ESG: Trends, Challenges & Risks
On June13th, 2023, the international network of UGGC Avocats organised a conference on the impact of ESG (Environment-Social-Governance) on the strategy of international groups, bringing together companies and members of our international network (France, Brazil, Belgium, China, Hong Kong, Morocco, Cameroon, Ivory Coast and Israel).
The conference provided an opportunity for a particularly rich exchange of experiences, thanks to contributions from Icon PLC, Kroll, Mirova, Le Train, Trapil, Unysis, Deloitte Corporate Finance, Affectio Mutandi, Hottinguer, Life’s solution, Kwanko and the French Chamber of Commerce in Brazil (CCFB), all of whom are working on these issues.
The network’s lawyers from Europe, Africa, Latin America and Asia began by recalling the origins of these criteria, which stem from a UN initiative (the Global Compact and then the Sustainable Development Goals), which were extended by the European Commission in its 2017 directive and subsequent texts, in particular its Sustainable Finance package of 13 June 2023, and which have undergone numerous developments in France (the Energy Transition Act, the Agec Act, the AMF initiatives of February 2023 and the Duty of Vigilance Act of 2017).
It is clear from these discussions that global companies are irrevocably committed to addressing these non-financial issues of sustainable development, diversity and governance. This movement is driven not only by the conviction of these companies to embark on this important path for the future of the world, but also by the financial leverage they generate through the resulting value creation, the demands of the shareholders of these groups for greater transparency in the management of companies in relation to these criteria, and the attractiveness they create for employees and job applicants.
This trend is also reflected in corporate governance. ESG governance committees have been set up, for example at ICON PLC.
This transparency is required by law, for example in environmental matters, but also in the way the supply chain operates, with a particular focus on respect for human rights. This first requirement means going very far up the supply chain to ensure that there are no ESG risks.
This transparency is also the result of the demands of the market and, in particular, of consumers, who now consume differently by incorporating motivations based on these criteria into their purchasing decisions.
Some asset management companies, such as Mirova, focus their investments on companies involved in sustainable and responsible development, which represents a significant financial lever for the beneficiaries of these investments.
These criteria therefore lead to a particular and heightened approach to risk in the event of an acquisition or investment, as the due diligence process has to integrate ESG risks, resulting in numerous additional due diligences with a global approach. For example, when investing in a mangrove restoration project, all mangrove populations must be considered in relation to their original natural environment to ensure that the ultimate benefit of this creation does not have negative short-term consequences.
As Kroll points out, these legal risks are numerous: legal action against “green washing”, which consists of falsely claiming to be part of the environmental movement (many countries have adopted regulations against this type of behaviour); the increase in litigation resulting from non-compliance with environmental or social regulations; and statements made by the directors of these groups on these issues that could lead to their personal liability. Recently, for example, three NGOs took the Danone group to court for failing to meet its due diligence obligations to reduce the use of plastic in its packaging. The stakes are high for Danone, because if the judge rules in favour of the NGOs, the company will have six months to come up with a plan to de-polymerise its business.
This new approach sometimes comes up against cultural changes that are difficult to accept, the need for long-term training of teams and the structures of the countries concerned, which sometimes make this development more fragile. However, even in countries where regulations have not been implemented, external constraints affect the extent to which these criteria are taken into account: these constraints may arise from the international communities to which the countries belong, from the trade relations that may exist with neighbouring countries, or from the globalisation of companies operating in these countries. If there is a significant trade flow with a neighbouring country that has ESG regulations, companies in that country will demand that their trading partners meet the same criteria (e.g. US restrictions on Mexican companies).
For a new player like Le Train, these environmental, social and governance issues are integrated into the very creation of the company to ensure the long-term future of the project and to differentiate it.
As explained by Deloitte, the litigation risk created by these criteria also raises the problem of assessing damages in the absence of compliance with the commitments and, in particular, the data available to assess the damage.
By Michel Ponsard.