6 minute read
ESG and nature
ARTICLE
ESG and nature
What actually is ESG?
ESG is an acronym, created with and for business, representing environmental, social and governance. There is no definitive definition in law or regulation. To some it represents three themes around which to assess risk, providing a risk management tool, to others it is an investment strategy and to Elon Musk it is a “scam” (in response to Tesla’s ESG rating, lowered as a result of labour and human rights issues).
What does that mean for a law firm?
Lawyers have been advising on ESG issues well before the acronym ESG was coined, environmental lawyers have advised on environmental law since the mid-18th century. Since the seminal Cadbury Report in 1992 lawyers have been advising on modern corporate governance in the UK. In many respects lawyers advising in relation to “ESG” is merely business as usual.
What is new?
Over the last few years clients have been starting to look at ESG issues through a new lens, the reputational risks, within their own business operations (and their supply chains) are too great to ignore. Increasingly the issues of E, S and G are no longer being seen as independent from each other nor as independent from core business strategy. ESG issues are now board room level issues with many corporates appointing Chief Sustainability Officers to the C-Suite.
Additionally, the law is progressively mandating how nature related ESG risks are managed, such as The Environment Act 2021 which, among other things, requires a biodiversity net gain for certain real estate developments and mandates deforestation diligence in the supply chain of certain commodities to identify illegal deforestation overseas.
Regulators are stepping up efforts to identify greenwashing, impact washing and sustainability washing in the financial services sector. In the run up to the UN Biodiversity COP 15 in December there are calls from business leaders and Business for Nature to make nature disclosures for corporates mandatory, such as the Make It Mandatory Campaign.
What are some of the issues with ESG?
As the FCA stated in their consultation paper in October in relation to their Sustainability Disclose Requirements and investment labels regulation:
ESG is not defined, nor is it static, leading to a perception of ESG being, overly complex, an alphabet soup of acronyms and “virtue signalling” The constant evolution is part of the problem and the solution, however this demonstrates the ability of ESG to flex and adapt over time, quite possibly away from the acronym itself, in favour of the underlying meanings e.g. environmentally sustainable, or socially impactful.
What is next?
Attention will continue to focus on preserving nature, reversing biodiversity loss and habitat degradation. The World Economic Forum states that approximately $44 trillion of economic value generation is either moderately or highly dependent on nature, which represents half of the world’s GDP. Supporting nature is fundamental to supporting economic growth for future generations.
The Treasury commissioned Dasgupta Review of 2021 refers to all of us as asset managers of natural capital. Scientists have reported that the UK has been a poor conservator of that capital. A report from 2021 stated that the UK has lost almost half of its wildlife and plant species as a result of human development since the Industrial Revolution and is ranked in the bottom 10% in the world and the worst among G7 nations. This could severely impact nature’s capacity to support society and future prosperity.
However financial markets are now putting a value on nature and new ways to invest in nature are emerging. In October the London Stock Exchange (LSE) amended their Standards to include their Voluntary Carbon Market (VCM) designation. The LSE hopes their rules will provide a framework to support the scaling of voluntary carbon markets and help increasing the supply of high integrity credits. It is expected that this will, in part, increase the flow of financing into projects which restore nature and sequester carbon. As noted above The Environment Act 2021 also created a compliance market for biodiversity related environmental credits.
Although the attention from financial markets in natural capital has been received with a healthy degree of scepticism amongst some environmental groups, an economy which is reviewing and understanding their dependencies on nature (such as via the Taskforce on Nature-related Financial Disclosures and/or the Science Based Targets for Nature) is the start of a pathway towards valuing nature for the ecosystems services it provides.
New nature based financial markets, both voluntary and compliance markets will continue to emerge over time, along with standards and the accompanying plethora of acronyms.
How is this relevant for lawyers?
The law is changing to protect nature and is intersecting with practice areas not traditionally environmentally or socially focused, for example investment management lawyers are advising in relation to mandatory Taskforce on Climate-related Financial Disclosures reporting and equity capital markets lawyers in relation to the LSE’s VCM.
Many clients see lawyers as an essential tool in helping manage their risks and facilitating their transactions in capital markets. As is the case for commercial awareness, lawyers need a broad understanding of the wider risk landscape and the capital markets into which their clients are investing in order to deliver robust legal diligence and contractual protections. An understanding of nature and its intersection with the economy, the law and the wider landscape could be seen as merely an extension of commercial awareness.
Final thoughts
Various ESG issues have been highly politicised and this makes for sensational headlines. However, these headlines shouldn’t detract from the core goal of “sustainability”, to manage natural capital resources to fulfil our needs without compromising the needs of future generations. It is an incredibly exciting time to be a lawyer, as we witness the law and capital markets stepping up to achieve that goal.
Rachel Richardson
Rachel Richardson
Head of ESG, Macfarlanes
