Key takeaways from my legal ESG event series (part I)
Following the launch of our ESG Legal interactive livestreams in November 2021, it has been rewarding to spend time engaging with General Counsels (GC) and Company Secretaries (Co Secs) across different industries and sectors. Together we have been looking at the impact of ESG on Legal and Company Secretarial functions and their interactions with Boards and management teams within the business.
The series was attended by over 1,000 legal and governance professionals, during events I asked viewers questions via live polls to gain perspective and opinions on related issues being discussed. During the launch event, an overwhelming majority, c.95%, said they expect ESG will drive transformation of the legal or governance function, and impact how they will support the business in the future.
How is ESG impacting businesses?
The move by governments to introduce changes to tax policy and enact new regulations and laws are acting as a catalyst for companies to strive towards and deliver against their net zero commitments.
This in turn is propelling ESG up the agenda for both boards, investors and stakeholder groups. Businesses are reviewing their core and non-core priorities as ESG drives deals and affects investor expectations. Their license to operate, underpinned by a moral duty, is forcing businesses to evaluate their long-term strategies to now include clear and decisive action to mitigate not only their impact on the environment, but also the disruption that businesses and markets could experience if these demands are not addressed.
Management teams are considering mitigation and adaptation strategies focused on climate change and in order to reduce an organisation's dependency on natural resources. This causing transformation opportunities across the organisation's value chain. These in turn creates new risks and liabilities for directors and shareholders across the public and private spectrum which require the support and guidance from the GC and Co Sec.
The current geopolitical landscape adds further complexities and has accelerated focus on how businesses depend on and utilise the world’s natural resources. For example, businesses might review their dependency on energy resources lying in one jurisdiction and seek out a broader global spread of renewable alternatives. We’ve recently seen media reference to the world’s first “climate change bankruptcy” in the US. Such incidents are only likely to increase in number.
What does this mean for the role of the GC and Co Sec?
The new world in which we operate calls for GCs and Co Secs to be strategic business partners to boards, the C-Suite and wider stakeholder network. It requires these professionals to upskill, review their function and look at resourcing along with the technologies which they can deploy to enhance support and delivery to the business.
There’s a sense of urgency here, because the regulatory landscape is changing at pace. Never before have businesses had to report and disclose information on how their organisations are structured and operate, with requirements ranging from policy implementation, decision making and the controls environment. With this comes increased legal risk, corporate reporting, regulation and political pressure from the UK government, the EU and other jurisdictions. This new landscape of non-financial reporting is driving an evaluation of how businesses approach, mitigate and manage ESG risks and opportunities from parent company boards downwards across the organisation. A refocus on the governance and management of subsidiaries is needed.
Environmental
Recent taxes on plastic are an example of the UK government using tax to influence the ‘Environmental’ behaviour of business and encourage the drive towards net-zero carbon emissions. Another example is the practical impact of changing regulations relating to extended producer responsibility across the UK and Europe, relating to packaging, batteries and waste electronics and electrical equipment, as well as wider categories of products that are being introduced to drive more producer responsibility and a circular economy. These are the kinds of things that GCs need to see coming down the line and be ready to advise on.
Greenwashing is the attempt to capitalise on the demand for environmentally conscious products and services but where more time and money is spent on marketing ‘environmental credentials than undertaking real sustainability measures. This is still a real concern for the legal function. In a poll we conducted, some 62% of respondents felt that greenwashing was an appreciated risk in their organisation.
It is clear just how worried GCs are around these risks and we are working with our clients to put together clear due diligence to help with managing them.
Social
The ‘Social’ pillar brings with it workforce disclosure requirements on diversity and inclusion, social mobility and employee engagement. Our polling data from part 1 of our event series placed stakeholder relationships (including employees) as having the biggest impact on the work of legal functions (55%). This was followed by diversity and inclusion (23%). The adoption of hybrid working brings its own legal considerations for boards, as companies look to strike a balance between what’s best for the business and its employees. Talent acquisition and retention is impacted as workers seek evidence of responsible business strategy.
Social also underpins more well-established ESG measures, such as workplace health and safety, as well as a wider focus on the community that the business serves and operates in, with community relations and human rights forming key parts of the ‘S’ in ESG.
Governance
‘Governance’ often binds the E, S and G together. This was reflected in our event polling, where 40% of the audience highlighted this component as their top priority. This was followed by a quarter prioritising ESG as a whole, and 24% homing in on environmental work. This falls in line with what we’re seeing in the market. Some businesses are creating an ESG governance framework that provides clarity on roles and responsibilities in an organisation around the use of data, and the need for assurance over external reporting. There’s also corporate governance regulation that requires boards to re-evaluate how they structure corporate governance at the parent and subsidiary level.
This is most recently evident in the context of the UK government’s Restoring trust in audit and corporate governance agenda and the European Commission’s initiative on sustainable corporate governance.
These are just some of the ESG dynamics at play. The challenge for GCs and Co Secs is how to respond, grow their influence and support leadership. Historically, scope has perhaps been limited to the day-to-day weeds of practice. Carving out time to contribute on sustainability committees and understanding how the new regulatory landscape impacts business strategy will be key.
That’s the world our clients face. Never have businesses had to disclose more about the way they operate and how they engage with stakeholders, which signifies a closing of the regulatory gap between public and private companies. Increased disclosure and reporting requirements create new litigation and regulatory risks. What you disclose now could be used in litigation in 10 years’ time.
What do I do now?
As we leap from one global crisis to another, we’re edging towards global alignment of ESG reporting and standards through initiatives such as the International Sustainability Standards Board though this remains a number of years off. Organisations operating on a global basis need to try and transition early – navigating different regulatory requirements on a country-by-country basis.
No matter what industry you reside in, GCs and Co Secs must now start horizon scanning. Seek understanding of the regulatory environment and find out where the gaps are. Once these are known, have remediation exercises in place to address these gaps and keep things constantly in review. Make sure you know your external reporting obligations. These are often now in financial statements, but must be understood in the context of interdependencies with other functions, for example, the relationship between finance and tax. Being aware of the possibile contradictions in data for different sets of reporting will mitigate the risk of litigation.
Over the next three to five years, we expect ESG reporting and regulations to evolve as the EU looks at pan-regional regulation and the UK is set to launch its own green roadmap. Other jurisdictions will follow suit.
The outputs of COP26 will continue to drive change and transformation for business, and this will bring new challenges and opportunities alike. The latter will help CEOs with their ambitions to generate purposeful and sustainable growth and long-term value for investors and stakeholders (as confirmed in our Annual CEO Survey).
As we look forward to continuing with part two of our new series, where we are taking a deeper dive into these regulatory issues. To book your place now, visit our designated ESG legal event page.
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