Alex Rhodes
Welcome everybody. I’m Alex Rhodes, Head of Mishcon Purpose and I’ll be your host today. Thank you very much for joining us for this Mishcon Academy Digital Session, which is a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals. This is the second in a collection of conversations that we’ve called ‘Purpose Matters’. In each conversation I bring together specialist lawyers from across our firm with leaders in sustainability and responsible business. Today, we’re going to strip away the noise and identify clearly the family of Environmental, Social and Government issues which have become known as ESG and explore why they matter to companies. In particular, how ESG is transforming the way companies and investors think about risk and how corporate Government standards are evolving to meet demands for greater accountability and transparency. I’m really excited to be joined by seasoned multi-national Corporate Affairs Director, Matt Peacock, who is a partner at the strategic and creative advisory firm, Blurred, and our very own expert on corporate governance, Legal Director Kate Higgins. Matt, perhaps I can ask you to start us off? ESG. Can I ask you to unpack at the beginning so we know what we’re talking about, what these three factors, Environmental, Social and Governance are and how we should understand them as a single proposition?
Matt Peacock
Yeah. Okay. So, I mean ESG is an aggregation of a bunch of different things and each of the individual components are not new. Okay, so one of the components in ESG is ecological risk, the extent to which companies have negative impact on the environment. You know, there have been rules and regulations and best practice around the management of water for example, going back centuries. So, the individual parts of ESG are not new. Just so we’re all clear, when we’re talking about ESG, essentially there are six sub-categories that are bolted together under this three-letter acronym. The E splits down into two; so the E is, on the one side it is climate, so carbon and energy. But also it’s a natural resource and ecological risk. So, the impact of an organisation on the immediate environment around it. The S splits down into two; internal stakeholders, which is essentially how the organisation is treating its workforce and the workplace conditions of the workforce and then external stakeholders, which is predominantly about human rights. The impact of the organisation on the community and society around it from a human rights perspective. And then the last bit, the G also splits down into two; on the one side you have what you could call traditional corporate governance. So, the obligations that a company has towards its shareholders, things like board independence and shareholder rights and then alongside that, the final part, is corporate culture. It’s questions of business integrity, issues like bribery and corruption for example. The extent to which the company manages its culture so that it acts with integrity. What they all have in common and this is why they are bolted together and why they are one of the biggest sort of… ESG is one of the biggest transformative changes in business, certainly in my working lifetime, is because they all have in common a re-wiring of the way companies mitigate and identify risk. So, what are the bad things that could happen to us as a company? You know, that is traditionally how companies look at risk. It’s the things that could happen to us. All of those different sets of ESG risk flip that on its head and what the company is required to do is to think about what are the risks that it could have in terms of the impact on the outside world? The impact on people and the impact on the planet and on a much longer timeframe – typically on a five to 10 year period. That in turn produces a different way of thinking about resilience. This is why ESG has become such a powerful force in the investment community and in business more generally. What’s emerging is that companies that think hard about their ESG risks and invest in the time and the expertise needed to manage them, prove to be much more resilient and much better placed to protect the value over time when something like Covid comes along.
Alex Rhodes
Kate, Matt’s given us that taxonomy. When we’re looking at how this is being driven from outside and where regulators are coming in, is that an accepted taxonomy? Is there a standard scope?
Kate Higgins
We’re starting to see regulations stepping in here and of course we’ve had pockets of regulation in the past but we are now starting to see Europe stepping in with its own definitions, its own taxonomy and then of course, you’ve got the standards that are out there. So, I think just sort of I’d like to add to what Matt is saying here. I think there is two elements that we see that come out of both the EU disclosure regulation which is one important place where we can see a definition starting to emerge and also from the standards themselves. One is doing good and the business being seen to do good and being a positive force, which is where the purpose comes in and the other is an assurance that the business is doing no harm and what we’re seeing with the standards that are out there and with the definitions that we start to get from the EU is both those elements coming into play and having some checks and balances and the governance piece of course is about making sure that you’ve got the risk management procedures in place to make sure that not only is the business doing no harm now but it’s not going to be doing harm going forwards.
Alex Rhodes
Matt, what I was going to ask you is just in your day-to-day work at the moment with companies, where are your clients sort of struggling with this? Where are their sticking points?
Matt Peacock
Well, I think sort of the first and most important sticking point is getting their heads around the sheer complexity of what’s expected from them. To be blunt, a lot of these when you get into the detail of them, actually overlap or even contradict. So, the first and the hardest thing for many companies to understand is just, you know, what does ‘good’ look like? What do I need to do in order to get to single A rating, or double A or even triple A rating from an ESG ratings agency? The answer isn’t simple unfortunately because these standards are all pretty new. The underlying problem here for a lot of companies is that whilst the kind of categories of risk are really, really well understood you know, we know what human rights risks and the supply chain for the garment industry look like. You know we know what water constraints for beverage companies’ look like. What isn’t as clear is how you measure the extent to which the company’s mitigations of those risks are effective and even less clear to investors and to ratings agencies, how you compare one company’s measures against another in a kind of objective and quantitative way.
Alex Rhodes
Kate to draw us into corporate governance, Matt in his introduction talked a little bit about the different approach that needs to be taken to ESG risks than to external or traditional risks, if we think of it in those ways. Can you tell us a little bit more about how boards are approaching this and how they should?
Kate Higgins
Well, of course again it’s not me really. We’ve got concepts of ESG written into our director’s duties and our corporate code and we’ve had corporate governance code rewritten in 2018. People are reporting against them now and what they say is really this is right in the remit of the board, it’s no good delegating it to someone here or there in the organisation to deal with. But risk is front and central to what boards of directors should be thinking about and you need to look at these issues, align them with their corporate purpose and your stakeholder engagement. So, that’s one of the things that happened in sort of more recent years and you know, not every company will be adhering to a corporate governance code. We’ve got lots of private companies but what we’re really seeing with the private companies is if they want to get investment, if they want to get lending, if they want to get insurance, these sorts of questions have got to be addressed and they’ve got to come up against them. So, it’s about having the right governance structures in place. It’s about having the right engagement structures in place. It’s about having the right remuneration structures in place. So, I think you know, we’ve got as I’ve mentioned, we’ve got quite a lot of regulation coming down the line that’s going to put the pressure that is exerted by the investors and filter that down further and I mean, Matt was talking about you know, the way that people have… that companies in the past have just been saying what they’re doing and picking up on the positive things. What I think we’re really seeing is a whole series of metrics and criteria now that you will be, we will not only be having to report what we do to the people that invested in us but we will also be turning to people like lawyers to be writing the protections into the contractual documentation where we’re dealing for example with the supply chain. Where we’re writing things into the investment documentation and also to do the due diligence and it won’t just be us it will be other advisers to do the due diligence to make sure that there’s some sort of assurance.
Alex Rhodes
Lots of people were saying that 2020 was going to be the sort of ESG revolution and then we find ourselves in this pandemic with everything that comes with it. Matt, with the companies that you’re working with, how do you find them striking the balance there?
Matt Peacock
Well, I mean in a sense, certainly the clients we work with, the pandemic has acted as a sort of a magnifier and an accelerant. In that it’s magnified trends that were already emerging before the pandemic started and it’s accelerated the pace of change within those trends. So, one of the immediate consequences is that it’s almost as if ESG at the moment is SEG. Social factors have come to the fore. Not because all the environmental issues have gone away and been resolved, far from it, quite the opposite. They are, if anything, even more frightening and more acute than they were before. But what’s also become clear to companies is that not only do they face serious questions about their resilience in the face of the climate crisis, they face serious questions about human resilience that are being exposed by the pandemic. And that’s human resilience right the way through the organisation from what would happen if the key leadership roles in a particular organisation were suddenly vacant because someone became seriously ill or died from Covid, through to the workforce itself you know, how can you adapt your workplace so that people can continue to be productive whilst meeting these new very onerous requirements about social distancing? And all the way down through the supply chain. So, Covid has essentially forced companies to think really, really hard about human resilience right the way through their business.
Alex Rhodes
Kate I thought I’d bring it back to the advice that we’re giving clients. Would you talk a little bit about sort of where our clients are asking for advice and where we’re providing that across the picture?
Kate Higgins
Yeah. I mean you know almost as well as I do, Alex that this is impacting all areas of the firm. Both our service line, so the practice areas and our sectors. You know, we are being asked on every front and I think it’s just even where we were advising on things that perhaps would seem routine like having a policy on diversity, all of these things it’s all part of ESG and actually knowing where the standards are and knowing what the requirements are is really key to what we do.
Alex Rhodes
Matt, I wanted to ask you, I thought I might just go back to what you were saying earlier in relation to ratings. There are all sorts of ratings agencies that give all sorts of ratings and the approach that ratings agencies are taking to ESG is quite different. When companies are thinking about sort of ESG readiness, how would you see them approaching that? Is it on a sort of sector basis or…?
Matt Peacock
Yeah. I mean, this is honestly, this is one of the hardest aspects of the whole ESG journey for any company you know, there isn’t a single standard template and for a board or a leadership team that’s coming to this whole question afresh, that can be really quite frustrating. It is starting to get better. The climate part is starting to stabilise. Probably the most important change of all is that SASB’s – Sustainability Accounting Standards Board, materiality map that’s, in my view, that’s the most important change that’s happened in ESG in easily the last five years. Because at least it gives everyone a common template for identifying what the risks are and I think what we’ll find, picking up on what Kate was saying earlier about the work that the European Commission is leading and the creation of a standard taxonomy, what will happen over time is the sort of rather vague and fuzzy concepts around well what is a human rights risk programme that a company in the extractives industry should have? What should that look like? It will move away from being essentially interpreted towards something that is much more assured, audited, measurable and comparable.
Alex Rhodes
Thank you Matt and with that, due to bad chairmanship, I run just over our allotted time. But Matt, Kate, thank you very, very much and thank you all for joining us.
The Mishcon Academy Digital Sessions. To access advice for businesses that is regularly updated please visit Mishcon.com.