ESG as a topic has been on everyone’s lips for quite some time now. The relevant stakeholders (in particular, regulatory bodies, companies and advisors) have not yet sufficiently contoured this area, even though recent activities of governments and authorities all across the globe have swamped the economy with regulations, requirements and/or general rules, and continue to do so.
These developments pose a true challenge for companies. This applies especially to (i) ensuring that the right measures and processes are adequately implemented and (ii) mitigating related risks (e.g., with regard to the allegation of greenwashing) in the best possible manner.
Top management only acts in the sustainable interest of society – and thus in accordance with their duties – if they meet the applicable best practice standards with regard to ESG aspects. Consequently, ESG – just like compliance – has to be an essential and integral part of good corporate governance.
The majority of ESG-related regulations and considerations can be implemented directly within the existing compliance organization – i.e., within the framework of internal regulations, trainings and education, the whistleblower system, internal (and, where legally required, external) reporting, as well as in connection with any internal investigation.
The “E” – Environmental
One major driver of ESG is the environmental component and the imminent need to have more effective remedies in the fight against climate change.
Measures regarding the “E” may, for example, be taken by a task force backed by top management (a “Green Team”) open to all company employees.
Areas to be considered are properly managing office space to reduce CO2 emissions, diligent selection when renting “green certified” office buildings with optimal, efficient utilization of the corresponding space, optimizing existing space, digitalizing processes in order to avoid unnecessary consumption of paper and other resources, using power energy-efficiently, reducing water consumption, recycling waste, consciously reducing non-essential travel activities, using means of transport with the lowest possible CO2 emissions etc. The items listed here are, of course, only examples and – depending on the specific industry – the list may be much longer (e.g., solar panels on production plant buildings, wind turbines, bicycles for employees, as applicable).
The “S” – Social
Exemplary action and awareness in connection with the “S” may be demonstrated by high flexibility in working time models, offerings for employees in the area of mental and physical health as well as in the consulting business, and by providing free advice to socially disadvantaged members of society (pro bono work). Intensive support of various humanitarian and charity projects – in the form of donations and/or physical assistance – may also be a crucial part of self-evident social contributions.
The “G” – Governance
When considering the “G”, a company has to be run in line with the highest moral and ethical standards. As good corporate citizens, professional trainings for all management bodies and employees must be part of a company’s culture to ensure that the moral and social requirements of each individual’s role are truly internalized and developed further.There are many great advisors providing ethical trainings in companies. As an example, McDermott Will & Emery have found an international partner in FASPE, which conducts so-called ethical leadership training with its lawyers at the highest level. Using case studies, which refer in particular to issues from the time of the Third Reich, it is made clear to the lawyers that there are (also) moral boundaries in relation to legal advice. Consequently, apart from the purely technical processing of a legal problem, the professional profile of lawyers always essentially requires use of a “moral-ethical compass”. These cases can also be transferred to the here and now with regard to various industries (for example, the diesel scandal, Cum-Ex transactions etc.,), which is why the knowledge gained is highly relevant and extremely valuable to every legal advisor working today.
Is there a one-size-fits-all approach?
The clear answer is “no”. An oil-producing company has a different ESG profile than a manufacturer of solar systems. However, the bottom line for both companies is to make ESG successes measurable and to document them clearly and thoroughly. This particularly applies to autonomously setting ESG targets and verifying their achievement. A science-based target-setting approach often helps to set ambitious but realistic targets – and to avoid any potential danger of greenwashing accusations as far as possible.
What are the challenges?
ESG is often criticized as “a distraction”, “too complex”, “not measurable” and/or “not having a meaningful nexus to financial performance”. These kinds of prejudices may only seem to be true at first sight. This is because customers of any kind of business, and the market as such, have also developed and changed their mindsets and views in recent years. A supplier of products who does not pay attention to human rights (e.g., not implementing any processes to avoid child labor and ensuring adequate safety at work) will not be an eligible business partner for companies that have implemented relevant supply chain requirements (e.g., as stipulated by an applicable Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz).
ESG-related items and aspects have become investment criteria for a lot of investment funds, i.e., if certain prerequisites regarding improvements to the ESG of a public listed company are not met, the relevant fund will not invest in group companies that will have a negative impact on the share price of the listed parent company.
It may be true that there still is some room for improvement as regards adequate overall ESG measurement processes. Apart from that, certain private rating agencies (Refinitiv, MSCI, S&P Global etc.,) still have not yet established consistent standard criteria for measuring ESG improvements, yet. Nevertheless, generally speaking, and considering the parallel development of certain best practices globally, future “base scoring” will not differ dramatically.
Outlook
In our view, every well-managed business will have to make constant ESG improvements a core part of its overall business strategy and DNA. Related changes will surely come with certain – in some cases substantial – investment costs, but these will result in competitive advantages and will pay off in the mid- as well as long-term as a result.