The importance of understanding ESG, the guidelines and ESG compliance, is becoming increasingly clear.Here, we define, in a few short paragraphs, some of the key topics relating to ESG. These topics will be the focus of more comprehensive articles in the future.

1. ESG investing versus sustainable investing

Due to a lack of standardisation in terminology, there is general confusion in ESG investing vs sustainable investing, and which is the best strategy for investors to pursue.

ESG investing considerations allow market participants to consider ways in which environmental, social, and governance (ESG) opportunities and factors have an impact on a company’s performance. The level of financial performance is maintained while applying sustainability principles. The emphasis is on long-term value by using ESG factors to identify opportunities and mitigate risks.

Sustainable investing, also known as socially responsible investing (SRI), produces adequate or sub-market financial returns, as a result of placing a premium on positive social change. Financial returns are more of a secondary consideration, while the investors’ moral values take more of a precedence.

2. What are the key metrics for measuring ESG?

There are several ESG metrics for measuring ESG in each of the three E, S and G pillars. Some of these are:

• Environmental: CO2 emissions, water usage, waste treatment, business travel, environmental incidents
• Social: diversity policy, sick day policy, employee pay, voluntary turnover, anti-slavery policy
• Governance: code of conduct, anti-corruption policy, cyber-security, board composition

These and many other ESG metrics are introduced and discussed.

3. What is ESG benchmarking?

Comparing ESG performance and disclosure among industry peers is a valuable exercise in determining and understanding a company’s ESG performance. There are various approaches to benchmarking, which will be discussed in greater detail.

4. What are ESG frameworks?

There are several ESG guidelines and frameworks, making ESG compliance more challenging. The purpose of these frameworks is to standardise reporting and ESG disclosure. They set the metrics and qualitative elements that are required for disclosure and specify the frequency and format of reporting. Some frameworks also specify ESG targets.

5. How do we develop a global approach to ESG?

A great deal of work has been done on standardising and creating a global approach to ESG metrics, reporting and disclosure, all of which will be discussed in more detail.

6. Why 2022 is the key year for ESG reporting

ESG reporting has historically been voluntary and not systematic. There has been little concern, as far as legal or regulatory enforcement is concerned. In 2022 however, reporting is becoming mandatory for certain companies. By mid 2022, the SEC in the US and the European Commission will have reporting requirements in place.

7. ESG data: What is it? Where to get it?

ESG data relevant to specific metrics comes from sources which record a company’s environmental, social and governance information, such as annual company and government reports, news reports, social media posts. There are several ESG data providers, collecting and managing this data, which is available for scoring, benchmarking and disclosure purposes.

8. Spotting greenwashing and avoiding it

Greenwashing is making misleading or false claims about the ESG characteristics of an investment or a company. Due diligence is essential in recognising greenwashing. Both quantitative and qualitative measures are needed to identify potential greenwashing in investments and in a company’s ESG claims.

9. Liabilities associated with poor ESG practices

With ESG being at the top of every corporation’s agenda, there is increasing risk of corporations and funds facing liabilities, brought about by poor ESG practices. These liabilities can be fines imposed by the regulators, or loss of market share due to reputational damage. They can also be claims due to litigation, such as claims brought in tort, statutory claims, equitable claims and criminal and administrative law claims.

ESG is a broad and all encompassing area and there is a lot of noise to cut through to get to the right information. Having a trusted advisory service, with the experience and industry knowledge will help you do this, and save you time and money in the process.

If you are looking for guidance on becoming ESG compliant in your business, please contact Jacqueline Faridani at jaf@prospectlaw.co.uk

Dr Jacqueline Faridani

Dr Jacqueline Faridani heads up Prospect Law’s fast growing ESG practice. She is an advisor in financial risk management with 20 years of experience in a variety of risk management, compliance and product control roles at Canadian, German, French and Russian banks and life insurance companies, as well as for the Canadian financial regulator (OSFI).

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

Prospect is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, insurance and risk management specialists, and finance experts.

This article remains the copyright property of Prospect Law Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.