In recent times, environmental and social considerations have understandably risen to the top of our cultural agenda. The corporate world, driven by an increasing need to satisfy a wider stakeholder base, has followed the trend and as a result, the third pillar of ESG – ‘Governance’ – often finds itself an afterthought in the wider sustainability & ESG narrative.
Nonetheless a robust approach to corporate governance is fundamental to the realisation of corporate ambitions across the ESG space, forming the foundation from which a successful ESG framework can be built.
The keys to good governance
Good governance encompasses a wide range of concepts but can largely be distilled down to the rules, regulations and frameworks which underpin a company’s management structure to facilitate efficient and transparent decision-making processes. Accurate reporting, executive compensation, transparency regarding diversity and ethical practices (such as preventing abuse within supply chains), and strong corporate values are also key tenants of good governance.
At the very heart of corporate governance is board level decision-making, strategy and most importantly, buy-in. The championing of ESG ideas at board and management level is crucial; it demonstrates to both internal and external audiences an emphasis on ESG, helping to drive employee recruitment, engagement, ethical decision-making processes and accountability throughout the organisation. This is why we would always recommend that ESG policies and procedures are approved by senior management, with confirmation of this fact being recorded therein.
While ESG strategy is ultimately led by the senior leadership team, such policies will be unsuccessful without a strong governance framework across lower management to help support initiatives on the ground. HR professionals, as the key conduit between a company and its employees (an increasingly important stakeholder group), can add real value here. For example, through the creation of new company-wide policies to help reinforce ESG principles. Moreover, HR’s role in the establishment of values committees and ‘people groups’ to cultivate new ideas across the workforce is an important means of promoting employee conversation and engagement. HR personnel are well equipped to ensure that the spirit of board-level ESG policy is reflected in decisions being taken elsewhere in the business, including during recruitment and management training. This can help to combat the significant reputational ramifications of an inconsistent approach to ESG.
There has never been a better time to start building and reinforcing your governance framework. For a number of reasons, sustainability & ESG looks set to gain even greater prominence and companies will need to adapt quickly.
Where traditionally a company may have only been beholden to its shareholders, it is becoming apparent that the stakeholder umbrella is rapidly growing. In 2019, as part of the Business Roundtable, over 180 CEOs of global corporations declared that companies should concentrate on providing benefits to customers, employees, suppliers and communities as well as deriving profits for shareholders.[1] Building on this theme, the UK government’s policy paper ‘Restoring trust in audit and corporate governance’, confirmed that directors were under a duty to monitor the impact of their decisions on employees and had a responsibility to strengthen workforce engagement. What is clear is that the workforce is no longer merely a tool to help promote ESG policy; it is fast becoming a key audience to cater for and align with. Given the diverse nature of today’s corporate stakeholder group, a strong governance framework is more important than ever to ensure the views of all interested parties are effectively reflected in the decision-making process. This is particularly the case in light of the politically and emotionally charged environment in which the sustainability & ESG agenda resides.
Legislative developments
Alongside stakeholder pressures are the growing numbers of recent and upcoming legislative developments which will no doubt drive corporate strategy in the sustainability & ESG space. Chief among these, is the Corporate Sustainability Reporting Directive (CSRD), an EU directive which entered into force on 5 January 2023 and must be implemented into national law by 6 July 2024. This legislation requires large companies to disclose, track and measure their sustainability performance. The first tranche of Sustainability Reporting Standards that companies within scope of CSRD must report under were adopted on 31 July 2023. The 12 standards have been categorised in reference to the traditional 3 ESG pillars and includes ‘workers in the value chain’ (Social), ‘pollution’, ‘affected communities’ (Environmental) and ‘business conduct’ (Governance). By 1 January 2026 all companies based in the EU will be within scope of this regime, and by 1 January 2028 all companies with even a branch or subsidiary based in the EU will need to comply.
The Corporate Sustainability Due Diligence Directive has also advanced through the legislative process in recent months, with an agreement on the content of the directive being reached in the European Parliament on 14 March 2024. This new directive was formally adopted by the European Parliament on 24 April 2024 and will place an enforceable duty on large companies to manage climate change issues and human rights abuses both within its own subsidiaries and wider supply chains. Within the UK, the Financial Reporting Council (FRC) was recently invited to strengthen the UK Corporate Governance Code and in January 2024, announced a number of minor revisions which nonetheless increase the focus on internal controls and robust risk management (along with related reporting requirements to ensure effectiveness). Wider revisions will likely depend on the appetite of the UK’s next government. In addition, the forthcoming duty on employers to take reasonable steps to prevent sexual harassment of their employees will come into force in October 2024. This represents a significant increase to an employer’s responsibilities and early non-compliance could result in both tribunal liabilities and substantial media attention.
Our team at DLA Piper are well equipped to discuss and advise on any of these issues. In particular, it is important for UK employers to familiarise themselves with the provisions of the new sexual harassment duty ahead of the enforcement date. Under the new legislation it will be vital for an employer to be able to demonstrate that it has taken reasonable steps to prevent harassment in the workplace. Training will certainly go some way to demonstrate such reasonable steps and we would be happy to discuss with you DLA Piper’s bespoke anti-harassment training offering.
Corporate governance is key to creating the right foundation for environmental and social ideals to flourish. This must start from the top by way of a clear, holistic and stakeholder-driven approach to sustainability & ESG. At the same time, it is only by creating a strong governance framework to help implement this policy on the ground that companies can start to experience the real benefits of a successful sustainability & ESG agenda. Sustainability & ESG issues can be controversial and often involve competing values. The importance, therefore, of HR personnel and other people managers in empowering the whole workforce to discuss and collaborate in this space should not be underestimated.
If you would like to discuss any of the issues raised in this series of articles or learn more about the bespoke training we provide at DLA Piper, please get in touch.
[1] What is the “G” in ESG? | S&P Global (spglobal.com)
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Read the previous articles in the series here: