Very little existing legislation in the UK or internationally is badged as explicitly regulating environmental, social and governance (ESG) standards
Although there is a significant body of EU and national legislation separately covering environmental, social and corporate governance issues, these are not generally thought of as ‘ESG laws’, even though compliance with these regulations forms the foundations of ESG practice.
The below table outlines ESG-relevant corporate activities that are typically governed by legislation in European jurisdictions.
|Pollution Waste Water management Mineral rights Emissions/climate impacts Land use/deforestation Energy consumption||Health and safety Product safety Human rights Modern slavery Child labour Employee relations Conflict minerals Community relocation/displacement||Anti-bribery and corruption Anti-money laundering Executive pay Financial/corporate reporting Non-discrimination Data protection/cyber security Directors’/officers’ duties and liabilities|
Yet despite growing interest in the conduct of corporations, governments seem unwilling or unable to update their legislative agendas with unequivocal ESG standards.
This has resulted in non-governmental actors and commercial institutions filling the void with non-mandatory codes and principles designed to encourage corporations to demonstrate ‘good’ ESG.
Pressure is being exerted primarily by the investment community, consumers and NGOs which, in the absence of the clarity and certainty of regulatory obligations, has resulted in something of a free market for ESG standards and reporting.
Although the expanding patchwork of ESG initiatives has undoubtedly delivered positive changes in corporate practice, gaps in disclosure and verification processes mean not all voluntary frameworks are as robust as they might be.
This is compounded by disagreement and confusion among and within companies over what ESG means, how it fits with concepts such as corporate social responsibility (CSR) and sustainability, and which of the many available codes best align with their corporate objectives.
Recognising the need for common legal standards to reflect public and institutional sentiment towards ESG, particularly for those operating in regulated sectors such as finance, the EU has begun to develop some ESG-specific and some ESG-relevant legislation.
In March 2018, the European Commission unveiled a cache of regulations as part of its action plan on sustainable finance, which require financial market participants and advisers to comply with certain standards when making decisions and dispensing advice on corporate ESG performance.
While these regulations help incentivise companies to improve their ESG performance and or/reporting, they arguably do little to regulate actual corporate practices.
Other recent regulatory developments are aimed more directly at setting minimum standards for corporate behaviour, however, particularly in extractive industries (such as oil and gas and metals and mining), which face some of the sharpest ESG scrutiny.
Examples include the EU’s conflict minerals regulation (EU 2017/821), due to come into force on 1 January 2021.
Ostensibly, the regulation aims to boost corporate transparency and encourage companies to adopt a more sustainable approach to sourcing ‘3TG’ metals (tin, tantalum, tungsten and gold) – and avoid supporting conflicts in areas where these minerals are produced.
The regulation is effectively the EU’s answer to Section 1502 of the US Dodd-Frank Act, relating to minerals sourced from in and around the Democratic Republic of the Congo (DRC), although the EU’s version has been criticised for its comparative narrowness of scope and absence of penalties for non-compliance.
Other relevant legislation include the EU’s Framework Decision and Directive 2011/36/EU on preventing and combating trafficking in human beings, which has been implemented into domestic law across the EU (in the UK, this was effected via the Modern Slavery Act 2015), and the EU anti-money laundering (AML) directives, currently in their fifth iteration.
The 2015 Paris Agreement on climate change, which was ratified by the UK in November 2016, has also proved a surprisingly effective tool for enforcing environmental accountability, notably through the introduction of Paris commitments into the UK’s Planning Act 2008, which were used to block plans for a third runway at Heathrow Airport in February 2020.
The Court of Appeal’s decision on Heathrow served as a reminder that failure to comply with expectations established, if not strictly prescribed, by legislative acts, may result in legal challenge and opened the door to future actions against potentially climate-damaging projects in countries that have ratified the Paris agreement.
Driving greater uniformity
Even though the popularity of non-mandatory ESG principles shows no sign of abating, there is potential for legislation to play a more decisive role in driving a levelling of the playing field for ESG.
Lawyers, who have not traditionally paid a central role in ESG, will be increasingly called upon to navigate the complexities of legal exposure and protect corporations against enhanced legal risks.
In addition to the increasing volume of ESG-relevant legislation, management of ESG risk is intrinsically legal and rests on effective due diligence and far-sighted contractual provisions, as well as awareness of regulatory obligations.