Businesses face a number of challenges in the current climate. While financial, regulatory, employment and pensions matters may be a priority for now, Environmental, Social and Governance (ESG) issues remain high on board agendas. Discussions are increasing around green growth and how businesses can respond to new opportunities as our environment and society evolves. Doing good is being equated more and more with doing well, making it essential for businesses to understand where ESG risks and rewards may lie.
What is ESG?
ESG covers a range of topics that combine to measure how ethically a company behaves:
- Environment: climate change, carbon footprint, circular economy, biodiversity, waste, water and resource use, pollution,
- Social: human rights, labour practices, health & safety, community, diversity & inclusion, systematic racism, pay equity, shareholder activism, corporate purpose,
- Governance: corporate governance, company ethics, regulatory compliance, executive pay, board diversity, lobbying, approach to taxation
Why ESG is important
ESG has evolved over the past few years and has now become a critical focus for businesses, investors, NGOs, governments, stakeholders, consumers, lenders, insurers and consumers. Expectations of businesses in this dynamic landscape have never been higher.
The potential impact is vast, affecting a number of areas including strategy, reporting, human capital management, operations, risk management and long-term value. While the companies that choose to work with you may take into account your business' ESG performance, there are increasingly other factors to consider.
The rise in benchmarks and indices that track a company's performance on ESG metrics means that the publication of 'warm and fuzzy' sounding pronouncements is no longer enough. ESG has moved from the domain of a PR and Communications team to become a board-level concern. ESG issues present a series of governance risks in relation to reputation, regulating compliance, investment and sales.
However, alongside managing such risks and requirements, there are many opportunities around sustainability and ESG. Those that are forward thinking in this area are likely to thrive in the 'new normal'.
ESG risks in business
ESG risks are increasingly becoming a focus for shareholders, with decisions built on data and planning that considers long-term risk assessments and investment strategies. Institutional investors are likely to ask questions about a range of different areas that can destroy or create value for businesses, from how well they can defend themselves against cyber security attacks to whether senior leadership has diverse backgrounds.
Companies that can demonstrate that they are managing these risks and meeting these standards are better equipped to sustain their operational and financial performance, and ultimately their value for socially responsible investments.
How can we help?
While ESG factors can often be associated with sustainability or Corporate Social Responsibility (CSR), the bottom line is that they are a reflection on how a business or institution manages risk, as well as how they contribute to society. Whatever your current position, there are opportunities now to 'reset' and consider how your business can be better aligned to sustainability goals.
Gowling WLG's specialist team is fully engaged in developments around ESG. Comprising of lawyers working across practice areas in our international offices, the team provides a wide spectrum of advice helping clients to understand their responsibilities and identify where risks and opportunities may lie.
If you are in need of advice and guidance regarding ESG issues, contact one of our teams today.