Environmental, Social And Governance (ESG) And Supply Chain Risk Management

• Jurisdiction: European Union
• Published date: 19 July 2023
• Subject Matter: Corporate/Commercial Law, Environment, Real Estate and Construction, Corporate and Company Law, Corporate Governance, Environmental Law, Construction & Planning, Waste Management
• Law Firm: Fenwick Elliott LLP
• Author: Mr Ben Smith, Oliver Weisemann and Tajwinder Atwal
• topic: Business of Law,Construction Law,Environmental Law,Corporate / Commercial

Introduction

It is uncontroversial that ESG is a boardroom level issue for many businesses, and this is unlikely to change in the near future. ESG is pervasive and cuts across many different aspects of a what a business does or areas with which it may be involved. With new and pending legislation, a Court of Appeal judgment, as well as a UK Supreme Court judgment, ESG and risk management, particularly in relation to supply chains, is fundamentally important for every company to prioritise.

Key considerations:

• Increasing demand for transparency and accountability by the public and non-governmental stakeholders.
• Introduction of legislation that increases businesses' reporting requirements.
• Expansion of legal responsibility to cover actions of the supply chain.
• How do you manage the risk?

Increasing demand for transparency and accountability

There is increasing pressure on companies to adopt "best practice". A survey by PWC in 2021 found that 83% of consumers think companies should be actively shaping ESG best practices and 86% of employees prefer to support or work for companies that care about the same issues they do. These are striking figures. Companies can also find themselves named and shamed where they fail to meet the standards expected of them.

Legislation

EU Legislation

The European Union and its member states have been particularly active in developing new legislation related to ESG.

In 2014, the EU took the first major step towards a new ESG framework by implementing the Non-Financial Reporting Directive ("NFRD"), which introduced reporting requirements for large companies, including listed companies, banks and insurance companies. Under the NFRD, these companies are under an obligation to publish information related to environmental matters, social matters, human rights, anti-corruption and bribery, and diversity of company boards¹

In 2019, the EU implemented the Sustainable Finance Disclosure Regulation ("SFDR"), which imposes mandatory ESG disclosure obligations and introduces rules for reporting on sustainability and ESG factors. For example, it states investments must not "do no significant harm". This means that if an economic activity contributes to an environmental or social objective, then it should also not significantly harm any other social or environmental objectives.

This is being taken further with the implementation of the Corporate Sustainability Reporting Directive² ("CSRD") in January 2023 (set to be implemented by EU member...