ESG : Compliance down to the letter

The fact that some 70 per cent of employees are now demanding “purposeful” work and that their employer takes a strong position on social issues illustrates a significant shift in attitudes, one that is realised at the law firm Shepherd and Wedderburn, whose dedicated ESG Advisory Group comprises lawyers drawn from across the firm to assist clients with their environmental, workforce, social and regulatory commitments.

Partner Louisa Knox leads Shepherd and Wedderburn’s pensions team

Louisa Knox, a partner in Shepherd and Wedderburn’s pensions team, explains the group’s approach: “There has been a critical recognition that as organisations – and the law and structures surrounding them – have developed, the concept of ‘people, planet, purpose’ has evolved. That can be further distilled down to sustainability with three supporting pillars: environmental, social and governance.”

The ‘E’, she says, has become an urgent priority because of the need to get climate change under control but adds that all aspects of ESG overlap to some degree: “ESG and sustainability are applicable both internally and externally, and that’s why we have drawn specialists from across the firm into our ESG Advisory Group to better support our clients.”

The pensions team, alongside investment consultants and advisers, is looking at what ESG credentials mean in practical terms. “For trustees and the fund members, for example, there’s now a much more informed and questioning approach as to what’s in their scheme assets and portfolio,” Knox explains.

Head of Clean Energy Clare Foster

Clare Foster, Head of Clean Energy at the firm, says: “I think that of the E, the S and the G, the environmental aspect is easier to explain because there are clear legislative targets in place. We have the UK 2050 net zero goal and the 2045 Scottish Government goal, with Glasgow, Edinburgh and other cities declaring climate emergencies and setting their own more ambitious targets. In addition, there has been a lot of awareness generated by COP26, so it is difficult to ignore this aspect of ESG and more and more organisations now have the environment at the top of their agenda.”

The social and governance aspects, Foster says, can seem more abstruse: “If you are an investor or a bank, how do you quantify these requirements to make a real difference? What does ‘social’ and ‘governance’ really mean from a board and investment perspective and how do you navigate the landscape in terms of the voluntary commitments, the regulatory regimes and the statutory obligations?”

Knox says that shareholder activism and pressure is demanding some of these answers. “We’ve been looking at the challenges of providing data in these areas and focusing on how they are being measured. People are going to be expected to supply more granular detail when reporting their progress on ESG. There is pressure to standardise reporting and set a level playing field. While we’ve seen the legislation put in place and the need to set commitments is coming, there are a lot of people scurrying around in the background trying to supply the data – and there are multiple ways of doing that effectively.”

Partner Gordon Downie specialises in competition law

Gordon Downie, a partner who specialises in UK and EU competition law and another member of the ESG Advisory Group, agrees that measuring the results of ESG compliance is not always simple: “For example, look at the health

and safety agenda. You can consider a company’s performance in terms of its having had an accident, but does that really tell you that its commitment is less robust than that of a company that has never been prosecuted for breaching health and safety regulations but has systematically failed to look after the wellbeing of its employees and has been lucky enough to avoid prosecution?

“When you try to apply a metric to a governance standard such as health and safety you run into problems with the data, which gives you an insight into how difficult it might be to come to a realistic conclusion.”

Different sectors – such as technology, engineering and financial services – also involve different nuances as to how the measurements are interpreted. “There is an overall ratchet effect as companies look to meet the expectations of their stakeholders,” says Downie, who also counsels against the temptation to offer commitments that may not stand up to scrutiny. “The retail sector especially feels a need to present its offerings in a way that appeals to its increasingly astute, sustainability-conscious customers. The risk is that retailers make statements that don’t subsequently stack up, which risks a backlash from consumers and potential reputation damage as a consequence of failing to deliver against those commitments.”

Shepherd and Wedderburn’s own clients are inevitably, says Knox, at different stages of the journey when it comes to ESG: “Some might have focused significantly on health and safety but need more guidance on data protection and post-GDPR audits. Looking at the pensions arena, the regulatory environment is only going one way with increasing compliance requirements that will have to be met.”

Meeting these will be more challenging for some companies than others. After Brexit, Covid, a raft of sustainability targets and now the prospect of dealing with the economic exigencies of war in eastern Europe, Clare Foster says many SMEs are punch drunk and for some the principles of ESG may seem overwhelming: “Many of them are asking themselves: ‘What do we prioritise and how can we afford to do what is needed?’

“They clearly want to measure up to the standards that the major corporates have announced they will achieve but they will need support. We recognise the need for action - our multidisciplinary ESG team works with clients to distil the key elements of ESG and help them plan accordingly to ensure compliance with the various legislative and regulatory requirements. It must be remembered that the underlying principles of ESG can create value and a positive, sustainable and fairer future – that is something that everyone should want to embrace and contribute to.”

For further information on Shepherd and Wedderburn’s ESG Advisory Group, you can contact Louisa Knox at louisa.knox@shepwedd.com