Global Taxes

LPD Showcase: Sustainability focus

Thursday 17 November 2022

This session, led by the IBA Legal Practice Division and the Energy, Environment, Natural Resources and Infrastructure Law Section (SEERIL), addressed the role of lawyers in the intersection of climate change, sustainability and corporate governance.

Lillian Rae Lindsay, Clifford Chance, London, England: Even though there's an awful lot of interest and noise these days around sustainability, what it means for business and ESG [economic, social, governance], the focus on these issues by businesses is not entirely new. And there are lots of great companies that have been doing amazing work over many, many years to both make a positive contribution and minimise their negative impacts on environmental and social issues in their communities for a very long time. The Corporate Social Responsibility Movement started back in the 1970s, coalesced in the early 2000s and really took off with a lot of standards and frameworks that guided businesses on how they should manage both their positive and negative impacts on the environment and society.

We had, for example, the UN Global Compact Principles, the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational [Enterprises], all of which continue to guide businesses in these areas and have created governance structures. And interestingly, even though none of these are mandatory legal requirements, they are encouraged by governments.

There's an expectation that businesses will adhere to many of them. The UN Guiding Principles and the OECD guidelines, in particular, now are underpinning new legislative initiatives and mandatory legal requirements in jurisdictions such as Europe.

Although a lot of this is agreed and obviously undertaken at the state level and there's a lot of international policy development and coordination around this with appropriate policy drivers, it's recognised that the private sector has a really important role to play in making sure that all of this does actually happen.

Creating a sustainability framework

A lot of businesses [who] find themselves creating the net zero targets are creating transition plans of how they will get to net zero over a period of time and building business strategies around that because it's the right thing to do and in a way that is, as I say, socially inclusive and takes account of all stakeholders. So that's been one of the main impetuses and drivers of all of this.

Transparency is a theme that underpins sustainability and ESG across the board

Lillian Rae Lindsay
Clifford Chance, London, England

In terms of pressure points, all of the work towards the transition to low carbon net zero economies requires a great deal of mobilisation of finance. So one of the drivers for businesses in terms of trying to burnish and improve their environmental, social and governance credentials, has come from the need for them to obtain finance from investors, and financial institutions are increasingly taking these issues into account. There is, in addition, incentivisation for businesses to develop these sustainability and ESG strategies, increasing law and regulation around how to conduct business sustainability with a view to achieving the policy objectives of governments.

Now, the framework is patchy around the world, but Europe has certainly taken a lead on this and has a very coherent and comprehensive package of measures which are designed to encourage sustainable business and achieve their net zero targets within the time frames that they've set. Europe sees itself as a standard setter in this space, and there's a lot of activity around, for example, sustainable finance initiatives, which are creating requirements and expectations on the finance sector in particular, which includes no less than 50 laws and initiatives designed to achieve this.

The Corporate Sustainability Reporting Directive will require companies to report not only on the impact that the environment, climate change and social issues have on the business and its value, but also on the impact that the company has on the environment and social issues itself. [It will also require] that businesses should conduct on a mandatory basis human rights and environmental due diligence throughout their businesses and their value chains – and we all recognise in the post-Covid era the importance of resilient supply chains. This is going to be enhanced on the sustainability front, by measures like this. Even in areas where companies are not covered by these mandatory measures, there will be knock-on effects.

I think transparency is a theme that underpins sustainability and ESG across the board; whether it's voluntary reporting on issues and disclosures or these mandatory measures, it's a policy tool of choice by governments across the world. What this means is that companies are having to publish information about what they're doing in these areas that allows their stakeholders, investors, consumers [and so on] to have comparability between the behaviours and performances of companies and also allows them to be held to account. And this is one of the key ways in which pressures are being continually placed on companies to adhere to these ambitious sustainability and ESG standards.

William Sisson, World Business Council for Sustainable Development, Avon, Connecticut, US: Today, information is being demanded to be increasingly material. It’s being asked to be verified. Assurance is on the horizon. It’s going under a standardisation process where companies are going to start to look to bring comparable, consistent, credible information together in the way it’s disclosed. And the audience today is largely the shareholders.

That broader collection of stakeholders we just heard about in the capital markets has arrived on the scene. We see a transition from what was one person’s collective responsibility for the firm to be the sustainability voice, to that person [being] responsible for integrating sustainability across functions within the company – functions like the operations, manufacturing, procurement strategy, risk. It’s all going on as we speak and the boards are getting involved as well.

We see executive compensation increasingly tied to the ESG performance of the companies that are putting that information out there

William Sisson
World Business Council for Sustainable Development, Avon, Connecticut, US

In fact, today we see executive compensation increasingly tied to the ESG performance of the companies that are putting that information out there. So as capital markets are engaging in these topics, they’re increasingly asking companies for more detailed information about their sustainability efforts and outcomes to put into their proprietary black boxes, which then give you a rating and an assessment that fits into their portfolios. Today nearly one out of every $3 of assets under management has found its way into an ESG performance fund. And around 43 per cent of the Russell 1000 have committed to emissions disclosures, with the market regulators now taking notice as it has all really gone mainstream. We call this today, in our work, embedding ESG into decision-making.

Energy security is a major topic today in the boardrooms of companies around the world, but we still see this transition and this transformation towards net zero. It's moving from voluntary to potentially mandatory requirements, and there [are] huge time pressures to get this right, to decarbonise. This is potentially one of those areas that we all recognise. This is about access to raw materials, which is under tremendous pressure right now, and Earth's ability to regenerate at the rate of extraction that is going on today.

Systematic inequality in our society is inherently unscalable and must be addressed to enable people to lead healthy, productive and dignified lives. Trends towards decent labour practices across the value chain of production, implying paying a living wage, ensuring safe working conditions and respecting human rights are increasingly visible in the ESG domain.

And then there is ‘greenhushing’ going on. Companies, and especially financial institutions, are afraid of this backlash and so they are setting targets on climate, but they're not disclosing

Motoko Aizawa
Author and Reseacher, Washington, DC, US

Today, we're seeing companies shift [their] agenda from marketing and PR orientation to one in which the C-suite has realised that they need to assess and address these critical risks and resilience in order to protect the firm's future value. This is about access to raw materials. This is about addressing whether volatility and issues impacting their operations. This is about supply chain disruptions that go well beyond what we experienced with [Covid-19]. This is about social unrest in their backyards where their operations are taking place. And this is about the real threat of climate and biodiversity risk.

I suggest this legal community consider how this will transact against corporate compliance and litigation risk involving regulatory pressure, greenwashing and green finance. The emerging standards and regulations that are arriving on the scene, the customer and market expectations that we just heard about are starting to drive into the corporate agenda and products and technology.

The intellectual property associated with climate solutions is going to be a very interesting topic for the legal community. And then this subject of revised valuation, discounted cash flow analysis is going to give way to something different. We're not exactly sure what that is, but it's going to show up and we're going to see this relationship between you and your clients change as a result.

Motoko Aizawa, Author and Reseacher, Washington, DC, US: I am going to talk about this ongoing, acrimonious, strident and very, in some respects, entertaining discourse around ESG, especially centring around financial institutions. So there is greenwashing, and then there are allegations against greenwashing, and whistleblowing against greenwashing in financial institutions.

There's a lot of bickering going on as to whether ESG is too subjective, it's too wishy-washy, it's too unreliable, too expensive, too ineffective. And then there is ‘greenhushing’ going on. Companies, and especially financial institutions, are afraid of this backlash and so they are setting targets on climate, but they're not disclosing. So that's called apparently ‘greenhushing’.

Michael Bloomberg puts it very succinctly: ‘Climate risk is financial risk’. So financial institutions at the individual level are having to contend with physical risks – this is the climate risk on their physical assets. Floods and hurricanes [are] wiping off assets and therefore financial institutions [are] taking losses. There are also transition risks to reckon with. Transition risk is the risk of the economy transitioning into the net zero economy by 2050. That involves policy risks as well as technology risks, and so the climate risks can potentially pose systemic risks on financial institutions.

There is such thing as TCFD. It's called Tax Task Force for Climate Related Financial Disclosure. It's an attempt to get insurers, banks and investors to take into account better climate information in their decision-making, and to connect climate information with accounting statements. And so the regulators are trying to figure out how to incorporate this into their regulations. The proposed regulation by [the] SEC [Securities and Exchange Commission] in this regard is one such effort in this country and it's going to help that we are potentially going to have an accounting standard by [the] ISSB [International Sustainability Standards Board]. So that will make companies’ and financial institutions’ disclosures easier.

Most importantly, [financial institutions] are conducting due diligence, using climate information, using ESG information in order to improve their decision-making. And in some cases, financial institutions are in a position to influence their corporate clients, to improve their behaviour, such as better climate disclosure or potentially improving the quality of their environmental assessment or climate risk assessment and so on.

The real role of the financial institution is to help with the transition, making sustainable finance available. [The] transition must be fair and inclusive and it must create decent jobs for everybody and leave nobody behind. It must address human rights, especially those who are vulnerable and marginalised in the process. Those who are more vulnerable and more marginalised are going to be the first ones, for example, to be negatively affected by technology risks.

Trends in ESG litigation

Samantha Rowe, Debevoise & Plimpton, London, England: ESG litigation covers: climate change, corporate reporting practices, global supply chains, working conditions and diversity, equality and inclusion.

I'm going to focus on the use of the UN Guiding Principles [UNGPs], high courts and tribunals around the world [and] the latest developments in climate change litigation. First, because references to the UNGPs can be seen as an imperfect but a helpful proxy for litigation concerning adverse human rights impacts. And second, because last year a report [was released] examining the impact of the UNGPs on the decisions of national judicial and quasi-judicial bodies across more than 50 national jurisdictions and ten international courts, tribunals and treaty bodies.

International courts and tribunals have generally been quicker to rely on the UNGPs when compared to their domestic counterparts

Samantha Rowe
Debevoise & Plimpton, London, England

International courts and tribunals have generally been quicker to rely on the UNGPs when compared to their domestic counterparts, but the Inter-American Court of Human Rights is leading the way and generally what we’ve seen is regional human rights courts using the UNGPs to really reaffirm states’ obligations to provide access to remedy when adverse human rights impacts occur.

Latin American domestic courts have been trailblazers in using the UNGPs to hold businesses to account. The Constitutional Court of Colombia, for example, has relied on the UNGPs to develop world-leading jurisprudence on local communities’ fundamental right to prior consultation.

In Europe, we’ve seen fewer decisions make explicit reference to the UNGPs. However, Europe has led the way in enacting a proliferation of business and human rights law and regulation that is grounded in the UNGPs, including the wider vigilance, the German supply chain and the Dutch child labour due diligence law, and the forthcoming Directive on corporate sustainability due diligence in Africa. We found that courts tended to rely on other business and human rights standards such as the ILO [International Labour Organization] conventions, along with domestic constitutional rights when determining business and human rights cases. Courts in the US and Canada, I'm sorry to say, have lagged behind their counterparts elsewhere in terms of relying on the UNGPs, although the Canadian courts have issued important business and human rights decisions premised on international law. Finally, it is worth noting the importance of other mechanisms such as national contact points in addressing adverse human rights impacts.

However, we are seeing a growing number of cases against subnational governments – [for example] a series of such cases in Germany recently – companies, trade associations and increasingly individuals. We are seeing claimants shift focus to other high emitting industries, such as food and agriculture, transport, plastics and finance. Actions are being brought through myriad different laws, including securities regulation, consumer protection legislation and often as a follow on from regulatory enforcement.

In short, ESG litigation will force us to re-examine and potentially reimagine tenets of law that currently seem immutable. And finally, ESG litigation is expected to become ever more diverse, encompassing a wider cast of claimants and defendants, sectors and industries, a diverse body of legal principles and instruments, international courts and tribunals and domestic courts in every single jurisdiction in the world.

This is an abridged version of the sustainability focus LPD Showcase at the IBA Annual Conference in October – November 2022 in Miami, Florida. The filmed session can be viewed in full here.