The UK government ushers in a new phase of ESG legal liability

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The last week of August is not usually the time for a step change in the law, but 2020 is no ordinary year and last month was no ordinary August. The publication last week of the UK government's consultation on a new "supply chain due diligence" law aimed at protecting global rainforests and other sensitive habitats ushers in a tectonic shift in the regulatory frameworks underpinning ESG. As currently conceived, "due diligence on forest risk commodities" would impose a duty on large businesses that use forest risk products to ensure they are not sourced from illegally cleared rainforests. These businesses would need to publish their due diligence plans, report on performance and be exposed to fines and other sanctions for breaches. Laws such as the UK's Modern Slavery Act or France's Devoir de Vigilance have moved in this direction, but now, for the first time, we will see active regulation of environmental and social performance in a global supply chain.

Illegal conversion of land for agricultural purposes accounts for nearly half of recent tropical deforestation. Deforestation is such a critical issue. Forests store carbon and support around 80% of the world's biodiversity. These forests support indigenous communities and help regulate the water cycle. Their destruction now contributes 11% of all greenhouse gas emissions. Therefore, the initial scope of the new law will focus on "forest risk products", seven commodities that are consumed in significant amounts in the UK: beef and leather, cocoa, palm oil, pulp and paper, timber, rubber and soya. However, other products will follow. The underlying work of the Global Resource Initiative acknowledges the need to extend the new law to other food products, mining and the extractives industry.

That this shift is happening during a global pandemic and on the eve of Brexit is perhaps surprising. Perhaps not. We have seen over the past couple of years how civil society has outpaced governments across the world when it comes to the expectation of environmental and social performance of corporations. Now, during the pandemic, we have seen these issues heightened and government inaction openly criticised. Administrations are being challenged to govern, and civil society has been clear and unambiguous about what it expects. So, this consultation should not be a surprise. Rather, it is the first move in a wave of regulation that will create an even playing field for Responsible Capitalism.

The food industry must act now, as should the banks that finance the sector. The extractives sector will follow, and that means any manufacturer or business that uses minerals. We have written before that GCs must anticipate ESG dynamics before they can measure their business's impact and manage future liability exposure. The UK government has fired the starter's gun on anticipating supply chain exposure, and businesses will need the six months before any regulation is likely to take shape, to:

  • determine their ESG values and performance indicators;
  • evaluate their supply chain management plans;
  • review their contractual protections;
  • develop their governance structures; and
  • implement a due diligence system that they are comfortable disclosing publicly and that will protect the business from liability.

The reference point for liability under the proposed UK law will be the legality of operations under local law. This will likely extend beyond environmental requirements to include human rights and local community issues. Consequently, businesses using forest risk products in the UK should start by asking themselves whether they have visibility of their supply chain and a full understanding of the legal duties and obligations of their suppliers. ESG-conscious businesses may well then challenge themselves further, asking whether adherence to local law is enough, or whether they should pursue a consistent global standard.

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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