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ESG: Corporate decision making

Insights / / London

Environment, social and corporate governance (ESG) issues, including human rights, have increasingly become a board level concern as ESG regulation, legislation and shareholder expectation continues to grow. The UK’s role as host for the 26th United Nations Climate Change Conference (COP26) in Glasgow this month has added to pressure already placed on directors to position ESG issues firmly on the board agenda. 

What is ESG?

There is no legal definition of what ESG issues consist of.  However, you can identify examples of what might typically fall within these heads as follows (not exhaustive):

Environmental
  • Climate change
     
  • Emissions
     
  • Energy efficiency
     
  • Waste and Pollution
     
  • Resource depletion
Social
  • Health and safety
     
  • Working conditions
     
  • Employee relations and diversity
     
  • Human rights and slavery
Governance
  • Anti-bribery and corruption
     
  • Executive remuneration
     
  • Transparency
     
  • Board structures
     
  • Shareholder rights
     
  • Fair tax strategy

Do ESG factors affect all companies?

Yes.  Directors have a statutory duty to promote the success of the company[1], with an express obligation ‘to have regard’ to a number of factors, including (but not limited to) the following:

  • the likely consequences of any decision in the long term;
     
  • the interests of the company's employees;
     
  • the need to foster the company's business relationships with suppliers, customers and others;
     
  • the impact of the company's operations on the community and the environment;
     
  • the desirability of the company maintaining a reputation for high standards of business conduct; and
     
  • the need to act fairly between members of the company.

These factors directly mention the environment and the welfare of employees.  This, together with the obligation to assess the long-term ‘consequences’ of decisions made by the company means that matters of sustainability, and the continuing success of the company, must be a focal point for directors and corporate decision-making.

What should UK private companies consider?

As ESG factors are likely to influence a company's financial position and reputation, insofar as they are not doing so already, companies and their directors must make sure that they consider ESG factors when reviewing the operations, management and future decisions of the company.   

Performing an ESG skills audit could also prove invaluable in identifying whether the company has sufficient knowledge and experience in-house to ensure adequate compliance.

In terms of actions, companies might consider the following practical steps (not exhaustive) to help assess and manage ESG risk:

  • Reviewing and updating safe working practices and ensuring compliance with health and safety legislation;
     
  • Ensuring that anti-bribery and modern slavery checks and balances are up to date in the operation of the business (including the supply chain);
     
  • Reviewing company reporting standards and making information on company performance available;
     
  • Implementing or updating an existing ESG policy or strategy to address the risks and opportunities posed by ESG issues relevant to the company, including the impact they will have on its business model and strategy;
     
  • Adopting codes of conduct promoted by the government or well respected industry bodies;
     
  • Implementing strong and clear policies to identify and manage conflicts when they arise;
     
  • Ensuring ongoing board diversity and putting in place effective systems to achieve diversity goals;
     
  • Voluntary reporting (e.g. ethnicity pay reporting);
     
  • Adopting clear and transparent remuneration policies;
     
  • Emphasising commitment to providing health and wellbeing support;
     
  • Ensuring there are appropriate systems in place so that any incidents of discrimination, harassment or bullying are dealt with in a timely and effective way;
     
  • Considering the company’s environmental impact and what changes might be implemented to improve commitment to sustainability such as:
     
    • Offering incentives to encourage sustainable commuting (e.g. an allowance to buy bikes);
       
    • Committing to agile working practices to reduce carbon footprint;
       
    • Promoting sustainable working practices e.g. turn off computers at the end of the working day, less printing, no single plastic use;
       
    • Giving staff the option of investing their workplace pension contributions in ESG titled funds that have a positive impact on people and planet;
       
    • Developing a "Green Handbook" which could include easily accessible resources and staff policies on environmental practices and issues; and
       
    • Encouraging staff to get involved in charitable activities or community work.

Listed companies are subject to additional requirements centred on best practice for companies in respect of corporate governance and protecting shareholder interests, and includes ESG requirements such as an emphasis on diversity in the composition of the board[2]. In addition, industry-specific obligations apply to certain classes of company such as financial market participants and energy companies[3].

What approach to ESG should group companies take?

  • Implement group wide policies.
     
  • Parent companies should consider whether the processes implemented by their subsidiaries and joint venture partners are in line with any group wide policies relating to supply chains, human rights the environment and employment and ensure that a consistent approach is adopted.

What ESG reporting and disclosure requirements must directors adhere to?

The disclosure and reporting obligations for directors in relation to ESG matters will depend on the size and nature of the company.

Some of the key obligations currently in place are as follows (not exhaustive):

  • As part of annual report and accounts most UK companies[4] must prepare a strategic report, which sets out the future strategy and key risks the company is likely to face. Quoted companies, traded companies as well as banks and insurance companies with more than 500 employees must prepare a more detailed strategic report which contains additional specific information stipulated in the CA 2006.
     
  • Companies with 250 or more employees must publish specific figures about their gender pay gap. In addition, listed companies with over 250 employees must also publish pay ratio information, comparing the pay of their CEO to the median, lower quartile and upper quartile pay of their UK employees[5].
     
  • Organisations that have a turnover exceeding GBP 36 million must publish a modern slavery statement, describing the actions taken to ensure its supply chain is slavery free and what it has done to deal with any slavery and human trafficking risks identified in its supply chain as well as in its own activities[6].
     
  • Quoted companies and large unquoted companies must disclose information on their carbon emissions and energy efficiency in their annual directors’ report[7].
     
  • UK incorporated companies with an average number of more than 250 employees (in both the current year and preceding year), must also include information in their annual director’s report on how the directors have engaged with employees, how they have had regard to the interests of employees and the interests of the company’s suppliers and customers during the relevant year[8].

As the UK focuses on its commitments made at COP26, we can expect a range of further rules and regulations designed to change the behaviour of private sector companies. These undoubtedly will create an additional burden for directors who are responsible for ensuring ESG compliance.

How can we help?

  • Work with you to develop ESG policies and practices;
     
  • Assist with the preparation of ESG codes of conduct for projects and transactions;
     
  • Prepare transactional anti-bribery, AML and governance reviews;
     
  • Advise Board and C-Suite on regulatory landscape and litigation risks;
     
  • Draft contractual mechanisms/dispute resolution clauses to permit exit where ESG policies are not implemented;
     
  • Review transactions for ESG impacts throughout value/supply chain;
     
  • Undertake ESG due diligence and impact assessments on transactions/lending;
     
  • Draft and review modern slavery reports;
     
  • Work with you to put in place ESG grievance mechanisms and remediation processes; and
     
  • If the need arises, represent you before courts and tribunals, if you face claims involving alleged environmental, social and governance abuses;
This Q&A does not constitute legal adviceShould you have any queries, or you  would like our assistance in considering the issues raised in this Q&A then please do not hesitate to contact the author of this article or your usual contact at Ince. Our team stands ready to assist.

[1] Section 172 Companies Act 2006 (CA 2006)
[2] This note does not consider further the obligations and requirements of listed companies.
[3] This note does not consider further the impact on industry specific companies.
[4] Except those companies that qualify as medium-sized under sections 465 to 467 of the CA 2006.
[5] Equality Act 2010
[6] Modern Slavery Act 2015
[7]Reporting on greenhouse gas (GHG) emissions and energy use, 2008 Regulations
[8]Statement of engagement with employees, Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (2008 Regulations)

Mona Patel

Mona Patel Partner

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