What is ESG?

ESG is a term commonly used to refer to Environmental, Social and Governance within an organisation.  Most see ESG simply as ‘sustainability’, however it encompasses a broad range of topics from executive pay and bribery risks, to energy efficiency and human rights concerns. Although environmental sustainability considerations have become prominent in recent years for businesses, this article identifies why ESG is important and how businesses can reduce the risks of breaches.”

Why is ESG important?

In almost every sector stakeholders have been vocal in their displeasure of companies who have not acted in an ethical manner. One key example is the ‘Volkswagen Dieselgate’ crisis, where circumventing the law regarding emission standards cost shareholders a whopping £25 billion. This is one of many examples showcasing the importance of legal compliance.

There are a number of other factors which highlight why ESG is a priority for business owners. As Environmental Sustainability has become an everyday topic of conversation, business practices must adapt to the growing transparency demanded. Demonstrating a commitment to responsible business practices and governance helps strengthen the relationships between an organisation and its stakeholders, resulting in additional potential funding and increased goodwill, as well as mitigating legal threats.

ESG obligations will only become ever more stringent in the modern world, and disputes over non-compliance are beginning to rise. Being transparent with your business practices, supply chain, and environmental considerations could reduce the risk that litigation will be heading in your direction. The EU Corporate Sustainability Due Diligence Directive (CSDDD) requires companies operating in the EU identify and mitigate human rights issues and environmental risks across their supply chains. This is extremely important for large UK businesses operating within the EU.

How to comply with ESG:

There is no ‘neat package’ of laws which governs ESG. Instead, there is a vast web of regulatory bodies, legislation and social pressure which can influence how a business acts in relation to it. Organisations such as the Financial Conduct Authority (FCA) and the Serious Fraud Office (SFO) enforce a vast array of governance issues, such as breaches of the Bribery Act 2010 and mismanagement of a company’s funds. Breaches of these regulations could land hefty fines or even prison time. The Environment Agency will impose civil and criminal proceedings for environmental offences and the risk of environmental breaches will only increase in the future with the UK’s intention to adopt sustainability reporting standards: UK Sustainability Reporting Standards – GOV.UK

In order to navigate the dense forest of ESG regulations, it is important that a company has an overarching ESG strategy, regularly reviews codes of conduct, best practice and ensures that its suppliers are compliant with ESG policies and contractual terms. Large organisations will need to communicate the wider strategy with their stakeholders, and this will need to be done carefully. Any statement regarding environmental sustainability must be accurate to avoid any potential greenwashing claims.

Regularly monitoring and auditing policies and procedures is absolutely key to a business successfully navigating the ESG minefield. Any due diligence and investigations into a business’s operation, must be thorough and robust to ensure that all ESG risks have been properly identified.

What are the next steps?

There are a lot of considerations regarding ESG risks:

• What are your main goals and objectives? Depending on your aims, your business practice may have different ESG considerations than your competitors.
• Consider what policies and terms and conditions you already have in place. Do you have a sustainability policy? Does your company have a code of conduct? What else is required to comply with regulations?
• Are you regularly training staff? ESG is a fluid area of compliance, and staff will need to be regularly informed of any changes to your businesses practice.
• Are you ensuring your supply chain is compliant with your ESG goals? By making suppliers contractually obligated to comply with your policies, you will have some control over whether or not your suppliers are acting ethically.
• Is there sufficient transparency within your organisation to ensure that employees and other stakeholders are receiving the right information?
• Do you have key reporting structures in place to monitor and improve on ESG obligations?

Different sectors will have different ESG responsibilities and regulatory requirements when it comes to Environmental Sustainability . Geldards can help businesses to navigate their way around ESG considerations, assist with drafting policies, terms and conditions and key commercial contracts which will ensure compliance with the ever-changing world of ESG.

For more information, contact Geldards’ Commercial team who will be happy to assist.