While the pandemic was an unexpected addition to GC workloads over 2020/21, how to deal with environmental, social, and corporate governance (ESG) concerns is an issue that lingers and continues to puzzle corporate entities.
This was discussed in more detailed earlier this month at a roundtable hosted by Freshfields Bruckhaus Deringer, as part of The Lawyer’s General Counsel Strategy Summit. The firm’s China chair Teresa Ko spoke in her capacity as a trustee for the International Financial Reporting Standards (IFRS) Foundation, which has been debating whether there is a need for global sustainability rules and whether the IFRS Foundation should play a role. At present, there are several voluntary frameworks for companies to follow, such as the Carbon Disclosure Project that scores organisations on what they report, as well as investor-focused requirements published by Sustainability Accounting Standards Board.
Fellow Freshfields partner Vanessa Jakovich co-led the discussion and highlighted the difficulties for companies as they choose which voluntary regime to follow. An over-arching theme of the debate was the pressure put on companies by investors, as they drive companies towards different reporting standards. “A trend we’ve seen over the last 18 months has been that people want more standardised international reporting,” says Jakovich. That’s where the IFRS comes in, as it becomes clear there is an urgent need for globally agreed set of principles. There are also moves afoot from the EU, World Economic Forum and Department for Business, Energy & Industrial Strategy to simplify reporting procedures.
Simplicity is a key consideration for businesses and especially for their legal teams, who are often jostling with different departments for oversight on the ESG issue. The pressures on smaller, private companies were highlighted, as they lack dedicated ESG teams or an allocated budget for mandatory reporting. “Are there better ways to invest rather than disclosure?” queried one GC, citing rising tensions between following the principles and ensuring financial stability. Highlighting too the rigidity of disclosure, another GC pondered whether companies should instead be led by their customers and employees when it comes to setting out ESG priorities. Here lies a catch-22 of course: “We do need rules obviously too,” they add.
Many general counsel on the call said they were caught between a rock and a hard place when it came to operating as a private company, but with public debt. Legal heads said there were challenges here relating to ownership, with all interested departments (such as finance, co-secretarial and legal) needing to come together to move the issue forward. Furthermore, public investors want to have their say when it comes to which framework would work best. One GC remarks: “One you start transitioning to a new set of rules, it is difficult and we’re bombarded. By accepting one framework, you’re rejecting the others and that’s not great from an investor point of view”.
The conversation also steered towards one of the biggest developments in climate news this year; namely President Biden’s decision for the US to re-join the Paris Agreement that aims to limit global warming to well below 2 degrees Celsius. The move was viewed as a positive one, but also highlights the continuing ebb and flow of the ESG debate and how companies can remain up to date. The US change shows how the politicisation of the climate crisis has been prioritised over the social and corporate governance aspects of ESG. This is largely down to the fact that sustainability can be better measured via a variety of metrics, such as energy use and a company’s carbon footprint.
For legal heads struggling to deal with the mounting pressures of ESG reporting, Ko urged parties to respond to consultations currently being carried out on global standards, such as the IFRS Foundation. If all goes well, the plan for them is to set out climate requirements by as early as 2022. Jakovich too had her own recommendations for in-house legal departments, such as encouraging groups to plan out priority areas of governance and stakeholder mapping. With the majority of the discussion revolving around external pressures, a key part of ESG reporting is working out which groups in the business have the final say. Lastly, keeping up to speed on litigation trends can help GCs to identify the key risks in their ESG strategy.
Unlike Covid-19, which should (at some point) come under control, the ESG matter is certainly one that will stay. As one GC nicely put it, ESG is “becoming a behemoth on its own” and in-house legal teams are often, although not always necessarily, at the front line.
Commentary: Freshfields’ Teresa Ko & Vanessa Jakovich
As our clients continue to face increasing pressure to make disclosures on the ESG-related risks and opportunities relevant to their business, being aware of the ways in which they can manage them is more important than ever.
Regulation is one of the key drivers. Mark Carney, then Governor of the Bank of England and now UN Special Envoy for Climate, famously warned in 2015 of a potentially cataclysmic climate-related financial shock if companies failed to look far enough ahead to see the costs of climate change: the Tragedy of the Horizon. In the years since, the G20, the EU and national governments, investors, NGOs and activists alike have been pursuing strategies to break that tragedy – to manage yet unseen impacts, related to both climate change and the wider scope of ESG issues. They are chasing three broad, interrelated objectives: pushing investment toward a sustainable economy; pushing corporates to have strategies which take account of ESG, and particularly climate risk, and pushing disclosure, to arm investors with information so they can invest more sustainably, and to nudge corporates to deliver the right business models through public accountability.
Stakeholder pressure is also making improved ESG disclosure and transparency increasingly important. The 2021 AGM season worldwide has seen an increasing number of shareholder resolutions pushing for ESG disclosure commitments as ESG activism steadily increases. Not disclosing enough or choosing the wrong language or focus can expose businesses to accusations ranging from “green-washing” to issues that can cause significant reputational and financial damage.
With nearly 400 mandatory and voluntary frameworks for sustainability disclosure worldwide, selecting a framework which will meet the requirements of a broad number of stakeholders has been difficult. However, the increased push toward international standardisation and the streamlining of disclosure requirements is promising.