How is ESG shaping the industry?
ESG will rise even further up the legal and wider business agenda as its importance has only been reinforced by COP26 and the UK Government's 2050 Net Zero Targets. Sustainability is a priority that can no longer be addressed with lip service – governments and the public now demand genuine climate resilience and tangible results. There is opportunity for legal teams to lead the way on ESG within businesses as it will continue to be an area of legislative focus that will impact on how they operate and consequently requires a comprehensive and integrated approach.
Importantly, ESG is a matter beyond regulation that is being driven by consumer expectations. More than ever consumers understand the impacts of unsustainable business practices and expect authentic ESG strategies. Anticipating and not just responding to those demands will be an important differentiator for some R&C businesses. ESG will be an overarching board priority in 2022 as anything from the supply chain to investments and the products and services provided to consumers must become more sustainable.
- The circular economy
Is your business driving the shift towards a circular economy? Moving towards a truly circular economy means embracing sustainability throughout the whole operation from waste management, natural capital and product development and distribution. Emissions over the lifecycle of a product can be significantly mitigated through the application of circular economy principles to product design that support durability, repair-ability and recyclability. It is important for retail and consumer businesses to create products that can be recycled or re-used through greener practices applied to the entirely of the products and services available to consumers. In reducing energy emissions, the circular economy consequentially reduces energy bills for manufacturers and suppliers.
The Department for Business, Energy & Industrial Strategy (BEIS) has highlighted the importance of the circular economy by illustrating how extending product lifetimes, enabling recycling and the extraction of critical raw materials to increase resource security in its energy-related product policy framework. The framework also conveys the BEIS' findings that the circular economy can be particularly effective for energy-related consumer products such as washing machines or heating appliances.
Packaging and waste: The new Plastic Packaging Tax and the Deposit Return Scheme reflect the pressure to eradicate single-use plastics and replace it with sustainable options as opposed to an overreliance on recycling.
Fast Fashion: Many brands are making efforts to transition towards more sustainable fashion offerings, investing in resale/repair/rental technology platforms, innovative materials and waste management technologies to reduce their impact on the environment. In December 2021, the European Environment Agency published a report stating that textile waste would benefit greatly from waste prevention measures, as this is a fast-growing, environmentally impactful waste stream associated with unsustainable consumption patterns. The average European generates approximately 11 kg of textile waste annually. Preventing textile waste has great potential, mainly through reducing consumption, eco-design and ultimately reuse. To facilitate this, emphasis should be put on product design to promote durable and long-lasting materials, while support should be given to repair (e.g. tax breaks) and reuse (e.g. regulation).
Investigations into greenwashing will continue and tighten in 2022 leading to more exposure to adverse claims. Preventing greenwashing is paramount for promoting transparency and accountability. Any Green Claims must comply with consumer protection law and any sector- or product-specific laws. To avoid greenwashing claims businesses should consult the Competition Market Authority's Green Claims Code for guidance. Retail and consumer businesses should mitigate any greenwashing claims to protect their reputations and meet consumer expectations. Potential legislative changes to consumer law will make the enforcement landscape much tougher in the years to come so changing practices now will mitigate future risk.
- Green Contracts
There is increasing drive to make legal relationships and documents more sustainably focused by including green clauses to obligate greener practices. The drive towards sustainability presents both challenges and opportunities for businesses, including those in the R&C sector. Sustainability clauses offer a way for businesses to seek to meet these challenges and embrace these opportunities responding to both regulatory and consumer. For example, this might be by: building 'net zero' or other sustainability targets in supply contracts to align supplier performance with the business' own sustainability goals (commercial / supply contracts); incentivising management teams to achieve 'green' targets (M&A); or promoting the construction of energy efficient buildings or stores (construction).
The Chancery Lane Project (TCLP) is an independent and politically neutral pro-bono effort of lawyers and academics around the world, which aims to develop new contracts and model laws to help fight climate change and achieve the net-zero target. Addleshaw Goddard is partner to this scheme. TCLP has developed the Climate Contract Playbook of 'template' sustainability clauses for use in a range of legal documents in the following areas: commercial contracts, corporate / M&A, project finance, loans, insurance, planning, real estate, construction, employment, public procurement, energy and transport, litigation and arbitration. It is intended to provide businesses with a vision of a greener, more sustainable future with template clauses for use as a starting point in their own contracts.
We are also running a survey across our client base to ascertain the challenges of incorporating these clauses and where clients have most success in negotiating these. The expectation is that this year certain climate-related audit and reporting requirements will become standard and non-negotiable since the UK Government has made it mandatory from 6 April 2022 for more than 1,300 of the largest UK-registered companies and financial institutions to disclose climate-related financial information– in line with the Task Force on Climate-Related Financial Disclosures (TCFD) becoming the first G20 nation to enshrine it into law.
- Supply chain
Contractual obligations need to be supported by the ability to track and measure compliance.
Pressure continues to increase on measuring sustainability across all aspects of the supply chain and ensuring that this is done so transparently. AI, blockchain, use of satellite images and digitization of supply chain data will continue to grow in sophistication, advancing end-to-end supply chain transparency. Blockchain is a technology that will play a role in tackling climate change. Introducing blockchain within supply chains can help in managing sustainable procurement, provide consumers with greater information related to sustainability and practices but can improve supply chain efficiency more generally with greater security.
Are you prepared for a greater scrutiny of financial and sustainability reporting? In line with consumer and regulator interest, investor engagement with corporates is already becoming much more proactive and demanding. A coherent ESG strategy and regular reporting will demonstrate commitment to sustainable business and provide insight into the progress made to hit targets. ESG reporting is vital from a reputational perspective to protect your business.
In particular, there are now mandatory Task Force on Climate-related Financial Disclosures (TCFD) reporting requirements for premium listed companies and other regulated entities such as asset managers and life insurers. This requires all premium listed companies to include a statement within their annual financial reports setting out whether they have made climate-related financial disclosures in that report (or in another document, and if so, which document and where it can be found) which are consistent with the four recommendations and 11 recommended disclosures (TCFD disclosures) of the 2017 final report of the TCFD. If some or all of those TCFD disclosures have not been made then an explanation of why needs to be included, as well as the steps being taken to ensure consistent disclosures can be made in the future. This aims to force companies to consider and prepare for the effects of climate change on their businesses.
- Sustainable Finance
Nearly every business refreshing their debt facilities is now at least considering a sustainable finance package. Sustainability linked loans bring significant benefits and having a sustainability strategy can impact a business's ability to seek finance in the future. Our sustainable finance podcast series hears from lenders, borrowers and advisors with experience of the issues - both the opportunities and the challenges.