Sustainable Trading celebrated its second anniversary with a special event on 28 February, hosted by member firm BMO. Eleni Coldrey, Business Development Director, EMEA at member firm Equinix, and a Sustainable Trading Board Member, led a panel discussion with other ESG and sustainability experts James Ford, Mayer Brown; Sarah Morris Lang, BMO Global Asset Management and Michael Torrance, BMO Financial Group.
The discussion focused on the social dimension of climate change and the environment, looking specifically at the intersection of environmental and social impacts, growing regulatory obligations to manage human rights risks throughout the corporate value chain, and the actions firms will need to take in response.
Regulatory Trends
The (voluntary) 2011 UN Guiding Principles on Business and Human Rights are being increasingly enshrined in national laws. For example, human rights and environmental due diligence and related reporting obligations are being introduced across (i) the EU through inter alia the Corporate Sustainability Reporting Directive, the Corporate Sustainability Due Diligence Directive, (ii) various EU member states (including France and Germany) have already enacted supply chain due diligence laws, and (iii) to varying degrees, North America and other regions around the world. Regulatory changes such as import bans by customs authorities, which are particularly evident in the US, underscore increasing legal obligations of companies to address forced labour concerns in their global supply chains.
Firms are increasingly expected to account for how they adhere to prescribed ethical standards to respect human rights. This includes financial institutions, which are also increasingly expected to disclose what steps they are taking to respect human rights and the environment across their operations, in their supply chains, and in their business relationships and financing and investing activities.
Due diligence
Human rights due diligence includes the detection and management of adverse environmental impacts from business activities, for example, those that impact access – and security of access – to fundamental human rights (including the right to food and water), or that impact people’s livelihoods. Illustrating this, the discussion highlighted the example of some proactive adoption of specific human rights due diligence by Canadian mining issuers related to their direct operations. Among other things, the panellists also observed the advancement of awareness and the need for human rights-related due diligence in response to regulation in global supply chain activity.
Going forward, companies will, among other things, need to continue to monitor evolving regulatory standards and legal obligations as well as to prioritise internal education and training around human rights due diligence frameworks.
Stakeholder Expectations and Investor Influence
Beyond legal mandates and compliance obligations, stakeholders (investors and consumers) are demanding more responsible business behaviours with respect to corporate sustainability and responsibility, with expectations of even greater ESG transparency and accountability and evidence of proactive efforts of positive societal impact from business activities.
Greenwashing
Companies’ green and environmental credentials play an increasingly significant role in investment decision-making. However, greenwashing, broadly speaking the practice of presenting a misleading impression of a company’s environmental credentials, remains a critical concern, and is a particular focus of many regulators.
The energy sector is under particular scrutiny with lawsuits from NGOs illustrating the need for transparency and accountability with respect to a company’s environmental or “green” claims.
Our panellists stressed the need for all companies to implement genuine sustainability practices with high levels of transparency in order to maintain stakeholder trust and confidence and mitigate the legal and reputational risks of greenwashing.
Geographic differences
The panellists also discussed the diverse global landscape in which most financial businesses operate, and highlighted the importance of understanding and respecting regional nuances with regard to sustainability practices and challenges.
Managing Systemic Risk & Integrating Sustainability and ESG in Business Strategies
This part of the conversation explored the interconnectedness of environmental, social, and governance factors, and emphasised the need for financial markets participants to take a “top down, bottom up” holistic approach to risk management and value creation.
Asset Management firms have fiduciary duties (and responsibilities) with respect to managing investor risk, and these extend to key systemic risks including environmental and social issues like climate change, biodiversity loss, inequality and systematic human rights abuse.
Trading firms should also be cognisant of the importance of taking a more rigorous approach to sustainability management, and redefining ESG within the context of their long-term business value beyond obligatory climate impact and risk reporting mandates. This requires proactive and quantitative assessment and integration of climate risks within risk management strategies and processes.
To sum up this informed and dynamic discussion, there is an increasingly compelling case for financial firms to implement the ‘double materiality’ approach to proactive management of adverse impacts on society and the environment (for example, human rights and environmental due diligence) while simultaneously considering material risk to enterprise value from ESG factors. This approach, embodied to varying degrees in the new laws highlighted above, will help to mitigate greenwashing risks, to drive more sustainable business practices and to support organisations in improving and maintaining the ‘health’ of the multiple systems on which we collectively rely to generate long-term value.