Principles on Business and Human Legal rights is a person such example. Recognising the emerging focal factors, and improving functionality in those people spots, need to be a precedence.


Community scrutiny intensifies
To acquire just one example, disclosure obligations in regard of ‘social’ difficulties has lagged powering that of ‘environmental’ and ‘governance’ challenges, in section for the reason that the tricky law necessities have not, as a result considerably, been as stringent in this location. Remedy of employees, for illustration, such as in the context of the company’s employment model, or conduct towards staff members throughout the pandemic, is customarily under-claimed. But that is altering. Specifically as superior profile scandals arise, and resulting community scrutiny intensifies, organizations will be underneath raising force to report – precisely of course – on staff-relevant troubles. As with many ESG troubles, these can be hard to measure, but it is obvious that there is significantly a demand from customers to do so.

Finally, these are, or must be, board-amount concerns duty for companies’ effectiveness, such as by reference to ESG issues, lies with the board, and a shut consciousness of the needs in this regard is essentially crucial. As ESG owing diligence and reporting prerequisites proceed to dominate the company agenda, guaranteeing best practice and compliance at an early stage will experience rewards, and ideally prevent pitfalls, down the line.