What do businesses need to be aware of in relation to ESG responsibilities?

Increases in compliance requirements for operating and reporting mean that environment, social and governance (ESG) issues should now be a high priority for businesses. If ESG fails to get on the agenda, a business is likely to suffer reputational damage; be on
the end of legal action if laws and regulations are breached, bring about poor relations with stakeholders, and face potential issues relating to supply chain and potential loss of business. On the positive side, investment in ESG matters can bring opportunities, create savings and efficiencies, and increase sustainability.

What is covered by ESG?

ESG encompasses more than just corporate social aspects of how a business operates; terms such as ‘corporate social responsibility’ are increasingly being replaced with ESG.

Several bodies in the UK are tasked with checking ESG obligations. These include the Financial Reporting Council (FRC), which is responsible for monitoring compliance with reporting requirements under the Companies Act; the Financial Conduct Authority (FCA), the financial services regulator, which oversees listed companies’ compliance with climate-related financial disclosures; and the Environment Agency, which can impose civil and criminal sanctions for environmental offences, including against directors and officers,
and impose fines. A business needs to understand the implications of non-compliance with applicable regulations.

A business will, if it has not already, come under increasing pressure to explain to investors, insurers, customers and the world at large how it is addressing climate change and other ESG issues. It is a key part of corporate governance.

What should the board be doing?

A business will need to consider its exposure in ESG areas to determine the risks, and how any issues should be addressed (due to regulatory compliance or contractual requirements) in a transparent manner. Even if a business is not required to report on these issues, it is still something that can be done on a voluntary basis, to comply with voluntary frameworks or to showcase thought-leadership and elicit goodwill with stakeholders generally.

To assess risk, a business will need to consider how it operates, and what the ESG risks are – for example, environmental impact, health and safety of personnel, local community response, etc. Once risks have been identified, the impact in those areas should be considered, including financial (for instance, cost and availability of resources) and the risk of non-compliance with any applicable laws or regulations.

In addition, a business should consider what controls are in place (if any) to reduce those risks or manage them effectively, as well as having insurance cover for certain risks, and whether such risks also need passing up or down a supply chain in order to minimise disruption or avoid breaches of applicable laws. It is worth drawing up an ESG strategy, including any relevant codes of conduct or values statements, which will need sign-off from the board.

Internally, a business may want to create (or add to existing) policies and processes to ensure key departments are aware of what the business needs its employees and stakeholders to do to support the ESG strategy. This will include working with HR, health and safety teams, supply chain co-ordinators, as well as legal and company secretarial. This will ensure that correct procedures are in place for escalating or reporting issues, relevant reports are filed with applicable bodies and regulators, and will provide an organisational structure that supports the ESG strategy. Staff training and internal communications will also need to be covered.

External communications carry a greater risk in terms of potential litigation and reputation damage when relating, for example, to climate change and ‘greenwashing’ claims. Disclosures about ESG matters need to be care-fully crafted to ensure a clear and transparent message without overdoing the claims. The Advertising Standards Authority has created the General Environmental Claims Code and a specific ‘Green Claims Code’, providing guidance on how a business should make environmental and social claims, whilst staying within the parameters of the Code and applicable laws and regulations. This is a suggested starting point for businesses seeking to create a position statement on ESG matters.

Key takeaways

• Board agenda item: ESG issues need to be considered at the highest level to make sure that they are being addressed sufficiently.
• Risk register: Make sure that any risks associated with ESG issues are highlighted to mitigate and reduce (or eradicate) them.
• Internal messaging and training: Create a culture that highlights the importance of the ESG strategy, and train staff to ensure everyone knows what the business is doing in relation to ESG matters and how employees can support this.
• Supply chain: Review contracts with suppliers (including any applicable codes of conduct or other regulatory compliance matters) to check that liability relating to such issues is addressed, including compliance with matters such as modern slavery. Supplier compliance with contracts and applicable laws, together with requirements to have appropriate insurance, are generally things that a travel business will have in place as part of its due diligence. ESG issues should be added to a supplier due diligence checklist so that
a travel business can obtain information around the supplier’s operations and reflect this in any communications with customers or operating statements.
• Communication strategy: Work with legal and marketing to get the position statement accurate around what the business is doing on ESG matters. Check the ASA website and applicable codes before launching any communications.
• Monitor the ESG strategy, policies and communications, and changing laws: Depending on the size of the business, assessments and audit of ESG issues and strategy (including updates) may be completed internally or with external assistance. It is
worth noting that there are specific ESG-related legal developments in the US and EU, as well as changes around codes of practice and other regulations for certain ESG matters in the UK. It is important to monitor these activities to ensure your business remains compliant and to align your ESG strategy and operations with any changes.