Legal teams need to go ‘beyond’ on ESG front
As the business moves into the post-pandemic market, legal departments will need to be cognisant of how it deals with the underlying environment, social, and governance (ESG) considerations that have become integrated, placing challenges for lawyers to go beyond compliance issues.
Speaking on The Corporate Counsel Show, Corrs Chambers Westgarth head of responsible business and ESG Phoebe Wynn-Pope said there were underlying dangers pertaining to ESG being seen, such as the lack of integration in businesses along with the need for a sufficiently holistic risk-based approach, which will require greater attention for businesses and law departments in the coming years.
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“I think there’s a lot of things obviously to unpack the underlying dangers around ESG. One of the key things that we are seeing a lot of is this siloing of approach to different ESG issues. So, organisations looking at their climate impacts and the impact of climate change on their business, their carbon emissions, their journey to net zero,” she said.
“When they’re doing that, that often will happen within a certain function in the business. And then, a lot of requirements for a lot of organisations to be thinking about, modern slavery, and that often will happen in another part of their business. And there’s not a lot of integration happening at this stage.
“One of the key issues, I think, around ESG and some of the risks that there are is being able to do your assessment across the different issues that fall under ESG, from environmental to human rights and the social and community issues, and think about what they look like together.”
Ms Wynn-Pope said the lack of integration in businesses is partly because ESG has grown out of this idea of corporate social responsibility.
“A lot of those things have happened in different parts of the business; organisations now are building ESG into their organisational strategy and their organisational risk matrix, which is where it should sit,” she noted.
“Then that’s requiring this need to look horizontally across the business. And what I mean by that, in terms of a practical example, so as we move towards net zero, and we’re all thinking about how we can shift to renewable energy or battery-stored energy in different circumstances, we need to think about the supply chains that go into those products, to enable us to achieve our carbon-reduction emissions targets, and those sorts of things.”
“When we’re thinking about those supply chains, if we’re thinking about batteries, for example, we know that there are supply chains related to batteries with rare earth minerals and particularly some of the components like cobalt and lithium that have very, very high risks of modern slavery, particularly child labour in the artisanal mines in, for example, the DRC, which is where a lot of the world’s cobalt comes from.
“If we’re thinking about doing good on one side and reducing our emissions, which we all should be thinking about, we also need to be thinking about how we do that in a way that is respectful of human rights, and really try to work across industry and across sectors to mitigate the risk of modern slavery and other human rights impacts.”
As these ESG considerations have expanded, businesses and law departments will need to have an increasing risk-based approach, according to Ms Wynn-Pope.
“You need to understand obviously your business and how your business impacts on people and the environment and how people and the environment impact on your business. I would recommend looking at where those impacts are the greatest, and if they’re negative impacts, to be focusing on those and how you’re going to mitigate against that,” she said.
“If you take that risk-based approach, that helps you prioritise action, because it is really difficult to do all of these things at once. And we heard at the AICD conference earlier in the year that the need to identify where you feel like you can have the most impact and address the issues that are most salient for your business is where you need to start.”
There are risks for businesses when ESG decisions are made in isolation without taking an integrated and holistic approach, Ms Wynn-Pope noted.
This includes organisations making decisions around net zero targets without really understanding how that might impact other aspects of ESG.
“For example. So, you might be putting in greenfield solar farms in outback Australia. And I have seen many times, people writing about the great emptiness of Australia being an enormous solar resource. But Australia is not a great empty continent, as we know, and there are traditional owners of the land. There’s native title. There’s a need to ensure that those First Nations people are consulted and brought into the process, and that free, prior and informed consent becomes a part of any project,” she said.
“The targets have to be set in a way that is realistic and respectful of the people that are going to be impacted by them. So, this is just one little piece of how these decisions need to be made in a very holistic way.”
Organisations were also seeking to think more about ESG in a holistic way, but often the structure was not necessarily very supportive of that.
“So, where there’s definitely a move to see ESG as a cohesive whole, and people talk about ESG and they might have their head of ESG, or they might have an ESG department, but still some aspects may sit outside,” Ms Wynn-Pope added.
“Sometimes the environmental decision making sits outside of human rights, for example, decision making, and they’re not necessarily brought together, although there is a great intent and, I think, an increasing understanding that it’s necessary to do that.”
With a number of boxes that would need to be ticked and some that might contradict each other, law departments see a changing nature in the way it manages ESG compliance ahead of any uncertainty, according to Ms Wynn-Pope.
“I think legal offices have obviously got to make sure that they have a very good and clear picture of what the regulatory environment is in their industry and their sector around ESG and what that looks like. And it’s tough, right? Because it’s changing a lot. Announcements are being made by different organisations and exchanges and regulators, on an almost weekly basis, about the types of things that they’re looking for from organisations,” she noted.
“Law departments need to make sure that they’re absolutely across what the requirements are for their business, and then they need to be absolutely across the fact, particularly in Australia, obviously in Australia, that all the disclosures to market are accurate, that the targets and the commitments that organisations are making are backed up by the sort of action that’s going to deliver on those targets and commitments.
“This is what we’re seeing, is this need to really focus on delivering some transparency and accountability in a way that requires quite a lot of due diligence around the edges.”
Ms Wynn-Pope added that the complications of ESG are that it brings a whole range of different issues together in a way that, in many instances, “goes beyond mere compliance”.
“You have to suddenly deal with not only what the law says, but what are the expectations of a whole range of different stakeholders, and how are you thinking about those in factoring in the normative changes that we’re seeing, as a lot of regulation moves from voluntary compliance with guidance and things towards mandatory regulation?” she explained.
“We see this in human rights, for example, a lot. So, we’ve had the United Nations Guiding Principles on Business and Human Rights, which provides a framework for the way businesses should apply their thinking about human rights, their human rights impacts. And that has been voluntary regulation for a long time, but it is increasingly being adopted by states.
“The EU has issued a directive around mandatory human rights due diligence. The French have the Duty of Vigilance Law. Even in Australia, in our Modern Slavery Act, they use the UN guiding principles as a framework for the guidance to the act and the implementation of, and the reporting under that.
“So, we’re seeing this shift. And I think that that’s a big challenge for law departments, is to not only be on top of the legal issues but to be on top of those beyond compliance issues.”
The transcript of this podcast episode was slightly edited for publishing purposes. To listen to the full conversation with Phoebe Wynn-Pope, click below: