Today's prevailing socio-economic agenda, 'responsible capitalism', is fuelling multi-faceted pressure on corporations to adopt and deliver high standards of environmental, social and governance performance. It is hugely disruptive for corporations to have to address these issues in the absence of clear and consistent regulation from Governments.
In mature regulated market places, these standards have historically been set by Governments. Regulation has been used to ensure public sentiment for environmental, social and governance standards are imposed on businesses as a restraint from free market capitalism. Regulation both creates an even playing field and ensures that costs which are not necessarily internalised in production processes (such as adverse environmental impact) are accounted for. Compliance with these regulatory frameworks has been the domain of lawyers. These regulatory frameworks are complex, in constant flux, and breaches must be defended to avoid civil and criminal penalties.
However, in the current socio-economic paradigm, Governments are not acting fast enough (or are not prepared to) and so pressure is coming from different angles to raise expectations on corporations and internalise further impact costs. The main pressure points are the investment community (including finance), consumer choice and NGO oversight. This has created a dynamic in which corporations are scrambling to understand what is required; they no longer have the clarity and certainty of regulatory standards to refer to. Also, their lawyers are floundering because they have lost their touchstones. Lawyers though must find the solutions, using their skills to bridge the gap, thinking through the complexities of legal exposure and protecting corporations against the enhanced legal risk that this dynamic presents:
- Inevitably regulation will catch up to reflect public sentiment and so, during this period, horizon scanning and understanding the likely future regulatory structures is an even more important skill than in a heavily regulated environment.
- Even in a weak regulatory environment, failure to meet expectations will still result in legal challenge. Corporations will be exposed to this through reporting obligations, re-interpretation of existing regulatory duties, and group litigation based on negligence.
- Management of ESG risk is intrinsically legal: acquisition targets need to be effectively diligenced; robust clean breaks must be delivered for divested assets; and the consequential impact on the supply chain can only be managed through a suite of contractual provisions.
- Harmonisation is absolutely essential in this process. Whether a corporation is bolting on a business unit, adapting practice across several divisions or agreeing high value services contracts, bridging the gaps between ESG approaches will be a skill in itself.
At the heart of 'responsible capitalism' will be the company's profile and the integrity of its performance. Profile and performance must speak to investor requirements and be sufficiently rigorous to ensure that mis-steps do not alienate consumers. The systems to deliver ESG profile and performance are plain vanilla 'compliance'. The only difference with ESG in this period of 'responsible capitalism' is that a single legislature is not telling corporations what to do; instead corporations must determine this for themselves. The objectives are clear, the framework is discernible and the consequences of failure are tangible – lawyers have the skills to enable corporations to meet the challenge.