How ‘ESG’ Is Your HR Practice? – Corporate/Commercial Law

In the past, large corporations could largely go about their
business, creating profit and satisfying their shareholders,
unhindered, but in today’s world, businesses are being buffeted
by world events as never before (latterly: climate change, a global
pandemic and armed conflict). Both governments and the private
sector are increasingly expected to act in accordance with the
growing consensus, particularly in the west, about what constitutes
sound business practice in this environment. International
businesses are often now seen, not simply as wealth creators and
providers of jobs, but as ‘citizens’ with ethical
responsibilities. If a business wants to recruit and retain talent,
this requires more than just a good customer-facing brand.
Potential employees (especially millennials and generation Z) are
choosy about whether to associate themselves with a business. All
this means that businesses are increasingly expected to work
towards real, measurable ethical credentials: in other words
‘ESG’

What is ESG and why does it matter?

What is ESG?

Environmental, Social, and Corporate Governance (ESG) refers to
evaluating business operations, not specifically from a financial
viewpoint but from an environmental, social and governance
perspective. But it’s worth noting that ESG is not necessarily
about businesses making ethical choices that make them less
profitable. Governments sometimes find ways to encourage businesses
to make choices that are good for them from a financial
perspective, but also further the broader aims of reducing the
impact of climate change (a ‘win-win’). For example, in the
UK, a law has recently come into force to encourages pension
schemes to make sounder ethical investment choices by requiring
trustees to consider the environmental impact of the businesses
they invest in. The idea is that this should nudge pension schemes
in the direction of more sustainable choices, whilst hopefully
still enabling them to make profitable investments.

What does it cover?

The ‘E’ for environmental criteria deals with a
company’s impact on the world around it; the ‘S’ for
social standards is about the company’s impact on the community
and their employees, such as its emphasis on diversity and its
values; and the ‘G’ for governance relates how the company
is managed and the principals it adheres to.

Why does it matter?

ESG matters for various reasons: it’s important in terms of
the sustainability of the business; it matters for a company’s
public profile; it impacts on how it can recruit and retain talent;
and on how well it can respond to external pressures of all kinds.
But ESG is also increasingly used by socially conscious investors
to select investments – and that means it is inextricably linked to
the bottom line.

Studies reveal that conforming to ESG standards benefits a
company in more ways than one and there is a positive correlation
between corporate financial performance and ESG in the longer term.
¹ Aside from financial performance, conforming to ESG
standards can boost a company’s reputation, thus its customer
pool and the trust in the organisation. In 2020, the Edelman Trust
Barometer revealed that ethical drivers (76{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}) were three times
greater than competence (24{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}) in terms of people’s trust in a
company.² In that survey, integrity, dependability, and
a positive impact on society were used to define the ethical
dimensions of a company.

Further, employees are drawn towards ethical companies. IBM
reported that for 41{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} of employees, employer ethics and values are
key engagement factors.³ Good employer branding is vital
in this new world and impacts on the kind of branding employers
need to do to attract and retain talent. For example, for many
years, Apple has inspired potential employees by its corporate
ethos and the elegance of its design. But today, businesses need to
go even further – an essential part of a good employer brand these
days is wrapped up in ethical credentials. To be one of the
sought-after brands of the future, an ethical strategy encompassing
employee-issues such as work-life balance, diversity and health,
along with good governance, environmental sustainability and
company accreditation – are all part of the toolkit employers
need.

And as mentioned, more and more investors are using ESG
standards to inform their investments .⁴ And according
to the Edelman Trust Trust Barometer Special Report: Institutional
Investors, “88{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} of institutional investors subject ESG to the
same scrutiny as operational and financial considerations.”
This is only logical, as a company’s reputation and its ESG
activities interact closely. A scandal can cost a lot of money in
fines or decreases in market value. Some famous examples are the
2010 Deepwater oil spill, which cost BP a USD 53.8 billion pre-tax
charge⁵ ; Volkswagen’s 2015 emissions scandal, which
cost the company more than GDP 25 billion⁶ ; and
Facebook’s privacy breaches that caused billions of dollars in
market value decreases.⁷

Where to start on the ESG journey

International organisations working in the ESG
space

There is a good deal of infrastructure to help businesses work
out what principles they should adhere to and how to effect the
changes they need to make. The most significant of these are the
United Nation’s 17 Sustainable Development Goals
(SDGs), which is the core of the 2030 Agenda for
Sustainable Development, adopted in 2015. The SDGs are widely known
and form the aims of many international institutions that support
and promote ESG practices.

It is also worth being aware of the UN Global
Compact, a voluntary initiative set up in 2000
“based on CEO commitments to implement universal
sustainability principles and to take steps to support UN
goals.” It was created with assistance from a number of
UN organisations, such as the United Nations Environment Programme
Finance Initiative (UNEP FI) and encompasses 10 basic principles in
the areas of human rights, labour, the environment and
anti-corruption. It says that:

“by incorporating the Ten Principles of the UN Global
Compact into strategies, policies and procedures, and establishing
a culture of integrity, companies are not only upholding their
basic responsibilities to people and planet, but also setting the
stage for long-term success.”

Following on from this, the OECD Guidelines for
Multinational Enterprises, which were first adopted back
in 1976 and last updated in 2011, contain detailed provisions
covering human rights, employment and industrial relations,
environment, combatting bribery & extortion, consumer
interests, science and technology, competition and taxation. These
are addressed to both governments and international enterprises.
The aim of them is to:

“encourage the positive contributions that
multinational enterprises can make to economic, environmental and
social progress and to minimise the difficulties to which their
various operations may give rise.”

The OECD also provides other guidance related to ESG, including
the OECD Due Diligence Guidance for Responsible Business
Conduct, and the G20/OECD Principles of Corporate
Governance.

There are other sets of standards too, not least those espoused
by the International Labour Organisation, the ILO,
providing international labour standards, some of which are similar
to the UN and OECD standards in many respects.

There is also the International Organisation for
Standardisation, ‘ISO’. Founded in 1946, the ISO
is an independent non-governmental international organisation that
develops International standards. They have issued thousands of
standards touching on all 17 of the UN Sustainable Development
Goals. They also have some more specific ESG-related guidance such
as ISO 26000 Social Responsibility and ISO
37000:2021 Governance of Organisations.

To help businesses set up reporting systems, there are some very
well-established standard-reporting organisations that companies
can use to report their progress, of which the Global
Reporting Initiative (GRI) is a large player. This is a
not-for-profit organisation, structured within the ambit of the UN
and funded by governments, along with other public bodies. It has
been around in some form since 1997 and now has a comprehensive
modular reporting framework, covering all aspects of employment, as
well as environmental reporting etc. They have one of the most
widely-known and used sets of standards for sustainability
reporting. Over 500 organisations from over 70 countries are part
of the GRI Community and this is growing.

There is also the International Financial Reporting
Standards (IFRS). It is a non-profit, public interest
organisation that aims to develop a single set of enforceable and
globally accepted accounting and sustainability disclosure
standards.

Another route is accreditation. The idea of ‘B
Corps’ started in the US but now 60{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} of B Corps are
outside the country. To qualify as a B Corp, a business has to
score 80 or more on the ‘B impact assessment’ and pass a
legal test to do with how the company is set up. The testing
organisation is set up as not-for-profit, and each B Corp is:
“a company that aims to redefine success in business – it
looks at the positive impact on people and on planet as well as on
profit.”

In short, many respectable leading international organisations
recommend and offer standards and guidelines on ESG. But how about
the law?

Top 7 for ethical expectation:

LAWYERS IN 25 COUNTRIES TOLD US WHAT LEVEL OF ETHICAL CONDUCT
THEIR BUSINESES ARE EXPECTED TO SHOW. COUNTRIES WITH THE HIGHEST
EXPECTATIONS WERE THESE:

AUSTRALIA

FINLAND

HONG KONG

ITALY

LUXEMBOURG

THE UK

THE US

Footnotes

1 Tensie Whelan, Ulrich Atz, Tracy Van Holt and Casey
Clark, ESG and Financial Performance: Uncovering the Relationship
by Aggregating Evidence from 1,000 Plus Studies Published between
2015 – 2020,
https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_
ESG-Paper_2021{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}20Rev_0.pdf

2 Edelman Trust Barometer 2020,
https://www.edelman.com/sites/g/files/aatuss191/files/2020-01/2020{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}20Edelman{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}20Trust{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}20Barometer{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}20Global{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}20Report.pdf

3 IBM, What employees expect in 2021,
https://www.ibm.com/downloads/cas/5BWJYEKZ

4 Investopedia, Demand for ESG Investments Soars Emerging
From COVID-19 Pandemic,
https://www.investopedia.com/demand-for-esg-investments-soars-emerging-from-covid-19-pandemic-5193532#citation-1;

5 Reuters, BP reaches $18.7 billion settlement over
deadly 2010 spill, 2015,
https://www.reuters.com/article/us-bp-gulfmexico-settlement/bp-reaches-18-7-billion-settlement-over-deadly-2010-spill-idUSKCN0PC1BW20150702

6. The Guardian, Dieselgate: British car buyers’
claim against VW reaches high court,
https://www.theguardian.com/business/2021/dec/05/dieselgate-british-car-buyers-claim-vw-reaches-high-court

7 Financial Times, Facebook privacy breach,
https://www.ft.com/content/87184c40-2cfe-11e8-9b4b-bc4b9f08f381
https://www.ohchr.org/en/hrbodies/hrc/wgtranscorp/pages/igwgontnc.aspx

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