Businesses must look beyond the E of ESG: Kate Howard

Social factors are underpinned by notions of fairness and equality. They not only include how a business treats its employees and people working in its supply chain, but also its wider impact on society and the communities in which it operates.

Many business owners will already be familiar with social considerations such as DEI, health and safety policies, and, depending on size, gender pay gap reporting and the publishing of modern slavery statements.

Regulatory pressure on businesses is only likely to increase – think ethnicity pay gap reporting, duties to prevent sexual harassment and increased transparency of due diligence processes.

Businesses will also likely need to consider potential implications of the use of AI, including the risk of bias and unethical outcomes.

Governance criteria relate to the transparency and accountability of a business, including its decision-making, audit and reporting processes.

Good governance may include accurate reporting to stakeholders, an independent and diverse leadership team, transparency surrounding executive pay, and clear policies relating to anti-money laundering, conflicts of interest and bribery.

Most business owners will already be on top of much of this, but here too scrutiny and requirements will inevitably increase, particularly where good governance is essential for the effective management of environmental and social issues.

Businesses that do not proactively adopt an ESG framework that takes into account social and governance factors (including in subsidiaries and supply chains), or that simply pay lip service to them, face a multitude of risks. In some circumstances non-compliance could result in regulatory action, civil or even criminal liability – for example, compliance failures related to human rights abuses, health and safety breaches or bribery.

Organisations also run the risk of reputational harm. You don’t need to look far to read about the brand damage suffered by major fashion retailers, coffee chains or beauty brands accused of workforce exploitation and forced labour in the pursuit of profit.

Revenue may also be affected, for example, as consumers seek out more sustainable products or choose to engage with businesses they perceive to be more trustworthy.

Not only does failing to adopt a robust ESG framework now pose a greater risk to businesses, there is also a greater likelihood that offenders will get caught. As internal and external stakeholder interest in social and governance factors increases, so too does scrutiny, and, with reporting obligations also on the rise, businesses are less likely to get away with non- compliance, opaque practices or misleading statements.

You’ve heard of greenwashing, but what about social washing?

Proactively managing social and governance issues is not just about doing the right thing.

Adopting and implementing policies and practices to prevent and address abuses can not only reduce risk and the costs of addressing issues reactively, but can also help with the attraction and retention of customers, investors and employees.

Kate Howard is an Associate in the Commercial Litigation team at Stewarts