Organizational Change
How Lawyers, ESG Experts See the Future of Regulatory Compliance

In the midst (and potentially mist) of the recent Volkswagen emissions scandal, there was no better time to discuss the ESG (environmental, social and governance) regulation space than SB’15 London. Marjella Alma, CEO of eRevalue, led Wednesday afternoon’s session with a diverse panel of representatives from law, corporate and investment branches: Chris Burkett, lawyer at Baker & McKenzie LLP; Kristie McIntyre, Director of Social and Environmental Responsibility at HP Inc.; Martina Macpherson, Associate Director of Corporate Management at Hermes EOS; and Will Martindale, Head of Policy at UN-supported Principles for Responsible Investment.

Alma introduced the session with an overview of the role of regulation within the corporate sector and the shift of ESG matters from a voluntary to regulatory consideration. Regulation can often be seen as a nuisance by forward-thinking companies, with its perception as a pre-condition for setting low minimum requirements and a barrier for more progressive action. Its role as a baseline-setter may produce some challenges, Alma admits, but there is still room for it to play a more positive role in improving standards.

eRevalue uses technology and data to analyse regulatory developments and advise sustainability professionals on company vulnerability to risk factors such as current and future regulation. The key question eRevalue asks is: How can it ensure a business is still around in 2020?

“In the 1920s the average lifespan of a company was 67 years,” Alma explained. “Now, the average lifespan of a company is 15 years. The prediction is that by 2020, 75 percent of the companies in the S&P500 are not around today.”

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highlights!Business and markets are in an area of disruption for two key reasons: technology and ESG regulation. This makes a friendship between corporate ESG professionals and lawyers absolutely crucial for a company’s survival. ESG risk and compliance is a key driver of failure. There are now 1,500 ESG-related regulations in place covering five key topics: waste, occupational safety and health (OHS), labour rights, energy, and product and service safety.

Burkett provided some insight from a lawyer’s perspective. In recent years there has been a wave of change from voluntary CSR activities to mandatory reporting and transparency — as a result, an increasing number of companies have been approaching him for strategic advice.

Focusing on the issue of human and labour rights, he explained why this was such a crucial issue for companies, and how the regulatory environment has changed in recent years. As most are now aware, supply chain management can be absolutely crucial for a brand to maintain a positive reputation. Yet still, 27 million people are still in forced labour worldwide, 14 million of which are in direct support of the global marketplace.

In response, a number of international organizations came together to put the pressure on governments to fulfil their role in protection, and put responsibility on corporations to uphold these standards. The emergence of regulation was aimed at setting at least a minimum standard. A number of global instruments have been led by the UN’s 2011 Guiding Principles on Business and Human Rights.

“What we’re seeing is a trend where this is moving away from being voluntary towards mandatory,” Burkett explained. “What this means is that it will catch the attention — if it hasn’t already — of your legal teams. So there’s an opportunity here to collaborate because the brand risk is so great and now there’s a legal risk. It’s an opportunity to capture the attention of people in all levels of the company on these issues.”

Macpherson then shared insights on how the evolution of the ESG regulation landscape has shaped her role as a sustainable investment adviser. Hermes has a portfolio of 1,000 companies, 400 of which it actively engages with. For Macpherson, ‘ESG’ is really referred to as ‘EESG’, with a strong ‘economic’ regulatory aspect in the form of fiduciary duty considerations.

Fiduciary duty is a particularly interesting element of the ESG regulatory landscape. Although ESG considerations are seen as important to fiduciary responsibilities, they are not yet mandatory in the UK. There is need for clearer mandate and full commitment on their inclusion in this legal obligation — a signal that is still outstanding, Macpherson says.

Hermes engages with a wide network of groups, including companies, policymakers, local legislation, other investors and civil society groups. This collaborative network is key as some elements are hard to address in isolation — especially issues concerning social regulation and expectations.

Why is ESG important to a company like HP? McIntyre explained five key factors:

• consumers now expect it;
• commercial customers now expect it to meet their own sustainability targets;
• 90 percent of HP’s worldwide annual revenue depends on social and environmental compliance requirements;
• employees value it (especially the rise in millennial expectations);
• investors are increasingly looking for this in their investment decisions.

McIntyre said HP has three key legacies at the heart of its mission and conduct: protecting the environment, strengthening society, and uncompromising integrity; ESG matters lie central to all of these core values.

McIntyre highlighted the four key steps in the development of regulation, starting from the academic theory of an idea; leading to think tank/NGO adoption; to government research/white paper development; and finally to regulation. HP is always trying to stay ahead of the game.

“We try to engage at all levels because it helps us get ahead of the curve,” she emphasised. “We don’t wait for regulation because our customers don’t wait for regulation. They just ask us for stuff and we’ll get on and do it.”

From his experiences in the responsible investment sector, Martindale elegantly highlighted the three ways investors can integrate sustainability into their portfolio:

1. Do no harm: This includes decisions such as divestment from activities with high negative impacts e.g. coal;
2. Do good through traditional investment methods by selecting more responsible company opportunities;
3. Financial innovation: making positively driven investment decisions such as blended finance of green bonds.

Martindale is optimistic about the future of more responsible and sustainable investment; many investors see them as highly important considerations in any investment decision. He admitted, however, that regulation and advisory facilitators were not yet clear enough to send the correct signals. The necessary data signals for ESG considerations are still lagging. He noted the significant potential to switch the trend from individual investment actors towards a wider ESG-conscious infrastructure in the investment chain.

An issue that all panellists strongly agreed on was the misalignment around ESG, sustainability, CSR indicators and terminology. The scalability of uptake in these matters could be increased by providing more clarity and reducing the ambiguity in dialogue. Companies will be more responsive if you make these issues easy and clear to engage with.

“Initially we had to isolate these issues into a bucket to put the spotlight on them to say ‘we call this ESG’, ‘we call this sustainability,’ or ‘we call this CSR’ to get the proper attention for it,” Alma concluded. “It feels like now we’re entering into the mainstream where we’re just talking about issues. I think that’s the key transition we’re seeing.”