Transparency is the currency of ESG

General counsel have a tough task in managing green concerns, a recent In-House and Public Sector Committee webinar heard. Mary Hallissey reports.

Because customers and other stakeholders now want to engage with ‘green’ companies, environmental, social and governance (ESG) issues are climbing the agenda. ESG refers to:

• Environmental factors (carbon, circular economy, and biodiversity),
• Social (modern slavery and human rights),
• Governance (transparency, diversity and inclusion).

Those requirements, and their impact on in-house solicitors and their organisations, were the topic of a panel discussion on 19 May, organised by the Law Society In-House and Public Sector Committee in collaboration with Law Society Skillnet.

The webinar heard that many market commentators believe that capital will become more expensive for those who do not have their ‘ESG house in order’.

Orlaith Delargy (associate director at KPMG sustainable futures) said that disclosure and action were closely linked. “ESG covers more than environmental issues – it also relates to employment rights and diversity,” she said.

An interesting ecosystem of information is emerging, as buyers ask suppliers for their green credentials, Delargy explained. Similarly, an investor who wants to assess their exposure to ESG risks in their portfolio will ask for information.

“It becomes a virtuous cycle of everybody asking: ‘What are you doing on this agenda?’ Pressure from all sides – that’s how the change will come,” she said.

The critical success factors for businesses are changing, and moving beyond financial fundamentals. “The increase in importance of ESG factors has been pretty astronomical,” Delargy said.

These factors are sometimes termed ‘non-financial information’ and can have a very direct impact on company performance. Firms that are well covered in terms of ESG can be profitable and can have better staff retention, she suggested.

Hot topic

And the push for change can also come from inside an organisation. Recently, McKinsey employees sent a letter to their partners, urging them to disclose how much carbon their clients were emitting, though the consultancy firm’s own footprint may be minuscule.

Climate change is the hot topic in ESG – literally – but the response to climate change includes both decarbonisation and climate adaptation – that is, building systems that are resilient in the face of rising temperatures.

Carbon footprinting is about calculating an organisation’s greenhouse gas emissions, but looking ‘under the hood’ to examine how these emissions are created is also important, Delargy suggested. Organisations must first look to avoid emissions altogether, then to reduce them. Carbon offsets are a last resort to balance out emissions that are unavoidable.

Furthermore, meaningful action on climate change must include biodiversity, she said. This means recognising that nature is our life-support system, and working to ensure that nature loss is halted and reversed.

Ireland must also move from a linear to a circular economy, away from the ‘make, take and dispose’ model and towards a ‘make, take and re-make’ approach, keeping raw materials in the system for as long as possible.

Circular economy

For companies that manufacture products, this means thinking about the product life cycle at the design stage so that, if one part breaks, the entire item does not have to be discarded. “Ireland is starting from a low base on the circular economy – we have a circularity rate of 1.6% where the EU average is 12%,” said Delargy.

The role of in-house counsel in managing all of these concerns is tough, because it’s impossible for any one person to be expert in all of these complex areas, she said. A culture of collaboration and continuous learning within and outside the company is required.

“Transparency is the currency of ESG,” she said, with an increasing set of disclosure requirements for business leaders.

The Corporate Sustainability Reporting Directive, among other regulations, will push companies towards disclosing their climate and nature-related risks and opportunities. This directive will apply to all companies larger than 250 employees and will mandate for ESG information in annual reports.

Non-financial reporting

“Non-financial reporting is being put on a level playing field with financial reporting in the annual report,” she commented. That will require new systems and processes to gather data that the in-house counsel will have to control and oversee.

On the upside, there is a huge drive towards harmonisation across the EU, with consolidation in reporting standards and frameworks. The vast investment and policy package that is the EU Green Deal will be the engine of much development in this arena, Delargy said.

‘Evangelical’ chief executive

In-house and Public Sector Committee chair Caroline Dee Brown  introduced solicitor Conor Keeling of AIB, where he recently established a sustain-ability legal team.

Younger employees, generally, are very focused on their company’s purpose and its contribution to society, Keeling said, and sustainability can offer a positive focus for an organisation, he suggested.

Keeling said that AIB’s chief executive Colin Hunt is “evang-elical” about ESG. AIB has a sustainability unit of 15 people, but this is only the tip of the iceberg for the organisation, which has set a 2030 net zero target for its own operations, he continued. “Incremental change isn’t going to do it,” Keeling commented, adding that enormous effort was going into setting a pathway to achieve these ambitious commitments.

Hunt recently declared that the green transition was the biggest opportunity in the history of global banking. “As well as being the right thing to do, it is also an enormous commercial opportunity for AIB as a bank,” Keeling said, which is why such large resources have been dedicated to it.

“It’s a major area of focus for our shareholders and investors … with a huge level of scrutiny on ESG issues,” he added. Bank analysts were now grilling companies on their ESG performance, he noted. “ESG is not a fad, it’s here to stay,” Keeling said.

In-house lawyers will have to scale up significantly in this area, he added, because corporate preparedness for the wave of ESG regulation that will land soon is not currently in a good state.

A KPMG study has indicated that only 2% of in-scope Irish companies are approaching readiness for the implementation of the Corporate Sustainability Reporting Directive, which is likely to drive an enormous amount of change in corporate life.

Enormous change ahead

Solicitor Michael Barrett (legal manager at the Commission for Regulation of Utilities) said that enormous change lay ahead in how Irish society would develop and operate.

The tragedy of the invasion of Ukraine has prompted an acceleration in the green transition at a European level, Barrett noted, with the EU beginning to wean itself off Russian oil and gas with the REPowerEU plan.

Speeding up permit procedures for wind and solar energy will be an important part of this process, he said. However, he warned that, in this complex area, there is “much scope for spoofery”.

While open minds and ambition remain important, energy customers must try to avoid greenwashing, with processes that ultimately don’t generate any extra renewable electricity, he said.

Regulators have an important role in getting the balance right, he said, to make sure that investors are protected, but also to ensure that old ways of thinking don’t block innovation.

Under REPowerEU, solar-panel installation may become mandatory on all new public and commercial buildings, with more aggressive promotion and greater incentives for domestic installation.

Transition challenges

“Another part of the plan is to accelerate the production of hydrogen, with €200 million set aside for research and a swift approval process for projects,” he said.

The west coast of Ireland presents an enormous opportunity from offshore wind and hydrogen generation, he added, but work must be done on harmonising standards on how hydrogen can be exported and circulated around Europe.

The dominance of oil and gas will be turned on its head, with renewable-energy producers likely to become household names, he said. There will be ESG challenges in the transition period, however.

For example, batteries for renewable technology require rare precious metals that are still mined and processed in ways that may not meet investors ESG standards, he commented.

Likewise, even as the EU stops buying Russian gas, this key transition fuel may be sourced in countries with questionable human-rights records.

The challenges that the world is facing provide an opportunity for an energy-efficiency movement similar to that spurred by the oil crisis in the 1970s, he said.

“The greenest electron is the one that never has to be produced,” he said, urging efficient demand-and-use strategies, in line with grid capacity.

Sustainability goals

C&C’s Susan Murray and Lucy Maxwell (senior legal counsel and senior assistant company secretary) said that, as a leading drinks distributor, sustainability was at the core of their business.

Both spoke about the import-ance of honeybees, and how the business has installed the largest rooftop solar-panel farm in Ireland at the Clonmel site, which will reduce the site’s carbon emissions by 4%. Plastic is no longer used in the packaging of C&C Group’s canned products at the manufacturing site.

Maxwell explained that a board-approved ESG committee was established in 2020, which is responsible for defining strategy. This year, the focus has been on the implementation of the Task Force on Climate-related Financial Disclosures and accelerating efforts to mitigate climate-change risks.

To reflect the company’s ongoing commitment to ESG, an environmental-performance target was included in the executives’ long-term incentive award. “Companies need to ensure they are not just paying lip service to ESG performance,” she said.

‘Snake-oil merchants’

McCann FitzGerald partner Brendan Slattery, who is head of the firm’s environment and planning group, said that it was important to ask questions in the context of ESG: “There are a lot of snake-oil merchants out there,” he commented, “and now is the time to flush out the spoofers.”

Assume nothing, he advised. “Always ask if something doesn’t make sense – and how relevant it is to the business.”

External service providers, such as lawyers and consultants, should be adding value in this area, he suggested. While ESG has been viewed as a compliance area – “and it makes sense that lawyers have to touch it” – its influence will extend across the entire value chain, he said.

ESG was a significant issue in terms of reputation and competitive advantage, he added. Recent climate litigation encouraged the discipline of thinking about the issue, and documenting how that has been achieved.

“Respect for ESG can only improve resilience,” he concluded. 

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