Why every business must care about Environmental, Social and Governance (ESG)?

We all like to think that modern slavery or bribery is something that happens somewhere other than “here”, either in our everyday lives (where do our clothes come from?), or within the businesses to which we contribute. Home Secretary Priti Patel had already called on the National Crime Agency (NCA) to investigate claims of modern slavery in clothing factories in Leicester, citing conditions in such workplaces as “truly appalling” as retailing giant BooHoo Group (which is behind brands including Karen Millen and Oasis) was the subject of a Sunday Times under cover journalist investigation which has made various whistleblowing allegations of employee exploitation. The Home Secretary said that the government would not stand for “sick criminals forcing innocent people into slave labour and a life of exploitation”.

It is a sad reality that Environmental, Social and Governance (ESG) has to exist, because environmental and social exploitation exists, everywhere. ESG is a buzzword in the finance community, and at the moment it is being used to push to rebuild a better post COVID19 future. But this means that all businesses need to pay more heed to their ESG credentials, and make sure it is not just lip service. And it makes business sense: research by Societie Generale found that an ESG controversy event will “halt a rise in stock price, and for a sustained period of a solid two years”. It found that after an ESG controversy event, two thirds of the of the time, shares underperformed the broader market by an average of 12% over the subsequent 2 years.

What does ESG compliance mean in practice?

For a certain size of business, ESG reporting is mandatory, but other relevant legislation (including the Bribery Act 2010, the Modern Slavery Act 2015 etc.) applies to all businesses with operations in the UK and applies to their entire supply chain. Businesses must assess the risk of ESG factors and put in place measures to mitigate these risks. This includes taking practical steps to carry out assessments, due diligence on supply chains, contractual measures to shore up and mitigate compliance risk, and ongoing audit. No brand wants to be the next BooHoo, but it would be naïve for businesses to think that this risk is limited to the retail or manufacturing sector.

There are many risk assessment tools and advisers which can be used to carry out risk assessments, either on the ground, or remotely, depending on location (and lockdown), and these types of practical measures should be fully documented. At Aria Grace Law we have many contacts in this field (which is very close to our hearts) and will gladly help you find support suitable to your business.

Acquirers and investors alike should be mindful of the potential acquisition of assets derived (in whole or in part) from criminal conduct which creates risks of the application of the Proceeds of Crime Act 2002 (POCA). Even if the POCA thresholds are not met, the risk of damage to a brand’s reputation with customers, regulators and investors alike is something which a business might find it difficult to recover fully from. Just this week we have woken up to an article in The Guardian of “Apple imported clothes from Xinjiang firm facing US forced labour sanctions". On further reading, the company in question is not even a current supplier. We can help you manage ESG across your supply chain, and within your business to minimise your risk exposure. Environmental, Social and Governance is something which creates huge brand value of which you can rightly be proud. Here at Aria Grace Law for example, we are the first law firm in the world to undergo a ‘Circulytics’ assessment, which helps companies measure their contribution to the ‘circular economy’, and donate all of our profits to charity.

Why should I care? The “So What” test?

Our team of commercial lawyers will always apply what we call the “So What” test when analysing and explaining legal risk Put simply, we stand in our clients’ shoes and think “so what does that mean to me and my business?”. The value of your business on sale or at point of fundraising will increasingly be scrutinised based on ESG due diligence. There is increased regulatory focus on ESG both in the UK, the EU, and the US with legislative developments and investigation activity on the rise. But ESG compliance should be a positive and even financially beneficial and not seen as a stick that beats your business.

Our lawyers are all firm believers that ESG values can and do deliver better outcomes and growth in all businesses and are delighted to help clients on their own ESG journey.

ESG Update by Alison Hastie - Partner at Aria Grace Law 14.08.2020