In today’s rapidly changing business landscape, companies across the UK face increasing scrutiny and growing expectations regarding Environmental, Social, and Governance (ESG) considerations. These factors are no longer just a matter of corporate goodwill; they have become legal business requirements that demand your full attention and proper legal expertise. ESG has become a prime focus for investors and is now firmly embedded within the supply chain.
Understanding ESG: A Legal Essential
ESG is the umbrella term used to encapsulate environmental, social and governance factors previously used mainly in the investment world to measure a business’s corporate responsibility. It is now a term which has spread across businesses generally and has far-reaching implications.
ESG involves a wide range of issues, from environmental sustainability, ‘greenwashing’ and ethical labour practices to responsible governance and B Corp.
The UK government and regulatory bodies have recognised the significance of ESG factors in the modern business world. It has established a comprehensive and evolving framework of regulations, codes and best practices to ensure compliance.
- Environmental Compliance
In the UK, environmental regulations have been progressively strengthened to address climate change, biodiversity loss, and sustainable resource management. Many companies must now comply with legislation governing emissions, waste disposal, and conservation efforts.
- Social Responsibility
The UK’s commitment to social responsibility includes specific requirements on labour practices, diversity, community engagement, and ethical sourcing.
- Ethical Governance
Governance practices have come under the spotlight, emphasising the importance of transparency and accountability. Shareholder activism and voluntary and mandatory governance codes have become integral aspects of corporate governance.
- Regulatory Compliance and Reporting
A key legal requirement now in the UK is the disclosure of ESG-related information for certain businesses. Large companies must report on their ESG performance in their annual reports and accounts. As a result, larger businesses now expect all businesses in their supply chain to be able to produce and provide the relevant information to enable them to comply.
Why is it important?
ESG reporting is now required for major UK companies (that is, those companies that are publicly ‘quoted’ or ‘listed’, whose annual turnover exceeds £500 million, or who have more than 500 employees). It is also being considered by smaller businesses to attract investors, clients and stakeholders. The scope of those affected will change, requiring many more to adhere in the future.
Stakeholders, suppliers, customers and shareholders will base many of their decisions on your environmental, social and governance (ESG) credentials. Some investors, banks and large institutions now will not trade or work with you without this in place.
Research by ‘Charles StanleyLink’ found that up to half (48%) of investors are looking to increase their ESG investments within the next three years. We have already seen investors focusing on businesses with a robust ESG framework.
The new generation of consumers purposely chooses products and companies specifically for their ethical behaviour and their published record on climate change. Many businesses opt to become B Corp certified, sending out a clear message that they consider all social and environmental issues. This requires a change in the company’s articles of association to reflect this focus.
The legal landscape is evolving. Firms that embrace ESG as a core component of their services are poised to guide their clients toward a more ethical and sustainable future.
Good ESG engagement can lead to the attraction of more employees. Some employees may want to work in more eco-conscious companies committed to implementing favourable ESG policies. Employees may want to associate themselves with companies that foster a diverse and inclusive workplace, with employee support programmes for mental well-being and improved work/life balance.
We help businesses understand, navigate, and comply with ESG requirements. By partnering with experienced legal advisors, companies can meet their legal obligations and thrive in an era where ESG considerations are important to sustainable and responsible business practices. Some of the key legal issues we have seen include:
- Risk Mitigation and Due Diligence. Our commercial team help businesses identify and mitigate ESG-related risks. This includes conducting due diligence in mergers and acquisitions to assess the target company’s ESG practices and potential liabilities. Effective risk management safeguards against legal issues and protects a company’s reputation.
- Contractual Considerations. We can play a critical role in drafting contracts that reflect ESG commitments and obligations. This includes preparing supplier agreements that address ethical sourcing, sustainability clauses in financing agreements, and terms related to responsible business practices in joint ventures and partnerships.
- Compliance –We can play a pivotal role in advising businesses to adhere to ESG regulations, conduct environmental impact assessments, and help them implement sustainable practices with specialist partners.
- Social responsibility
We have assisted many companies in developing policies and practices that align with ESG values. We also provide guidance on compliance with labour laws, anti-discrimination regulations, and human rights standards, ensuring that businesses foster inclusive and responsible workplaces.
- Ethical Governance
We have advised clients on corporate governance structures, board responsibilities, and compliance with governance codes. We work with many clients who are going through the process of becoming B Corp certified.
ESG is not just a trend but a fundamental shift in corporate governance and responsibility. ESG adds long-term value for your brand, growth and working relationships. Governments are implementing more and more regulations demanding transparency, as we have already seen regarding diversity, equal pay, carbon emissions and modern slavery. It is vital that you ensure you have in place a suitable ESG policy and that this has been implemented throughout your business.