The "ESG" agenda (UK Construction focus)

Dentons

The growing call for construction businesses to address environmental issues and reach net zero targets should not blind directors and managers to other key societal and governmental issues: the "S" and "G" in ESG should also sit firmly on construction agendas.

Investors, shareholders, supply chains, clients, tenants and the general public are increasingly demanding that businesses prioritise and integrate "ESG" measures into their businesses and commercial relationships. There are many ways in which those involved in construction and real estate can demonstrate their ESG credentials (such as WELL Building certification, which assesses human health and wellbeing performance in buildings, using standards developed by the WELL Building Institute).

If you are new to ESG, where do you start? This article suggests action you can take to ensure that your business is addressing the key issues.

Contents

  1. What is the ESG agenda?
  2. Why does ESG matter? (The UK employment law perspective)
  3. Do you have ESG covered? Five questions you should be able to answer
  4. ESG standards and frameworks – what should you consider?
  5. A checklist for creating your ESG strategy
  6. Further information

1. What is the ESG agenda?

The ESG agenda encompasses a highly diverse range of Environmental, Social and Governmental issues – issues that have to be tackled globally and affect every market, every business model, every business. The COVID-19 pandemic has heightened awareness of the importance of social impacts across the globe. Increasingly, ESG issues inform company policy rather than being a tick-box exercise at the end of the AGM agenda. Every organisation must grapple with how it deals with and integrates ESG into its broader organisational strategy.

If you have not started analysing ESG risks for your business, you need to do so − and quickly.

What does ESG cover?

  • Environmental includes contributions made to climate change through emissions and carbon footprint, the impact the business has on natural resources, pollution, waste, land contamination, biodiversity, energy use, sustainable resourcing, recycling of resources used etc.
  • Social factors can include modern slavery, human rights, labour standards across the supply chain, pay equity and adherence to workplace and industry health and safety standards. Diversity and inclusion also feature strongly, as does contribution and impact on the communities your organisation faces.
  • Governance refers to themes surrounding corporate governance and behaviour, including ethics, corruption, transparency, response to sanctions, political contributions, anti-competitive practices, human rights abuses and corporate sustainability.

ESG is, increasingly, not a choice and presents legal challenges. Businesses need to draft contracts to minimise ESG risks; agree and implement appropriate standards; avoid disputes, spot early and address potential claims, manage the dispute resolution process with a focus on early resolution; and understand and comply with current law to avoid criminal sanctions (and associated costs and reputational damage).

Corporate ESG ratings are becoming the norm. The key question is whether environmental and social performance is ancillary to or embedded into your corporate strategy and operational decision-making. You can take our quick test on whether your board has covered ESG in our guide: ESG: What Boards, Directors and GCs need to know.

Do not underestimate the emotive impact of ESG issues – and their potential, if mishandled, to damage a company's reputation and profit margins. A discovery of modern slaves in your supply chain or illegal waste dumping from one of your projects will almost certainly attract unwanted publicity. An ESG strategy, understanding your legal obligations and clear contractual obligations with your clients and suppliers will help minimise the risk of such scenarios arising.

Take a look at Dentons' interactive methodology: Anticipate-Measure-Manage Methodology: a methodology and mindset for how to approach ESG in employee welfare, environmental, support to contractors, supply chain disruption and insolvency.

2. Why does ESG matter? (The UK employment law perspective)

ESG is a tool for businesses to measure sustainability using environmental, social and governance factors. Businesses are now being scrutinised by their ability to drive and shape policy changes that promote a positive environment for the entire workforce. The benchmark has also moved into the global arena as international standards of fairness and equality are used. Getting it wrong can have a huge impact, in terms of both profitability and reputation.

Employers who fail to address ESG issues (for example, by failing to address, say, workplace racial discrimination) risk not only damage to their commercial reputation, less productivity and falls in inward investment or share prices, but also significant penalties for ESG breaches. (Note that companies operating in countries with lower standards cannot rely on the geographical location.)

For more on your role as employer and how to avoid these risks, read Employment and ESG: five reasons why it matters.

3. Do you have ESG covered? Five questions you should be able to answer

Knowing what you do not know is half the battle when you are tasked with leading, managing or monitoring your organisation's response to ESG. The regulatory landscape is not the same everywhere, so when you have understood your legal baseline and approach for one market, do not assume it will be the same elsewhere. And, critically, do not forget about your financing requirements when addressing ESG. Given the amount of focus on ESG from sources of finance and stock exchanges, you will need to have a plan of action if refinancing is on the horizon in two years plus.

To help you identify how mature your organisation's ESG response is, see how easily and robustly you can answer the five questions below:

  1. What is your organisation's ESG strategy?
  2. Who has responsibility for making the ESG strategy a reality and how does the board have oversight and monitor?
  3. What is the cost, risk and opportunity associated with the ESG agenda for your organisation? Are you aware of the laws and liabilities for the company and the board associated with ESG?
  4. How are you measuring the impact of your ESG strategy?
  5. How are you reporting or communicating your ESG strategy to stakeholders?

Access the online version here.

You can find additional guidance on ESG strategy here:

4. ESG standards and frameworks – what should you consider?

Anticipating what aspects of the various schemes will become law and preparing your business for the upcoming compliance environment is critical to managing risk and ensuring the future success of your organisation.

Read our ESG Standards & Frameworks Guide for an in-depth look at the standards, guidelines, frameworks and accreditations your organisation could consider adopting when it comes to ESG.

5. A checklist for creating your ESG strategy

Our anticipate, measure and manage process, summarised in Getting from E to G – a checklist for creating your ESG strategy, will help you build your ESG analysis and create your strategy.

6. Further information

For more on ESG and the construction industry:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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