• Two thirds of respondents say they have not assessed ESG risks in their supply chain in the past two years, finds survey
• 43% of respondents recognise ‘doing the right thing’ as single biggest driver of change
• 60% fail to integrate ESG due diligence into wider activities and compliance measures

A new report by global law firm Dechert and global advisory firm StoneTurn, Are you ready for ESG as a critical business imperative?, indicates that organisations which adopt and embed ESG (‘Environmental, Social and Governance) factors into their business strategy will create value and accelerate growth, while minimising their legal and regulatory risks.

The report, based on three events held by Dechert and StoneTurn and a pulse survey* of executives present, discusses the impact of ESG across business and the evolving regulatory and legal environment. It shows that integrating ESG and continually reassessing an organisation’s ESG strategy is a future-proofing investment that can create value, drive cost reductions and increase productivity and growth, with the potential to be a powerful business force for good.

Demonstrable action needed

With tighter regulation looming and stakeholder and activist groups demanding increased ESG accountability, the report reveals that companies must demonstrate real action now on issues including sustainability and supply chain due diligence.

The pulse survey indicates that many have some way to go to meet these increased demands. It found that fewer than one in three say their organisation has carried out a risk assessment to identify ESG risks in their supply chain in the past two years, while 60% failed to integrate ESG due diligence into wider due diligence activities and compliance measures.

Failure to embrace and embed ESG

The report highlights how a failure to embrace and embed ESG into an organisation will have serious financial and reputational consequences, which could include litigation, regulatory action, and the restriction of access to capital as lenders start to charge higher premiums and interest rates to organisations with poor ESG risk rating. Markets are also responding with correlations emerging that stocks with positive ESG ratings drive share price and dividend growth.

Matthew Banham, a partner at Dechert specialising in corruption, fraud and financial services regulatory enforcement, explained: “Integrating a clear and robust ESG strategy will go a long way to ensuring that businesses do not run afoul of tighter regulations, thereby minimising the potential for litigation, as well as meeting the demands of both stakeholders and activist groups for increased accountability. This would result in better governed organisations that will preserve their value and ensure their viability in years to come.”

Culture is vital to the success of an ESG strategy

The report identifies key considerations and offers practical advice on how to maximise the success of ESG business commitments, including ensuring a strong awareness that a desirable business culture permeates an organisation to enable a positive environment for change. Points include:

• Strong direction, a robust tone from the top and ethical commitment from business leaders, reinforced by aligned corporate governance, to support businesses in delivering sustainable priorities.
• Businesses should rethink business purpose and the enabling culture of the organisation, so everyone is clear about what is the ‘right thing’ to do: 43% of pulse respondents said this was the single biggest driver of change, which indicates that over 50% see ESG as only a compliance or regulatory initiative.
• Navigate and identify the evolving regulatory landscape as the scope of reporting deepens to cover areas such as environment, nature, human rights, anti-corruption and bribery, and diversity – within organisations and across their stakeholders and value chains.
• Shine the ESG spotlight on all relationships: parent, subsidiary, and contracting third parties. Although courts are traditionally reluctant to ‘pierce the corporate veil’ and find a parent liable where it was not a party to the contract in question, recent case law indicates that, when the facts are right, courts will be more willing to extend potential liability to parent companies.
• Integrate ESG into an organisation’s existing risk and compliance framework to establish accurate and reliable data gathering processes for essential ESG-related metrics.

To read the full report, click here.

*About the pulse survey
In the first half of 2022, Dechert and StoneTurn held a series of virtual and live events exploring the future impact of ESG across business and the evolving regulatory and legal environment for organisations and their directors. In these events, we used live online polling to capture data around how far down the line organisations are in their ESG journey. 114 people were polled over a two-month period.

About Dechert
Dechert is a leading global law firm with 22 offices around the world. We advise on matters and transactions of the greatest complexity, bringing energy, creativity and efficient management of legal issues to deliver commercial and practical advice for clients. To learn more, visit Dechert.com

About StoneTurn
StoneTurn, a global advisory firm, assists companies, their counsel and government agencies on regulatory, risk and compliance issues, investigations and business disputes. We serve our clients from 15 global offices across five continents. To learn more, visit StoneTurn.com.