Does your company have a climate-friendly reputation, value the importance of a diverse workforce and have grounded governance policies? When investors want to know more about your company, these are some of the investment considerations.
The latest metric that investors have incorporated into their investment decisions is a corporation’s value as it relates to ESG – Environmental, Social, and Corporate Governance. In this article, we are going to delve into some ESG basics and then discuss why you, as the senior legal leader, CLO or GC, need to play a leading role in ensuring that your company develops and maintains an effective ESG strategy. The future of your company may depend on it.
ESG in Brief
As you know, ESG is a term used to quantify a company’s social and environmental impact. Stated differently, it is a metric that is used to measure a corporation’s “social credit score.” Over the last two decades, the ESG movement has increased from a corporate social responsibility initiative pioneered by the United Nations, into a $30 trillion phenomenon with a surge of capital dedicated to ESG-linked products.
While consideration of social and environmental factors used to be viewed as a hindrance to a corporate entity’s bottom line, the current thinking with regard to the intangible asset of ESG policies and practices is very different. Now, industry analysts find that the failure to consider ESG issues, as part of a company’s long-term investment value drivers, is an abdication of the company’s fiduciary duty.
What Are Some of the Details that Inform an ESG Score?
As the ESG moniker indicates, there are three main factors that fall under the ESG score:
- Environmental issues. Investors, like pension funds, are beginning to respond to the wealth of research on the current global climate crisis. Investors are screening companies with regard to their impact on climate change. In addition, corporate value is more and more reliant on whether the corporation provides sustainable products, or remains dependent on ever-diminishing raw materials. ESG considerations work against industries that rely, for example, on fossil fuels.
- Social issues. A company’s social impact covers the diversity of the workforce; impact on local communities and the health and welfare of its employees; the ability to protect the company’s consumers; and the ability to respect and protect the welfare of animals.
- Corporate Governance issues. Corporate governance concerns center on the behavior of corporate executives. Issues that matter for investors include a company’s management structure, its success with employee relations, its guardrails against excessive executive compensation, and fairness with employee compensation.
In choosing where investment money should flow, investors find that ESG criteria are becoming an increasingly significant factor.
What Role Does a GC Play in Implementing ESG Policies?
It is not easy to find, or justify the cost, of a dedicated, external ESG expert. What that means is that CLO or GC, typically are given the mission to navigate the company’s ESG portfolio. As the CLO/GC, what should your role be with regard to a workable, successful ESG strategy?
In short, your role is to serve as a leader on ESG strategy. Why? CLO/GCs are uniquely positioned to be the arbiter of good corporate practices and ethical considerations. As the senior legal leader, you are an advisor to the executive suite on the legal, ethical approach to defining and achieving corporate objectives.
It naturally follows that the CLO/GC is the person best positioned to set the tone for a corporation’s ethical culture.
- ESG should be the prism through which you view questions related to appropriate company disclosures.
- ESG policies should also inform your company’s litigation strategy. If a scorched-earth litigation approach will diminish the impact of the company’s ESG reputation, then it may be worth reconsidering the litigation strategy with ESG in mind.
- Decisions on corporate compliance should be guided by the ESG implications that may result.
Is ESG Here to Stay?
As you think about ESG concerns, you may wonder if ESG is just another investment trend that will evaporate in a few years. All evidence, however, seems to suggest that ESG is here to stay. Hence, you need to make sure that your company is ready to implement its own ESG strategy and objectives.
- “49 percent of millennial millionaires make their investment decisions based on social factors, not just the bottom line.”
- The European Union’s Sustainable Finance Disclosure Regulation, effective as of March 2021, mandates that asset managers and other financial market participants provide ESG disclosures. That may mark the beginning of a global shift to ESG-mandated public disclosures.
- Sustainable funds – which are funds for those who want to invest within ethically defined parameters – surpassed $51 billion in assets in the U.S. as of December 2020.
GCs are in the perfect position to lead ESG initiatives and enterprise-wide strategies. It is clear that investors are already incorporating ESG concerns into their investment decisions, so your company’s brand and its social credit score depend on effective ESG strategies. Are you ready to lead the ESG initiative?