The rising tide of ESG
The component parts of ESG are not new. GCs and company directors have long had climate issues in mind, and the rise of social movements such as Black Lives Matter and #MeToo have given diversity a new momentum. In recent years, however, ESG has been viewed as a whole, with a renewed emphasis on Governance which falls squarely within the GC’s remit.
The pressure on businesses to embed coherent ESG strategies across their operations comes from all directions: shareholders; investors; customers and even employees demand increasingly a measurable commitment to ESG. Critical to this are the disclosures made by companies about their ESG credentials, and the accuracy of those disclosures.
ESG-washing and the risk of claims
Regulators are becoming more and more interested in ESG, and businesses are facing increasing levels of mandatory ESG disclosures. This presents a number of opportunities as strong ESG credentials serve to attract investments, increase share value as well as potentially reduce insurance premiums as ESG is a factor taken into account by insurers when assessing risk.
ESG statements and disclosures are scrutinised by regulators, consumers, investors and activists in order to satisfy their own ESG objectives. These representations take many forms – from product labelling and advertising, to a company’s prospectus or annual reports. If those representations are found to be misleading, this is known as ESG-washing. ESG-washing is broken down into sub-sets ranging from the very well-known green-washing, to the less common blue-washing which refers to an organisation which pays lip-service to its affiliation with the UN Global Compact.
ESG-washing, once out in the public domain, could result in a drop in a company’s share price, triggering claims from investors who relied on false representations. These claims can come not just from traditional investors, but also activist investors who acquire a minority shareholding solely as a means to bring a claim against a company or its directors.
Regulators have taken significant steps this year to crack down on green-washing in particular. The US Securities & Exchange Commission has targeted major banks with respect to misleading claims by managers of ESG funds, and German police raided the offices of DWS in May 2022 following allegations of green-washing by the asset manager. In the UK, the FCA has warned that financial products with ESG or financially sustainable characteristics should be accurately disclosed and marketed.
In response to the threat of such claims, a trend in ‘green-hushing’ has emerged. This is the conscious dialling back from strong ESG statements amid concerns of future ESG-washing claims.
The next chapters: supply chains and the protect duty
The transfer of responsibility from government to the private sector means that ‘Governance’ is becoming an increasingly important part of ESG for GCs. On the horizon, we see a focus on supply chains and anti-terrorism for which GCs will need to be prepared.
As well as a business’ own ESG credentials, there is a move towards responsibility for the entire supply chain. In Germany, the Supply Chain Due Diligence Act will come into force on 1 January 2023, compelling businesses in Germany undertake due diligence throughout their supply chains to ensure compliance with human rights and environmental protection.
The integrity of the supply chains is also important when considering cyber-threats. Supply chain attacks pose an ever increasing and costly risk to businesses, targeting suppliers as a means to gaining access to, or disrupting, business operations.
Meanwhile, in the UK the draft Protect Duty Bill aims to improve public security through the creation of a legislative duty to protect the public against terrorist attacks. The goal is to create a culture of security, with a consistency of application and a greater certainty of effect.
The wording is still under consideration, but is likely to be targeted at those who own or operate at publicly accessible locations such as stadiums, hotels, pubs, high streets, shopping centres, schools, hospitals, places of worship, parks and other open spaces.
In both cases, it will fall to business to ensure they have the governance in place to comply with these increased responsibilities.
With this increased scrutiny and legislation, businesses need to be prepared to collaborate with regulators and governments, as well as their insurers and stakeholders.
Recent events such as Brexit, the pandemic, climate change, war in Ukraine, energy crises, recession and governmental instability all reinforce the need for global collaboration.
Although some of these issues have been looming ever larger for some time, unexpected risks such as Covid-19 and the war in present new challenges for GCs.
‘Rowing in the same direction’
In conclusion, harnessing the power of a coherent, joined-up ESG strategy, devised in collaboration with key stakeholders is going to be key in mitigating the risks posed by ESG.
Many emerging threats are critical operational issues but businesses must nail them into their strategic planning. This means having the expertise to identify the issues, analyse the threats they pose, create plans and put in place robust operational responses.
As Professor Paul Watchman, special legal adviser to the United Nations and a contributor to DAC Beachcroft’s latest thought leadership report, notes: ‘If we don’t have government, business and civil society all rowing in the same direction, we are not going to be able to achieve anything. This is something on which we must have global co-operation.’