Time for an ESG risk assessment?

A company’s ‘ESG’ rating is an increasingly important factor when others make decisions to invest or do business with it, with ESG referring to ‘environmental, socio-economic and corporate governance’ factors.

Stakeholders will look at a company’s ESG scores and ratings to determine risk. Equally customers are becoming choosier about who they buy from and are more concerned with ethics and environmental factors than ever before, while journalists are on the lookout for headline-grabbing stories.

Along with reputational risk, loss of custom and problems attracting investment, a company can also face significant fines and penalties for breaching the increasing number of rules and regulations that have arisen and continue to arise for companies in this area.

Whether you are the owner of a large corporation, or are a sole trader running their own business, failure to manage these risks could have significant financial ramifications for a business.

Here we provide a brief overview of the factors which make up an ESG risk, and what your company can do to if it faces a legal claim for breaching regulations.

Environmental risks

What constitutes an environmental risk will vary according to the type of business, but this needs to be kept under review. A company can impact the environment in any number of ways, and the regulatory framework is changing as the government moves towards its Net Zero strategy.

You will need to be aware of all the regulatory policies which relate directly to your business, for example around the materials you use, packaging, waste disposal and recycling. Do you consider the impact your company may have on pollution or climate change? For example, is this on the agenda when reviewing your fleet vehicles?

When Volkswagen admitted to falsifying emission tests in 2015, they had to pay billions in fines, penalties, and settlements. This was a public relations and financial disaster for the company.

Risks which can lead to financial penalties include failing to meet your responsibilities in regard to the recycling of packaging. Failure to comply with regulations concerning emissions, and negligence in knowing where the company’s waste products end up.  Failing to monitor how company land is used which may lead to environmental misuse, and issues such as is there asbestos on site?

Socio-economic risks

Socio-economic risks cover elements such as human rights policies, how a company deals with its workforce, what sort of supply chain it uses, and the general ethical considerations of a company in relation to employees, suppliers and customers, and the local community.

Businesses now are increasingly judged on their ethics, and failure to consider the importance of this can have devastating reputational effects as well as having serious legal ramifications – as was seen in the scandal over pay and conditions at fashion company BooHoo.

Socio-economic concerns affect employee policies, fairness to customers and suppliers, and the general community. For example, ensuring your business uses an ethical supply chain or ensuring transparency in regard to equality for employees.

Governance risks

Corporate governance risks relate to how a company is run by its directors and shareholders, with risks relating to fraud and negligence, regulatory compliance, health and safety, and policies for staff such as diversity and inclusion, among others. 

Traditionally corporate governance has had more of an internal emphasis within a company. However, with more accountability being called for, more whistleblowers willing to come forward, and more companies being called out for non-compliance on social media, reputational and financial damage can be significant and far-reaching for those breaching corporate governance rules.

For example, it is now essential to provide transparency on company policies including environmental and social policies, diversity and inclusion as well as transparency on salaries, including at board level. Maintaining and following a clear GDPR and cyber security policy is also essential and the fines for non-compliance can be punitive.

What can happen if these risks are ignored?

Environmental factors are big news now more than ever, and an environmental blunder or what might be considered to be a lack of social conscience by a company can have a very serious impact on its reputation, as well as leading to significant fines for that company.

In addition, the effects of ignoring environmental factors are affecting insurance premiums.

Companies that fail to show transparency around employee pay and conditions, have suffered with staff claims, as well as problems with recruitment and retention.

There are many initiatives that companies can undertake to ensure they lower their ESG risk factor. The key is to identify your specific risks and prioritise what is important for your company in order to manage those risks as part of the corporate strategy. 

In the event of legal action

If the worst should happen and your company faces legal action for a breach of regulations, losses or a fine in any of these areas, early legal advice is essential to limit the impact to the company both financially and reputationally.

Contact us as soon as you are aware of a potential problem brewing.  The sooner we are aware of the issues, the sooner we can help formulate a plan to mitigate the damage.

For further information and assistance, please contact a member of our Dispute Resolution team on 01904 624185.

 This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.