UK Public Markets Snapshot – ESG Means Business (Part 1) September 2021

Key recent ESG developments 

1. New obligations to diligence supply chains on M&A, and report publicly – part of the drive for greater disclosure, accountability and transparency globally, with “best practice” and regulation continually evolving.
2. Uptick in ESG activism – activist pressure increasing on back of recent successes.
3. ESG litigation – quickly rising up the risk agenda.
4. Views from the U.S. – driving global trends.
5. “Getting the house in order” – we’re helping clients get set-up and best-placed on ESG – important to “get it right” early on, and those that haven’t need to soon.

Increasing and important ESG expectations are being seen as key drivers of financial performance and business resilience – and are actively being pursued by a broad range of important corporate stakeholders, including shareholders, lenders, employees, governments, regulators, and customers:

1. New obligations to diligence supply chains on M&A, and report publicly, including rigorous new German legislation to identify, address and report on human rights and environmental violations throughout a company’s entire supply chain, with breaches attracting heavy fines. Our German team expands (including guidance on the risks/requirements and practical steps to address these) in further detail here, and more broadly in their latest ESG update.

This is part of the drive for greater disclosure, accountability and transparency globally. Similar mandatory requirements are being imposed in other major jurisdictions, including France (eg. the already enacted “Duty of Vigilance” law) and the UK (eg. the Environment Bill expected to come into force later this year) – and the recently released European Corporate Sustainability Reporting Directive will significantly increase the standards and detail expected in ESG reporting (and broaden the scope of companies caught) in the EU and probably beyond.

New “best practice” and regulation in this area will likely spill further into the UK and be a major area that UK corporates and their advisers need to prepare for (including proactive supply chain review and broader ESG DD and risk management frameworks).

2. Uptick in ESG activism against corporates, including (on an unprecedented single day of “climate crisis” reckoning for oil majors – “Green Wednesday”) the aggressive unseating of ExxonMobil board members, and a shareholder vote at Chevron to cut carbon emissions – with activists imposing substantial pressure to actively address ESG risks and ‘value-driver’ trends, and adapt accordingly.

Activists have also been helping to mount pressure on listed companies to hold annual “climate votes” and announce “net zero” strategies. It’s important to deal pre-emptively with activists, given substantive risks in not doing so, including in terms of shareholder value erosion and board instability. In turn, major institutional shareholders and proxy voting bodies are turning up the heat to ensure that ESG risks are actively engaged with and addressed.

3. ESG litigation is a major risk area, as companies such as Volkswagen (diesel emissions) and Boohoo (employment and supply chain issues) are all too aware. Potential complainants aren’t afraid to “throw in the kitchen sink” with civil and criminal claims, class actions, and trying a range of statutory, tort, equitable claim and administrative law angles.

Potential heads being pursued (with financial liability and reputational/brand damage consequences) include breach of new laws and (sometimes unclear/untested) regulations, over-optimistic or unsubstantiated ESG disclosures (so-called “green-washing”, hence the need to effectively control and verify these), and “going after the cash-rich parent”/liability for the actions of overseas subsidiaries (as noted in recent cases involving Vedanta and Royal Dutch Shell).

4. Views from the U.S.:  our market-leading U.S. Public Company Advisory team notes that the U.S. is playing a significant role in driving the ESG agenda globally. Plus: 

• the U.S. is seeing similar themes on greater (and more specific) ESG disclosure requirements and accountability: SEC rules on this area are expected later this year (backed by investor pressure) and likely to include quantitative ESG metrics, which will require enhanced and robust controls and procedures, assurance and auditing to ensure a foundation for such disclosures. As further described here and here, the SEC recently approved NASDAQ’s board diversity rules, showing the SEC is not alone in recognizing investor interest in ESG.
  • we’re also helping prepare clients for increasingly regimented reporting expected going forward, including company-specific and third party targets, and disclosure of performance against these as well as consequences for failing to hit them.

5. "Getting the house in order”: we’re helping clients set up and tailor their ESG operations and review processes (many of which are already in-train), including:

• scoping out (and monitoring and refreshing, on an ongoing basis) ESG obligations and policies, risks, compliance and “best practice” – and stress-testing (and rectifying as needed) against various relevant benchmarks and ESG risk factors, consulting with key stakeholders as needed.

• the impact and implementation of ESG policies across the business, including:
  • setting up new and discreet ESG operational teams and reporting lines, and subsidiary policies and practices.
  • crisis management, employee communications and retention, diversity and inclusion/equality, mental health and wellbeing.
  • litigation, environmental (and “green agenda”, including decarbonising, “net zero” targets and energy transition), human rights, anti-bribery and corruption, health and safety.
  • commercial relationships eg. making sure the right (and up-to-date) ESG requirements are met in JV and partnership arrangements, supply chains and outsourcing. 
  • M&A eg. doing the right ESG DD, and getting the right contractual protections – more to come in our next snapshot (“ESG means business”: Part 2 – “what to watch out for”).
  • ongoing reporting obligations eg. public documentation, reports and circulars – and control and verification procedures to guard against “green-washing” problems.
  • finance-raising, including green finance where relevant.

Post-script: as predicted in our July public markets snapshot, the Takeover Panel (in light of recent controversy around “shadow bidding”) has published this statement following a review of the relevant rules and consultation with relevant third party investors and corporates, and concluded that no changes to the existing regime are needed, and that indeed to do so could be counter-productive (including in terms of market stability/certainty, and shareholder value).

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.

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 Patrick Sarch and John Holme