ESG Market Alert – August 2022

In this month’s ESG Market Alert, we cover:

• New UN guidance on how businesses should ensure respect for human rights in conflict-affected areas;
• The FCA’s  feedback on the integration of ESG criteria in UK capital markets; and
• What’s new in market practice: Climate tech funding defies market trends.

New UN guidance on how businesses should ensure respect for human rights in conflict-affected areas

The UN has published updated guidance on how businesses should ensure respect for human rights in “conflict-affected” areas (the "Guide"). The Guide is based on the United Nations Guiding Principles on Business and Human Rights ("UNGPs"), which emphasise the need for businesses to carry out 'heightened' human rights due diligence when operating in areas where there is existing or potential conflict, as such businesses face an increased risk of being found to be complicit in human rights abuses committed by other actors. Whilst there is no universal definition for the term “conflict-affected” areas, the Guide stipulates that it includes, but is not limited to, areas that experience “various levels of armed conflict or widespread violence including inter-state or civil war, armed insurrections, violent extremism or other forms of organized violence”.

Expanding upon the UNGPs, the Guide states that businesses must evaluate the actual or potential adverse impacts on people and on conflicts to which they may cause or contribute. The Guide recommends that heightened due diligence should be carried out on an ongoing basis, given the dynamic nature of conflict, and provides useful information on best practice for the scope of due diligence in this area. It also provides a list of considerations for determining adequate measures to mitigate human rights risk, for example by identifying impacts on vulnerable groups and planning exit strategies.

Businesses should also be aware that they may need to consider other standards in addition to human rights (which apply in all situations and may be temporarily suspended during states of emergency and armed conflict). In particular, the Guide says that businesses “should respect the standards of international humanitarian law” (which is applicable only in armed conflicts but does not allow for any derogations). Businesses, including individual managers and staff, operating in conflict areas that fail to respect human rights and international humanitarian law standards are at increased risk of legal liability both in terms of criminal liability for the commission of, or complicity in, war crimes and crimes against humanity, and in terms of civil liability.

For further information on the Guide and the UNGPs, please click here. For further advice on how we can support you, please contact our Business and Human Rights team.

FCA Feedback on ESG integration in UK capital markets

The FCA has published a summary of its feedback on the integration of ESG criteria in UK capital markets. This included feedback on the rapidly expanding, but currently unregulated, markets for ESG data and rating providers – independent third parties that evaluate companies’ ESG performance based on their own metrics and assessment strategies (“ESG DRPs”). Capital market participants, including corporations, investors, and advisors, are becoming increasingly reliant on ESG information provided by ESG DRPs, both when it comes to making investment and capital expenditure decisions and when it comes to complying with their ongoing reporting obligations.

The FCA concluded, based on its assessment of the responses to its Consultation Paper, that there is a rationale for increased regulatory oversight of ESG DRPs and for a globally coordinated approach. The FCA has therefore committed to engaging more closely with businesses with regards to their use of ESG DRPs when pursuing ESG investment strategies and will work with the Treasury to develop and consult on a new regulatory regime. For example, in determining what is a “sustainable investment”, the FCA is considering the inclusion of a requirement that the issuer undertakes appropriate due diligence on any sustainability related data, research and other analytical resources on which it relies when making any ESG/sustainability statements, including when it uses information provided by ESG DRPs. In the meantime, the FCA will work with the Treasury to produce a voluntary code of conduct, which may continue to apply to ESG DRPs pending further regulation in this space.

Given the rapid expansion of the market for ESG DRPs and their increasing influence on investment and capital expenditure decisions, it is likely that this market will continue to be subject to FCA scrutiny.

What’s new in market practice: Climate tech funding defies market trends

While the global venture capital market slows down in response to ongoing supply chain issues, rising inflation and the challenging political environment, there are signs that climate tech funding appears to be resistant to this slowdown. For the first half of this year, investment activity in climate tech businesses is on track to equal 2021’s record numbers, whereas both the dollar value and the number of deals fell for the venture capital market as a whole. This trend is particularly noticeable in respect of early-stage companies. Where early-stage climate start-ups were previously deemed highly risky, an improved talent pool and heightened global focus on climate issues has made these companies an increasingly attractive prospect for investors in recent months.  We think this trend will continue.

ESG Counsel™

The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and -geographic holistic advice as ESG Counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximize positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.

How we can help 

Our knowledge of ESG matters, coupled with our sector-focused expertise and experience can help businesses navigate this complex area. In particular, we can help by:

• bringing clarity to the complex and fast developing legal and regulatory background driving ESG considerations and helping your business shape its response to those requirements, opportunities and risks;

• engaging effectively with policy-makers and regulators that will shape the environment in which your business operates;

• undertaking a sustainability and business integrity ‘healthcheck’ to identify and establish corporate purpose and clear ESG initiatives/targets;

• evaluating supply chains and procurement processes to ensure that they appropriately deal with ESG considerations;

• ensuring that governance structures are “fit for purpose” and drive appropriate behaviours within your organisation;

• evaluating best practice with regards to talent management, diversity and inclusion, employee engagement, corporate purpose, culture, reward and remuneration and tax practices; and

• in cases of crisis, assisting in responding to and dealing with that crisis.

Our recent ESG public markets experience 

• Advising SABMiller plc on governance transitions and reforms.

• Advising a number of companies and stakeholders on ESG-related activist and stakeholder engagement.

• Advising ITV on ongoing corporate governance matters.

• Advising Shaftesbury on numerous corporate governance matters.

• Advising an international ride-sharing company on its governance arrangements in the UK in the context of an ongoing license appeal.

• Advising Brookfield on the environmental aspects of its acquisition of Greenergy, including its interest that owns Thames Oilport and Thames Enterprise Park.

Authored by Nicola Evans, Patrick Sarch, Liam Naidoo, Kevin O’Connor, India Maddison, Scott Prior, Madalena Marques and Imogen Thwaites.