Sustainability (ESG)

WHAT IS ESG COMPLIANCE?

ESG compliance is the ability of enterprises to comply with a number of standards in three areas:

• Environmental (climate and environment)
• Social (labour rights and human rights)
• Governance (good governance practices)

ESG compliance is related to CSR. But where CSR is corporate social responsibility, ESG compliance has become particularly cross-disciplinary in ranging wide and impacting on many operators in any value chain. This is expressed in key concepts such as ESG reporting, ESG ratings and ESG risks being closely linked to sustainable investments whose popularity and relevance have grown significantly in recent years.

Since ESG work often translates into reporting, ratings and risk assessments, there is a strong focus on measurability in ESG matters. Large enterprises in reporting classes C and D, for example, must account for their corporate social responsibility work in connection with their annual reports, and the future EU reporting directive – Corporate Sustainability Reporting Directive or ”CSRD” - will accentuate the demands placed upon enterprises in that regard.

As stated above, the area is broad, and the three concepts of ESG can each include much. They are further explained below one by one.

Environmental – environment and climate

How green are you? Within the environmental ESG aspect, climate conditions and decarbonisation are some of the major subjects. But beyond this, the environmental conditions also relate to the measures taken by you with respect to circular economy, such as recycling and waste separation, and whether you support biodiversity, water resources and reduce pollution.

Social - labour rights and social responsibility

How socially responsible are you? The social area is very much about what you do for the well-being and labour conditions of employees. This applies to the legal minimum requirements for the terms and conditions of employment as well as inclusion and diversity etc., which are some of the fundamental human rights. The social responsibility also covers your leverage throughout the value chain.

Governance - good governance practices

How well is your enterprise governed? Governance, or good governance practices, is about integrity, transparency and openness in connection with, for example, the reporting of ESG matters. In addition, it will be noted in the composition of the board: is it independent and does it have a reasonable gender balance? In addition, corruption and tax matters are important factors.

As appears from the above, there is a significant overlap and synergies between the three areas. For example, the diversity that is addressed in the social area also applies in the boardroom and is thereby also a question of good governance practices. The composition of the board of directors, the management board, and your governance structure in general, will also have a spillover effect on environmental impact and social matters.

ESG – LEGISLATION, RULES AND PRACTICES

Although the role of enterprises is historically connected to the focus on generating revenue for their investors, many stakeholders have an increasing focus on ESG. Apart from investors, also clients, employees, potential employees and, not least, NGOs, politicians and media will pay attention to your level of ESG compliance. You will therefore need to be thoroughly prepared, both legally and commercially.

A well-known example of a breach of ESG compliance with a wide effect is greenwashing. Greenwashing not only has large financial consequences but can also be downright fatal to the reputation of an enterprise. In this connection, the European Commission and the Consumer Ombudsman have announced an increasing focus on breach of the requirements related to green marketing. In addition, increasing environmental and climate-related obligations are inserted in contracts between enterprises.

Other examples of increasing demands and growing attention are found in the Taxonomy Regulation and the Disclosure Regulation, and not least the future EU directives on reporting requirements and corporate due diligence in environmental matters and human rights. They define what is understood by sustainable financial activities as well as the information requirements for financial market operators and advisors.

The area is thus large and complex, and despite common features in certain industries, the needs of different enterprises are individual. Without individually structured and organisationally well-considered practices, the individual enterprise can easily lose perspective and assume unnecessary risks of both a legal and other nature. We therefore recommend that the enterprise establishes practices to ensure identification of key risks and subsequent regular monitoring and updating.

USE ESG FOR VALUE-CREATING BUSINESS DEVELOPMENT

It is now a vital component in being a responsible business to ensure ESG compliance in the value chain. It is no small task, but properly handled it will be of great benefit that extends far beyond a defensive approach to only avoid problems. A good start and maintaining momentum will ensure that the regulatory requirements not only represent a burden and costs but also an opportunity to create value and to maintain and develop the business.

Enterprises that are good at adapting to the increased focus on climate and environment, social factors and good governance practices will also be strongly positioned to spot the strategic opportunities and competitive challenges early in the process. In other words, well-integrated and proactive ESG policies will entail obvious competitive advantages.

At the same time, it is hard to overestimate the reputational significance of making active efforts to improve labour conditions and thereby give something in return to both the local community and the global labour market. The benefits of encouraging the management of enterprises to promote diversity in their teams and to take a stance on environmentally sustainable policies also play a major role in strengthening the company brand.

There are many signs that the importance of the above will intensify in the coming years. As millennials become investors, consumers and employees, it will be increasingly clear that they are aware of and reward the enterprises that are strong on ESG compliance.

ADVISORY SERVICES ON ESG COMPLIANCE

Poul Schmith/Kammeradvokaten has the expertise and experience necessary to assist in understanding the complex and volatile ESG agenda. The area is developing fast, and it takes good preparation to maintain an overview of the challenges and related risks that might arise.

We are ESG specialists and have experience in advising enterprises requiring a sustainable transformation, assistance with sustainable financing and prevention of risks.

Our services include:

• ESG compliance, gap analysis and implementation in connection with the Taxonomy Regulation and the Disclosure Regulation.
• Establishment and monitoring of ESG compliance schemes.
• The drafting of relevant policies, guidelines and procedures.
• The establishment of ESG action plans and visualisation of data.
• Marketing compliance for the purpose of avoiding greenwashing.
• ESG due diligence in connection with M&A and due diligence for customers, suppliers and other business partners.
• Analyses and opportunities relating to green bonds and sustainable financing.
• Reporting on ESG, CSR and corporate social responsibility.

We will provide targeted advice to our clients throughout the entire ESG process. Our advice is tailored to the individual enterprise’s values and objectives, which is vital to creating sustainable value for you.

RELEVANT SECTORS

• Financial enterprises.
• Private equity funds and their portfolio companies.
• Other investors.
• Industrial companies that are subject to industry regulation or standards, such as production companies, offshore/wind, food industry and life science industry.