ESG from a legal perspective

Sustainability policy always had a legal dimension, and this is being taken to new levels with the current and future waves of EU law in this area. Mishcon Purpose, the ESG consultancy of the law firm Mishcon de Reya, was launched this year. Its founding head Alexander Rhodes spoke at the ILA Substantiality Strategy Talk on Friday 13th November. 

From the SFDR to the green taxonomy, and the new versions of ESG regulation planned for later in this decade, there is an added incentive for businesses to act in a sustainable fashion and been seen to do so. Inevitably, organisations will need experts to help them interpret these rules. Alexander, in conversation with Andy Schmidt, member of the ILA Sustainability Strategy for Boards committee, highlighted how seeking to do the right thing is not always enough. 
Corporation or collusion? 
Alexander noted the general move towards stakeholder capitalism, so not only must companies work for their shareholders but “also deliver value to their customers, invest in employees, deal fairly with suppliers, and support the communities in which they operate.” All this sounds uncontroversial, but these ideas can become laced with the potential for conflicts of interest. For example, when do close relationships with other stakeholders tip into being, or being seen to be, unfair or even corrupt?
“As a lawyer, when you start thinking about businesses cooperating together, the competition law bell goes off in your head,” Alexander noted. He pointed to the case from 2011 when Procter and Gamble and Unilever were fined tens of millions of euros for anti competitive behaviour by the European Commission. They were working together to improve the environmental footprint of their detergents, but the EU competition authorities found their agreement went beyond merely the environmental objective. Nine years later, he explained, the EC is consulting on how to encourage private sector collaboration for sustainability within the framework of EU competition law.  Companies are well advised to take advice.

How to advocate for ESG

A viewer of the online session asked Alexander how boards could challenge reluctant executives to take a more ESG-focused approach. His recommend first stage was to speak with management at different levels to understand the roots of their concerns. If that approach was not sufficient to move the dial, then “maybe have a conversation with in-house or external lawyers. If you start the conversation in the context of legal advice, this can in some instances remove roadblocks,” he said.
Alternatively he recommended appealing to values. “Some of the best conversations I've have had were with family businesses, approaching the question from a multi-generational perspective,” he said. This involves asking questions such as “what does our family stand for.” 
This is also a reason why he supports the ideas of companies and asset managers taking a“purpose driven” approach to governance, rather than seeking just to manage ESG risks on a compliance basis. “Purpose is to do with questions such as ‘why does our company exist?’ ‘what is the business’ function?’ and therefore ‘what role does it play within society?’” he said. With this the board and management have a foundation of principles on which decisions can be gauged. 
As for how Mishcon Purpose approaches clients, he says they are willing to work with clients who have a “high risk” ESG profile, “but the point is to help businesses to improve, including those in difficult sectors.” However, to manage these relationships requires the law firm to have “both a very robust ethics committee and policies to enable us to assess clients, and that allows us to take a nuanced approach.”

Where does risk lie

Alexander also commented on his firm’s relationship with B Corp, which assesses sustainability performance. Of particular interest was achieving understanding not only of direct greenhouse emissions, but those from third party suppliers. So in the investment sector this comes with the realisation “that actually it is investors who are carrying climate risk and not the corporates who they were investing in but which don’t report on the climate risks they are facing.” 
Taking this into account moves the centre of decision-making responsibility from the realm of ESG to being a central business concern. “When something lands on the financial directors desk, it has a different impact to when it lands on the ESG guy's desk,” Alexander noted. He also sees such changes as giving “a strong sense of cultural purpose and buy-in, suggesting the organisation is really setting itself up to be resilient.”