Protect Legal Adviser, Caitlin Comins, outlines the increasing importance of Environmental, Social and Governance (ESG) to employers, workers and consumers. She highlights how establishing effective whistleblowing processes is crucial for addressing all three areas.
This week’s public resignation from a senior consultant for Shell, because of the company’s “double talk” on climate change, drives home the importance of honest and genuine ESG reporting.
ESG is increasingly high on employers’ agendas. Genuine and strong Environmental, Social and Governance (“ESG”) standards should enable an organisation to minimise the negative impact it has on the world around it and maximise its sustainability. ESG credentials can also enhance the reputation of an organisation, boosting profit, and improving retention and recruitment. Whistleblowing has a key role to play both in helping organisations improve their ESG credentials and in ensuring compliance.
Socially, there is a growing awareness of the importance of ESG. Employees and workers increasingly want to work for organisations that reflect their values. Consumers increasingly opt for sustainable products. And shareholders and investors increasingly insist that the companies they invest in have strong ESG credentials. There can be little doubt that ESG is something organisations need to take seriously.
What is ESG, and where does whistleblowing come in?
ESG is an acronym that encapsulates a broad range of issues:
‘Environment’ refers to an organisation’s impact on the climate crisis, including greenhouse gas emissions, carbon output, waste, and pollution, to name a few.
‘Social’ refers to an organisation’s relationships and engagement with people, including labour standards, equality, and diversity, as well as its compliance with human rights and modern slavery legislation.
‘Governance’ encompasses compliance with regulatory requirements, business ethics, corruption, and transparency.
There is yet to be a unified, set approach to ESG standards, although this may well emerge. This means that, in practice, organisations tend to independently identify the issues within the E, S and G that are pertinent to them, measure and assess them, set targets and processes, and monitor and report on their progress. Whistleblowing cuts across the three elements of ESG. A strong ‘Speak Up’ culture and good whistleblowing procedures are key to establishing good social and labour relations, and fostering an open and transparent environment, where employees feel comfortable to raise concerns. In terms of governance, whistleblowing arrangements are critical to risk and compliance; whistleblowers are the first line of defence against wrongdoing. If listened to, they enable organisations to prevent wrongdoing before it escalates or even before it occurs. They ensure accountability and deterrence. And whistleblowers have an important role to play in ensuring environmental standards are met, by raising concerns about environmental damage, compliance with environmental law, and honest reporting of ESG credentials.
The regulatory web
Employers have to navigate an expanding regulatory web. Larger organisations are already subject to certain climate related reporting obligations under the Streamlined Energy and Carbon Reporting and the Energy Savings Opportunity Scheme. The Companies Act 2006 places a duty on all directors to act in a way that considers the company’s operations on the community and environment. Certain sectors, such as financial services, are subject to more stringent reporting requirements. The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022, which have only recently come into force, apply to economically significant companies and impose mandatory disclosure of climate-related information on governance, strategy, risk management and metrics and targets. Smaller organisations may not yet be subject to climate related disclosure regulations but the direction of travel points to increased regulation and many employers are beginning to pre-emptively introduce climate related monitoring and reporting.
ESG risks and rewards
The ramifications of failing to meet ESG targets, providing false ESG credentials or breaching ESG related regulations are significant. Litigation, regulatory intervention, drop in share prices, loss of profit, staff exodus and reputational damage are all associated risks. Last month, ClientEarth initiated a ground-breaking claim on behalf of Shell shareholders against Shell’s directors for failure to comply with their environmental duties under the Companies Act 2006. In the US there have been a steady stream of ESG related whistleblowing cases. Last year, the ex-CIO for Sustainable Investing at BlackRock, Tariq Fancy, publicly decried sustainable investment as “a dangerous placebo that harms the public interest.” The former Head of Sustainability for DWS, Desiree Fixler’s disclosure that DWS had mispresented its ESG capabilities triggered an investigation by the US Securities and Exchange Commission.
All signs suggest that ESG is only going to increase in importance for employers. ESG standards are only beneficial if they are genuine and reporting is truthful. Employers should set targets that are ambitious but realistic. There must be follow through to ensure these targets are met and honesty when they are not. Reports should be transparent and publicly available, and employees should have the opportunity to feed into the process of setting standards.
Embedding whistleblowing into your ESG strategy
Whistleblowing arrangements should form a crucial piece of an employer’s ESG strategy. Effective whistleblowing procedures and a strong ‘Speak Up’ culture, not only help to evidence good social and governance standards but can also ensure that breaches are prevented before they escalate. To find out more about how employers can embed whistleblowing procedures within their ESG strategy, attend our specialist masterclass on Whistleblowing and ESG.