The 'S' in ESG. Why every ESG strategy must consider social impact and human rights
16 November 2022 | Applicable law: EU
IKEA is implementing an ambitious and well publicised sustainability strategy in order to become climate positive by 2030. IKEA’s plan includes reducing its greenhouse gas emissions by more than the IKEA value chain produces. However, despite the positive media response to their environmental policies, IKEA has been recently criticised for human rights impacts from producing its furniture in Belarus and reportedly using Belarusian prison labour.¹ This contrast highlights the need to focus on all aspects of ESG – not just the “E”. Crucially, businesses need to focus on human rights as part of their strategy to address the “S” (or social limb) in their ESG and sustainability strategy.
We are seeing increasing demands being placed on companies of all sizes and across all sectors to ensure that social (including human rights and labour) standards are being respected, in addition to environmental standards. The UN Guiding Principles of Business and Human Rights, unanimously endorsed by the UN Human Rights Council in 2011, are the global standard for preventing and addressing the potential adverse impacts on human rights. Guided by these principles, several States have implemented laws which impose due diligence obligations on businesses to monitor and mitigate potential human rights risks within their operations and supply chains.
Investors also increasingly incorporate respect for human rights in their decision-making processes. In January 2022, for example, Aviva Investors, a UK asset manager with over £200 billion in managed assets, told 1,500 company directors that it may seek their removal for failing to tackle human rights issues and the climate crisis. In August 2022, 39 investors representing over £4.5 trillion in assets signed a letter to the UK government asking it to put in place a “Business, Human Rights and Environment Act”. The letter suggests that legislation for robust human rights and environmental due diligence by companies would enable investors to identify risks to people and planet. On that basis, investors could make “informed and sustainable investment decisions and demonstrate to beneficiaries that their money is being managed in line with international standards”.
In addition to investors focusing on ESG, businesses and governments are facing litigation and reputational risk for a failure to protect human rights within their organisation and supply chains. A recent example is the legal action brought against the UK government for continuing to procure PPE for the NHS from a manufacturer, Supermax, accused of labour abuses. Similarly, fast fashion retailer Boohoo has experienced negative press coverage over poor working conditions in its UK warehouses. This included repeat coverage each time the business issued a new report on how they were taking steps to address the issues originally identified.
What businesses should do
To attract investment and minimise risk, a robust organisation-wide strategy assessing and addressing ESG performance is now essential for companies, their founders and directors.
Businesses without existing frameworks should consider implementing their own ESG policies and governance so as to ensure alignment with national and international standards. But even businesses with existing frameworks need to stay on top of changing international dynamics and regularly review what they have put in place. Topics cover a broad range, including, but not limited to environmental impact, wage and working conditions, supply chain due diligence, active governance and establishing grievance mechanisms.
Similarly, businesses considering acquisitions, mergers, investments or expansion opportunities need to undertake suitable due diligence to address potential ESG issues in order to mitigate financial, legal and reputational risks. This is particularly the case if the transaction will result in the business operating in new jurisdictions where those involved may not be as familiar with local requirements. Although there are often sound financial reasons for certain activities, such as low-cost bases in other countries, these can increase compliance risks, including with regard to ESG.
Things to consider include:
- assessing an organisation’s strategy, structure and operations for ESG risks and current compliance;
- considering any ESG issues facing a target, including sectorial and regulatory developments likely to arise in the country or sector in which they will operate;
- conducting ESG risk assessments of potential suppliers, business partners and third parties;
- analysing applicable international and domestic hard and soft law standards; and
- engaging appropriate experts to advise on and conduct ESG due diligence effectively.
How we can help
We work across a range of legal disciplines to help address complex needs in the evolving business and human rights landscape. Drawing on expertise in the corporate, employment, litigation and reputation management areas, we can assist you to:
- design and implement bespoke ESG strategies;
- review existing ESG policies and frameworks to ensure these remain fit for purpose;
- advise on specific human rights issues, such as working conditions both domestically and internationally and work with you to put in place appropriate mechanisms to detect and address issues;
- assist you with integrating environmental impact assessments in your organisational framework and coordinating impact assessments;
- put in place supply chain due diligence reporting mechanisms;
- develop and implement operational level grievance mechanisms;
- assist you with litigation and dispute resolution; and
- manage any related reputational issues.