Introduction - ESG is No Longer Optional

Posted in Compliance Corporate, M&A and securities Risk advisory Environmental, social and governance (ESG)

With the globally increasing awareness of ESG (Environmental, Social and Governance) topics and the responsible investment movement, businesses and governments are being urged to consider the interests of all stakeholders. Rather than focusing solely on shareholder interests or short-term profits, decision-making and implementation are including the ESG expectations of, among others, investors, customers, and employees. With this series, the Istanbul office of Norton Rose Fulbright takes the initiative to discuss the importance of ESG and analyze the main topics surrounding the ESG concept.

In this, the first chapter of the “Understanding ESG Series,” we examine the background and importance of the ESG concept. In following chapters, we will dig deeper into core ESG issues, such as climate change, diversity, child labor, human rights, corruption, and data protection.  

Understanding the ESG Concept

The ESG concept includes:

  • a wide array of environmental issues (the E of ESG) such as climate change, resource depletion, waste, pollution and deforestation;
  • social problems (the S of ESG) such as human rights, modern slavery, child labor, diversity and employee relations, animal welfare; and
  • last but not least, regulatory and governance issues (the G of ESG) such as bribery and corruption.

The rise of responsible investment and ESG initiatives encourages stakeholders, including governments, businesses, and non-governmental organizations (NGOs), to weigh ESG factors at least equally with other traditional parameters, e.g. financial metrics, legal compliance, etc., in decision-making and implementation.

ESG Integral to Success

Businesses and governments have historically been an integral part of the causes and also the solutions of many ESG issues. There have been many examples in the past 50 years where businesses and governments were held accountable for their actions in ESG controversies. Some examples of ESG driving decisions with outstanding results include:

  • the large-scale divestment of foreign investors from South Africa in protest over apartheid in the 1980s;
  • a major pharmaceutical company reducing the cost of AIDS drugs in developing countries in the 2000s; and
  • the criminal cases against executives of two leading automotive manufacturers for corrupt regulatory and environmental practices in the late 2010s.

In the digital age, around-the-clock global media coverage, social media, and instant communication opportunities augment the visibility of ESG issues on a global scale. Disregard for ESG issues can easily turn into financially threatening scandals, ignite major public backlash and cost millions in losses. With that in mind, more and more stakeholders have begun to embrace ESG topics as a way to monitor and control their responsibility towards the global community. A new understanding is emerging of how long-term success, including financial performance, depends on the integration of sustainability and ESG discussions into key business decision-making and implementation processes.

A recent Bank of America Merrill Lynch study revealed that intangible assets such as reputation, brand and intellectual property can no longer be analyzed without using ESG metrics and that companies with better ESG integration are more likely to outperform their competitors. This is in line with the fact that  many jurisdictions have already made changes at a legislative level to incorporate ESG compliance into the fiduciary duty of executives.

Wider ESG Initiatives

The rise of ESG stakeholder discussions as well as the increase in regional/global ESG initiatives such as CERES, the UN Global Compact, and the UN-backed Principles for Responsible Investment help shape the narrative around the importance of ESG as a method to realize a better, sustainable and transparent future where all stakeholders benefit from the impact of ESG-driven value creation.

We will continue our “Understanding ESG Series” with “Climate Change”.

 

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