Our recent series of articles has looked at various aspects of corporate governance from an ESG (environmental, social and governance) perspective. More information can be found in our previous articles on why SMEs need to take ESG seriously, how directors’ duties might be affected and the impact of ESG on corporate transactions.
Understanding the importance of ESG from a business perspective is very different to taking the practical steps necessary to address any shortcomings. Given the broad range of topics that ESG covers, it can seem incredibly daunting for anyone tasked with improving an organisation’s ESG credentials.
In this article we have set out our five top tips to help businesses tackle the seemingly mammoth task of ESG.
Every business is different and there is no ‘one size fits all’ solution to how to improve ESG performance. As a first step, we would always recommend looking at your own business and understanding what it relies on for success.
Most likely, your success will be dependent on your workers, customers and suppliers - with one of these groups at the top of your list and the other two not far behind. These three factors are integral for any business to succeed but there are many others such as property, location or compliance with certain regulations.
Once you have ascertained what the key driving factors are behind your business you can then review the processes and policies in place for each aspect and consider how to make improvements from an ESG perspective. This could include implementing new ESG-related policies, updating supplier contracts to include ESG criteria or simply switching energy suppliers.
To assist businesses with this process, Penningtons Manches Cooper has created an ESG checklist which provides a framework for organisations seeking to improve their ESG credentials.
Greenwashing is big news at the moment, with a number of businesses being targeted for making false or misleading statements about their supposedly ‘green’ credentials. It is therefore vital to ensure that any statements made about an organisation’s ESG performance (whether internal or external) are unambiguous and based on reliable data.
To read more about identifying and mitigating ESG risks, along with the issues that can arise from greenwashing, see our articles here and here.
It is common for businesses to announce ambitious targets, particularly when it comes to ESG matters. Although ambition around ESG should be applauded, it is also important to ensure that the targets are realistic and have a clear framework to enable them to be achieved. Making bold statements that cannot be supported are likely to be quickly dismissed, leading to possible reputational damage, professional embarrassment and, in some instances, costly litigation.
An organisation’s constitutional documents (articles of association, partnership agreement etc) will form the basis on which directors and the management team make decisions. Often these documents go further than what is prescribed by law and incorporate a business’ ethos.
Any business serious about making positive changes from an ESG perspective should consider updating their constitutional documents to reflect this. Such changes would mandate that the management team must take account of the wider impact of decision- making and not just company profit.
Businesses looking at B Corp certification, an independent certification for businesses who meet high standards of social and environmental performance, are already required to amend their constitutional documents to reflect this shift. For organisations not yet ready to become B Corp certified, there is nothing to stop them from updating their constitutional documents to give boards the necessary power to instigate change.
It is crucial that anyone tasked with the responsibility for improving a business’ ESG performance is able to effect action at every level. While meaningful change will require engagement across the board, effective change must be made at the highest levels if a business is to be taken seriously.
By making everyone, including management, accountable to those responsible for implementing ESG changes, it will ensure that they are seen to be ‘walking the walk’ and not just ‘talking the talk’.
While the concept of ESG has been around for several years, the wholesale changes to reporting standards and increased expectations from stakeholders is a relatively new shift. It is understandable that many businesses will be uncertain about the best steps to take and whether their proposed changes comply with legal and regulatory requirements.
Any business that is unsure of its obligations or the potential ramifications of making various changes should always obtain appropriate professional advice. This includes not only legal advice but also accounting and, where appropriate, advice from specialist ESG consultants.
As improving a business’ ESG credentials is not something that will happen overnight, it is important to remember to take things one step at a time. For the majority of businesses, while there are currently limited legal obligations with which to comply, this presents a great opportunity to start considering their key commercial drivers, identify areas for ESG improvements (whether implementing them now or at a later stage), and ensure that management is up-to-speed with their duties and responsibilities. This forward-looking approach will help to ensure that their businesses are well-placed when regulators seize on SMEs to drive the UK’s green agenda.
As we have already discussed in this series, there are several benefits to taking early action on ESG matters. However, that should not deter organisations if they can only make small changes for now. Simply starting a dialogue with stakeholders and being transparent about realistic ambitions can often be an incredibly positive step forward, particularly for businesses who are not yet able to make significant changes.
Penningtons Manches Cooper is always happy to discuss business needs with its clients and we can help to point businesses in the right direction where any advice required falls outside our specialist legal knowledge.
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