The three pillars
More than ever before corporations need social legitimacy to operate. In recent years, we have seen numerous significant risk, compliance and culture failings in companies that, at their core, are symptomatic of a lack of a robust and integrated ESG focus.
The three pillars of ESG – Environmental, Social and Governance – require companies to exercise greater scrutiny as to whether they are conducting their business sustainably and responsibly. ESG covers the full gamut of issues regarding:
Environmental impacts, including climate change, resource efficiency, biodiversity and species protection
Social impacts, including impacts on labour, community, vulnerable groups and other social stakeholders
Governance challenges, including anti-bribery and corruption, cyber and privacy, whistleblowing, transparency and disclosure, business ethics, remuneration and incentives, and accountability particularly for risk and compliance matters
Risks and opportunities
Stakeholder expectations and shareholder activism on ESG issues have increased in recent years, and will continue to do so. Having leading ESG commitments and practices embedded in a company's structures and processes from the board down are both a risk mitigant and enabler – they are a real asset and can lead to substantial success. Conversely, ESG failings can have significant commercial, operational and reputational consequences.
It is also clear that there is a high benchmark for companies in setting ESG standards - globally accepted norms that are captured in international laws and soft law standards set a high bar across these subject matter areas. For example:
- the Paris Agreement on climate change;
- the UN Declaration on the Rights of Indigenous Peoples as one such standard on engaging with First Nations peoples; and
- the ILO Declaration on Fundamental Principles and Rights at Work on core labour standards, to name a few.
These international and soft law standards are also informing the development of legislation in these areas – with the global trend in modern slavery laws one such example. The ESG failures we have seen in recent years have shone the spotlight on the importance of going beyond compliance with domestic laws – the bar set by domestic law is too low as a reference point for setting ESG culture. Stakeholder expectations have shifted to align more with the global standards set by international laws and standards.
International law as a tool to inform a robust ESG policy position and culture
Organisations faces a poly-regulatory environment - domestic laws are a baseline but recent events in Australia and elsewhere demonstrate that compliance with those domestic laws alone are insufficient to shape a robust ESG risk and compliance culture. Stakeholders – investors, employees, civil society – are holding organisations to the higher standards set by international laws and soft law standards. While international law is agreed to and applies between states and does not apply to companies directly, in some cases these state international law commitments are incorporated into domestic law (for instance leading anti-bribery laws and modern slavery laws). In many cases companies have committed themselves to aligning with those international laws or standards by express reference in their policy commitments. Where such commitments are made, stakeholders are increasingly scrutinising (both before and after something goes wrong) whether companies are honouring those commitments and, in some cases, exercising their leverage to take action where they are not. In some jurisdictions, depending on the regulatory environment, a failure to do so can lead to misleading and deceptive conduct claims or shareholder actions.
International laws and standards are relevant to organisations shaping a strong ESG position and culture here and now. Going forward, these international laws and standards will continue to influence the direction of domestic law obligations imposed on organisations.