Environmental, Social and Governance – why does ESG matter to us?
There’s plenty to discuss about Environmental, Social and Governance (ESG) – a subject which can become overwhelming for busy corporates to tackle. Here, we will examine the regulatory changes and challenges through the lens of the Board, consider what it means for the organisation and identify the drivers to adopting a meaningful governance strategy on ESG.
ESG is an extension and broader concept of what is commonly known as “Corporate Responsibility”. The intention of ESG is to reflect increasing shareholder interest and scrutiny in corporates having a sustainable policy on dealing with environmental and social aims and responsibilities.
A company’s performance in this space may, among other things, give confidence to stakeholders (existing and future) on the issue of whether that company will subject its investors to too much risk or in fact provide an opportunity to potentially achieve operational and financial improvement, whilst also benefitting the environment or society. Some of the greatest ESG risks to a company arise through its supply chain and the huge reputational damage that can be caused by, for example, inadvertently using child labour or failing to comply with product regulation.
These are typical examples of how ESG impacts on a business:
- Environment – Emissions to air, water and land
- Social – Health and Safety
- Governance – Board wages
At a domestic level, changes to regulations have been a clear indication of the government’s expectations on businesses to do better and make a difference. Most recently as 2021, the government announced its intention to impose more robust requirements on companies under the Bribery Act and we have also seen some changes to the Equality Act. A major concern of many critics is the concept of “greenwashing” which occurs when corporates claim they are adopting a green agenda (or giving the impression of doing so) where they are not, thereby misleading investors. Whilst it is hoped that sustainable finance will redress this problem, it is by no means an easy gap-filler.
Many readers will be aware of s172, Companies Act 2006 that sets out a director’s duty to promote the success of the company, which means acting in a way that is most likely to promote the success for its members. All companies (except medium-sized public and private) are required to prepare a strategic report on how their directors have met the requirements under s172(1)(a) namely “the likely consequences of any decision in the long term”.
It is likely that body corporates will soon feel the pinch from investors who have an interest in sustainable growth. Arguably, there are huge merits for an organisation to invest in ESG such as attracting and retaining talent, enhancing reputation, and achieving cost savings. ESG could also negate any potential commercial risks, including loss of access to capital, availability, and cost of resources within its own supply chain. By the changing of stakeholder preferences, particularly those investors who are much more proactive and agenda-driven in the ESG space than they were, say 25 years ago, relating to which business they invest in, this could put pressure on a board of directors to improve ESG accountability.
For any Corporate advice please do not hesitate to get in touch with the team.