Brands and businesses that adopt and embed ESG (environmental, social and governance) factors into their strategy are more likely to create value and accelerate growth, while minimizing their legal and regulatory risks, according to a new report from global law firm Dechert and advisory firm StoneTurn.
The new report, Are You Ready for ESG as a Critical Business Imperative?, based on a series of events and a pulse survey of executives in attendance, discusses the impact of ESG across business and the evolving regulatory and legal environment. It shows that integrating ESG and continually reassessing ESG strategy is a future-proofing investment that can create value, drive cost reductions and increase productivity and growth, with the potential to be a powerful business force for good.
Demonstrable action needed
With tighter regulation coming into play and stakeholder and activist groups demanding increased ESG accountability, the report emphasizes that companies must demonstrate real action now on issues including sustainability and supply chain due diligence.
The pulse survey indicates that many firms have some way to go to meet these increased demands. It found that fewer than one in three respondents say their organization has carried out a risk assessment to identify ESG risks in their supply chain in the past two years, while 60 percent failed to integrate ESG due diligence into wider due diligence activities and compliance measures.
Failure to embrace and embed ESG
The report highlights how a failure to embrace and embed ESG into your business strategy and processes could have serious financial and reputational consequences, which may include litigation, regulatory action, and the restriction of access to capital as lenders start to charge higher premiums and interest rates to organizations with poor ESG risk rating. Markets are also responding, with stocks that have positive ESG ratings driving share price and dividend growth.
“Integrating a clear and robust ESG strategy will go a long way to ensuring that businesses do not run afoul of tighter regulations, thereby minimizing the potential for litigation, as well as meeting the demands of both stakeholders and activist groups for increased accountability,” said Matthew Banham, a partner at Dechert specializing in corruption, fraud and financial services regulatory enforcement, in a news release. “This should result in better governed organizations that will preserve their value and ensure their viability in years to come.”
Culture is vital to the success of an ESG strategy
The report identifies key considerations and offers practical advice on how to maximize the success of ESG business commitments, including emphasizing that a values-focused business culture permeates an organization to enable a positive environment for change. Points include:
- Strong direction, a robust tone from the top and ethical commitment from business leaders, reinforced by aligned corporate governance support businesses in delivering sustainable priorities.
- Businesses should rethink corporate purpose and the enabling culture of the organization, so that everyone is clear about what is the ‘right thing’ to do. Only 43% of pulse respondents said this was the single biggest driver of change, which indicates that over 50% see ESG as only a compliance or regulatory initiative.
- Navigate and identify the evolving regulatory landscape as the scope of reporting expands to cover areas such as environment, nature, anti-corruption and bribery, and diversity – within organizations and across their stakeholders and value chains.
- Shine the ESG spotlight on all relationships: parent, subsidiary, and contracting third parties. Although courts are traditionally reluctant to ‘pierce the corporate veil’ and find a parent liable where it was not a party to the contract in question, recent case law indicates that, when the facts are right, courts will be more willing to extend potential liability to parent companies.
- Integrate ESG into an organization’s existing risk and compliance framework and establish accurate and reliable data gathering processes for essential ESG-related metrics.
Key action items from the research:
“Culture and good corporate governance can make or break an organization’s ability to deliver on their strategic ESG priorities,” said Tracey Groves, partner at StoneTurn, in the release. “Engaging the whole business in not just what needs to be done, but why it matters and how it aligns to the values and purpose of the organization, will be critical to securing buy-in and commitment to doing the right thing from all stakeholders. An enabling and empowering culture does not happen by default, it must be designed and shaped with intention and purpose.”
In the first half of 2022, Dechert and StoneTurn held a series of virtual and live events exploring the future impact of ESG across business and the evolving regulatory and legal environment for organizations and their directors. In these events, we used live online polling to capture data around how far down the line organizations are in their ESG journey. 114 people were polled over a two-month period.