Legal advisers and the transition to a sustainable economy

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Daniel D'Ambrosio
DLA Piper, London
Daniel.DAmbrosio@dlapiper.com

Roberto Randazzo
R&P Legal Studio Associato, Milan
Roberto.Randazzo@replegal.it

One of the many lessons of 2020 will be that a sustainable and inclusive economy – that promotes positive, long-term economic, environmental and social outcomes – requires cooperation, engagement and innovation from all stakeholders.

Legal advisers have an important role to play in this economic transition by supporting business decision making to consider longer-term time horizons and the spectrum of environment, social and governance (ESG) issues holistically. This includes working with businesses and investors to:

• understand key terminology and concepts to align actions with stakeholders’ expectations;

• navigate an increasingly complex normative landscape of interacting and interconnected legal regimes, legal systems and legal forms; and

• translate this all into practice, addressing key challenges such as ensuring access to remedy and improving impact measurement of human rights issues.

Understanding key terminology and concepts

Terms like sustainability, impact investing, business and human rights, climate change and ESG receive daily mention in the media. Navigating this maze of terminology can be difficult for global regulators, policy makers, investors and businesses alike. However, a coherent and consistent understanding of these concepts is key to ensuring that business action is aligned with stakeholders’ expectations.

Sustainability refers to the ability of businesses and investors to create value over the long term with reference to the ESG dimensions of their operations, supply chains, investments and ultimately performance. ESG is a tool that businesses and investors use to guide decision-making and operational considerations, and to measure sustainable performance. It isn’t a destination or a thing in and of itself.

The labels ESG, impact investing, and sustainable finance are different ways to describe a path to sustainability focused on finance and investment decision making, albeit with slightly different approaches and objectives. Impact investing and sustainable finance both seek to drive financial returns over the long term with reference to ESG considerations, rather than just quarterly earnings. However, impact investing weighs more importance on positive ESG-related impacts. In short, ESG is about framing best practice organisational performance; integration and impact is about generating positive impact alongside a financial return.

Impact investing focuses on embedding positive economic, social and environmental impacts into investment strategies, using the principles of ‘intentionality, measurability and additionality’:

• ‘Intentionality’ means impacts should be targeted intentionally and the investment should achieve a positive benefit for society, which requires an explicit before-the-event statement and an investment strategy that proactively pursues economic, social or environmental goals;

• ‘Measurability’ means impacts should be measured quantitatively and qualitatively, ideally by independent third parties to maximise trustworthiness and credibility; and

• Finally, ‘additionally’ requires that the investment is made in undercapitalised areas, considering whether the impact outcome would have occurred without the investment.

Navigating the normative landscape

Business and human rights – which is about embedding a corporate responsibility to respect human rights into business decision making – and addressing the climate emergency are core sustainability challenges. Both areas are driving significant legal and regulatory change across jurisdictions and financial markets.

For business and human rights, the baseline is the UN Guiding Principles on Business and Human Rights (UNGP) and the Organisation for Economic Cooperation and Development’s Guidelines for Multinational Enterprises (OECD Guidelines). For climate change, the baseline is the 2015 Paris Agreement and the Recommendations of the Taskforce for Climate-related Financial Disclosure (TCFD) with a science-based objective to limit global temperature increases to well-below 2°C above pre-industrial levels and pursue efforts to limit temperature increase to 1.5°C.

These are not separate agendas or concepts. They are intertwined across the spectrum of ESG issues. This is acknowledged increasingly in law and practice both at the domestic and international level where, for example, consideration of environmental impacts will be intertwined with definitions of human rights. We have already seen a number of prominent examples of this, including:

• Dutch courts acknowledging a clear link between climate change and human rights obligations in the Urgenda case. A number of other national courts are moving in a similar direction, for example, France and Norway;

• National Contact Points considering climate change in the context of human rights obligations in the OECD Guidelines, with climate change being similarly considered by National Human Rights Institutions; and

• international human rights jurisprudence articulating the impacts of climate change in human rights terms, for example, the right to a healthy environment.

The key for businesses and investors is understanding the financial tools, legislative frameworks and other rules, legal and remedial mechanisms and local and global political discussions developing around these labels that are converging to create a shared purpose: holistic consideration of ESG issues in the context of long-term value.

Addressing practical challenges

Diverging approaches across jurisdictions

Translating these developments into practice is challenging. Different jurisdictions are reflecting sustainability differently in areas such as:

• legislation;

• fiscal incentives;

• fiduciary duties;

• fiscal support for mission-related/ESG investments;

• reporting and transparency requirements;

• compliance regimes;

• board accountability;

• sustainable/impact frameworks;and

• innovative financial tools to help scale up financial products.

For example, the EU has developed the EU Taxonomy Regulation as the pathway to ‘net zero’, and climate risk disclosure aligned with the TCFD is increasingly becoming mandatory in Europe, but we have not seen parallel trends in the US or other major regions yet. Similarly, sustainable corporate governance is a key legislative priority in the EU, but in Australia recent proposals were pushed back on.

Increasing regulation of ‘soft law’ standards

Another challenge is the complex galaxy of regulation, laws, standards and voluntary requirements driving consideration of ESG risks and opportunities across business activities, supply chains and investment strategies. Many voluntary requirements are becoming mandatory – and at the top of the list is the TCFD and the UNGP. It is no longer a matter of if, but when.

Regulation will integrate more holistic consideration of issues across the ESG spectrum into business activities and investment decision making. Two prominent examples are commitments by the EU to:

• integrate social performance metrics into the EU Taxonomy Regulation beyond their inclusion in the concept of ‘minimum safeguards’ requiring alignment with the UNGP and OECD Guidelines; and

• develop due diligence legislation addressing human rights, environment and governance risks in global supply chains in the context of reorienting corporate governance rules.

This should drive businesses and investors to innovate and demonstrate impact in areas that have proved challenging in the past. One such area is human rights risks,  where developing key performance indicators (KPIs) and impact metrics is challenging – in part because these issues are less susceptible to quantifiable measurement than environmental impacts.

Addressing novel liability challenges

A common thread across all of these developments is the overarching objective of driving different types of behaviour that reorient decision making to consider longer-term time horizons and the spectrum of ESG issues holistically.

This raises novel legal issues. For example:

• balancing environmental and social impacts with an increasing civil liability landscape; or

• ensuring an appropriate consideration of the interaction between global and local norms so that social licence to operate is maintained.

Though novel, these issues are not insurmountable, and lawyers must develop solutions that promote positive economic, environmental and social outcomes while navigating legal risks. This might include more holistic remedy ecosystems that engage global and local stakeholders beyond opportunities provided under existing private law mechanisms.

Looking ahead

The coming years will see best practice emerge to address some of the key challenges in this space. For example:

• better use of data from grievance processes and remediation mechanisms will improve risk mitigation; and

• the development of consistent definitions and approaches to measuring ESG dimensions will enable comparability and qualitative assessment of business activities, supply chains and performance.

To that end, the recent announcement by the Sustainability Accounting Standard Board, the Global Reporting Initiative, the Carbon Disclosure Project, the International Integrated Reporting Council and the Climate Disclosure Standards Board that they will collaborate on and harmonise their complementary approaches should go a long way to addressing the challenge.

Cooperation, engagement and innovation from all stakeholders is at the heart of the sustainability agenda. Whatever the path, lawyers have a key role to play. More effective engagement between policymakers, investors, businesses, lawyers, workers, communities and wider stakeholders is key to reorienting global economies to support a shared sense of purpose around long-term value.

Note: The authors would like to thank Elise Groulx-Diggs, Martijn Scheltema, Steven Gray and Christopher Garner for their contributions to this article.