Author: James Whitaker (pictured) and Sam Eastwood, each companions at worldwide legislation agency Mayer Brown
April 6, 2021
The strain from stakeholders, be they lawmakers or shareholders, regulators or activists, or certainly society at massive, on firms of all sizes, and throughout all sectors, to recognise, adhere to, enhance, measure and report efficiency in opposition to ESG metrics is more and more pressing and compelling.
Why is ESG reporting so vital in the enterprise world of 2021, and what are the related dangers? As ever, and recognising the adage that prevention is best than treatment, figuring out potential points early on, and guaranteeing an efficient framework is in place to reply effectively to developments, is vital. That is especially the case in the age of social media, the place perceived transgressions are rapidly and broadly shared.
Whatever sector or jurisdiction an organization operates in, efficient due diligence of ESG points and correct reporting of the outcomes of that diligence, in addition to having regard to rising requires standardised world ESG disclosure, is crucial. The US Securities and Exchange Commission’s not too long ago introduced Climate & ESG Task Force, inside the Division of Enforcement, highlights the rising give attention to gaps or misstatements in ESG– disclosures.
The growing prevalence of, and give attention to, firm reporting is, nonetheless, just one aspect of the story. Recognising and enhancing – in a significant, measurable, means – the points which might be turning into as necessary to assessments of firm efficiency as classic fiscal metrics is vital. Commitments to internet zero carbon emissions and different environmental targets are laudable, however notably in the absence of a single unified reporting framework, firms’ environmental impacts should be assessed, and reported, with care. Shortcomings in codes of conduct, human rights and different insurance policies, sustainability reviews and press statements are more and more being recognized, scrutinised, and challenged – whether or not in litigation or in any other case – by stakeholders, together with buyers.
As an early step, guaranteeing that an efficient and complete compliance programme is in place is crucial; that programme ought to have regard to present, and forthcoming, legislative developments together with, for instance (in respect of EU-domiciled firms, or these with EU-based subsidiaries or operations), the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation; or (in respect of UK-domiciled firms), the Modern Slavery Act, and the anticipated laws signposted not too long ago by the UK Task Force on Climate– Financial Disclosure, to call simply two examples. Similarly, the much-anticipated company governance reforms in the UK, introduced by UK Business Secretary Kwasi Kwarteng MP final month (February 2021), will influence on ESG, on reporting obligations on this space, and the value of failure to conform. The significance of these reforms to firm administrators, whether or not at board stage or in any other case, is vital. Internally, these non-traditional, non-financial, elements will influence selections on government remuneration. Externally, firms’ behaviours in these areas will likely be scrutinised and challenged.
Reputational and fiscal harm
The importance of human rights due diligence can’t be overstated, in the context each of the firm itself, but additionally up and down the provide and worth chain. Recent excessive profile scandals – usually leading to litigation – have revealed the appalling human value of failing to make sure compliant behaviours, in addition to, of course, the related reputational and fiscal harm that inevitably follows. Awareness of, and adherence to, the necessities of the numerous benchmarking regimes, equivalent to the World Benchmarking Alliance’s Human Rights Benchmark, is vital to make sure that finest observe is noticed. Such benchmarks – which signify impartial assessments of firms’ human rights programmes – are helpful bases upon which to develop and reinforce practices on this space, hopefully, earlier than issues emerge. Not reporting on these points shouldn’t be an choice and, as disclosure more and more turns into necessary, firms want to make sure that their efficiency will stand as much as scrutiny in the mild of the altering authorized and regulatory atmosphere.
But ‘laborious legislation’ obligations are just one component of this fast-changing panorama. Consideration ought to equally be given to the broader societal expectations which might be rising from company efficiency and disclosures of that efficiency, not solely in the context of environmental influence and human rights due diligence (as vital as they’re), but additionally in respect of the a number of different points falling inside the scope of ESG. ‘Soft legislation’ developments, whether or not at nationwide, regional or worldwide stage, usually replicate altering societal norms; the UN Guiding Principles on Business and Human Rights is one such instance. Recognising the rising focal factors, and enhancing efficiency in these areas, needs to be a precedence.
Public scrutiny intensifies
To take one instance, disclosure obligations in respect of ‘social’ points has lagged behind that of ‘environmental’ and ‘governance’ points, partially as a result of the laborious legislation necessities haven’t, to this point, been as stringent on this space. Treatment of staff, for instance, equivalent to in the context of the firm’s employment mannequin, or behaviour in the direction of staff throughout the pandemic, is historically under-reported. But that’s altering. Particularly as excessive profile scandals emerge, and ensuing public scrutiny intensifies, firms will likely be beneath growing strain to report – precisely of course – on employee– points. As with many ESG points, these will be troublesome to measure, however it’s clear that there’s more and more a requirement to take action.
Ultimately, these are, or needs to be, board-level issues; accountability for firms’ efficiency, together with by reference to ESG points, lies with the board, and an in depth consciousness of the necessities on this regard is essentially necessary. As ESG due diligence and reporting necessities proceed to dominate the company agenda, guaranteeing finest observe and compliance at an early stage will reap advantages, and hopefully keep away from pitfalls, down the line.