Sustainability, CSR environmental, social and governance (ESG) and other responsible investment considerations are now firmly on the agenda for corporates as well as investors. Keeping abreast of the increasingly broad legal and regulatory framework governing these issues, as well as managing reputational risk, represents an enormous governance challenge for businesses.
ESG and sustainable finance – issues for corporates
Overview
Key issues
Corporate governance and reporting requirements
Good corporate governance for sustainable businesses is not just about meeting the requirements of the UK Corporate Governance Code, the Stewardship Code or the Wates Principles. It is also about appropriately managing the broad spectrum of regulatory risks across their entire operation, ranging from bribery and corruption risk, human rights compliance, fair treatment of suppliers, and environmental protection, to the need to meet the broad swathe of investors’ ESG requirements, in order to create a long-term sustainable business.
Increasing transparency and a focus on the wider impacts of corporates (both at home and abroad) continue to be areas of focus for policy and law makers, and recent litigation based around the concept of liability for the operations of subsidiaries (for example, Okpabi v Royal Dutch Shell and Vedanta v Lungowe) suggest a pressing need for tightening global risk management and governance arrangements in multinationals. Corporate governance, and the corresponding reputational risk issues, therefore remain serious boardroom concerns.
Understanding the investor perspective
ESG criteria are increasingly used in considering the investment potential of companies alongside traditional financial metrics. There are plenty of studies suggesting that ESG investments can yield high returns as well as reduce reputational risk, and investor appetite for ethical funds has increased significantly in recent years. In 2019 for example, a total of €120bn was invested in European ESG funds alone (source: Morningstar), so there are considerable benefits available to corporates who can meet ESG investment criteria. For deeper insight into the investor perspective, view issues for Asset Managers.
ESG investment criteria typically focus on the following areas:
- Environmental – management of carbon emissions and other pollutants, energy efficiency, waste and resources management
- Social – welfare, workforce diversity and inclusion, access to employment opportunity and fair employment terms, community engagement, supply chain and business human rights
- Governance – shareholder rights, avoidance of fraud, bribery, corruption and other financial crime, reporting transparency, ethical tax compliance, board-level processes and succession, management of hostile shareholders and approaches, and development and implementation of robust policies and procedures. For more information on how to minimise liability and reputational damage as well as meet investor requirements in these areas, see the Corporate governance and stewardship and Business ethics sections of this site
Overview of relevant law and regulation
The ESG agenda is being driven in part by the expansion of legislative and regulatory requirements on both corporates and investors. Corporate reporting and transparency obligations have been significantly strengthened in recent years, as discussed in the Corporate governance and stewardship section of this site and some of these requirements are designed to foster ethical and socially-responsible business practices as well as investor protection.
To help you to navigate the increasingly complex set of reporting requirements relating to these issues, we have developed an ESG Corporate Reporting Framework, which identifies the mandatory and voluntary reporting regimes currently in force, as well as those on the horizon. Click here to request a copy of this Framework.
For investors, in the post-Brexit environment, it is important to remember that the UK is considering to what extent it will implement UK-specific versions of the various EU legislative proposals to promote sustainable finance, including ESG-related disclosure requirements and embedding ESG preferences in the investment suitability process. Read more on the legislative and regulatory environment affecting investors.
Here are some useful links to relevant sources:
Our work
Navigating legal and regulatory obligations in relation to environmental, social and governance regimes can be daunting, particularly in an ever-changing landscape.
From directors' duties through to wider matters of corporate governance, we advise on the specific obligations relevant to each individual situation. Our ongoing corporate support to both listed and private clients, and their group companies draws on specialist advice from practice areas across the firm resulting in a consistent multi-disciplinary approach.
Recent work
We assist clients in particular with
- meeting disclosure and reporting obligations
- bespoke training for management on their legal and regulatory obligations around ESG issues
- horizon scanning to enable our clients to anticipate developments in the legal and regulatory framework, and embrace change to maximise operational efficiency and performance
- understanding and meeting the ESG requirements and stewardship obligations of investors and shareholders
- the design and implementation of governance tools, such as anti-bribery and corruption, anti-tax evasion, whistleblowing and other HR-related procedures
- market and regulatory issues arising out of environmental compliance obligations such as carbon offset, renewable energy trading and emissions allowance trading arrangements
- operational regulatory, compliance and risk management issues
- crisis response
- international litigation risk
Contacts and further reading
