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AN OUTLOOK ON THE JURISPRUDENCE SURROUNDING ESG
All Insights / By Alakonya Law LLP
AN OUTLOOK ON THE JURISPRUDENCE SURROUNDING ESG
INTRODUCTION
ESG represents a framework designed to assist stakeholders in comprehending how an organization is addressing both the risks and opportunities associated with environmental, social, and governance criteria, often referred to as ESG factors. It's important to note that ESG adopts a comprehensive perspective, recognizing that sustainability encompasses more than just environmental concerns.
What Does ESG Stand For?
ESG is an acronym that stands for environmental, social, and governance.1. Environmental
Environmental factors encompass an organization's influence on the environment and its strategies for managing risks. These factors encompass both the direct and indirect emissions of greenhouse gases, the responsible management of natural resources by leadership, and the company's overall ability to withstand physical climate-related risks such as climate change, flooding, and wildfires.
2. Social
This aspect pertains to how an organization interacts with its stakeholders. This encompasses various factors by which a company can be evaluated, such as human capital management metrics (such as equitable wages and employee engagement), as well as the organization's effects on the communities where it conducts its operations.
One significant aspect of ESG (Environmental, Social, and Governance) is the widening scope of social impact expectations. These expectations now extend beyond a company's internal operations to encompass its supply chain partners. This is particularly relevant for partners located in developing economies, where environmental and labor standards might not be as stringent.
3. Governance
Corporate governance pertains to the manner in which an organization is directed and administered. When ESG analysts delve into this aspect, they aim to gain a deeper understanding of several key elements. These include assessing whether the incentives for leadership align with the expectations of stakeholders, examining the organization's stance on and adherence to shareholder rights, and evaluating the internal mechanisms in place to foster transparency and accountability among leadership.
Important Points to Note
• ESG represents a structure that aids stakeholders in comprehending an organization's approach to handling sustainability-related risks and opportunities.• The development of ESG can be traced back to previous movements that concentrated on concerns such as health and safety, pollution reduction, and corporate charitable activities.
• ESG has transformed the way major global financial service companies and asset managers determine where to allocate capital.
• A new group of ESG experts is entering the field and backing initiatives related to achieving net zero emissions and carbon neutrality objectives.
CASE ANALYSIS
Africa is moving towards a future where ESG compliance holds greater importance.The developments are a result of the below shifting priorities:
• Growing pressure to adhere to ESG standards is driving a change.
• Sustainability is crucial for business growth, especially in Africa's resource extraction-heavy industries.
• Increased vulnerability to climate change further emphasizes the need for ESG compliance.
South Africa's case study demonstrates how some countries are taking concrete steps to address environmental concerns through legislation and policy changes.
• South Africa's efforts to combat climate change illustrate the broader trend.
• The National Climate Change Response White Paper (2011) laid the groundwork for climate change legislation.
• The Carbon Tax Act (2019) and related regulations incentivize businesses to reduce emissions.
• The proposed Climate Change Bill aims to solidify a comprehensive climate change policy framework.
Despite various developments across the board, ESG has been met with a major challenge known as Greenwashing.
Greenwashing
This is the deceptive practice where Financial institutions and companies make inaccurate or misleading ESG claims, particularly regarding climate change. It includes unsubstantiated environmental performance claims, selective disclosure, or non-disclosure of environmental and social impacts. In other jurisdictions there has been a surge of litigation in these categories, and sometimes the regulators themselves have taken action.Examples of greenwashing litigation:
• Ramirez v. ExxonMobil Corp: Shareholders sued for directors' alleged breach of fiduciary duty by not disclosing climate change's impact on the company.• Abrahams v. Commonwealth Bank of Australia: Shareholders sued the bank for investing in coal mines, potentially contradicting its ESG claims.
• SEC v Vale S.A.: The SEC charged a Brazilian mining company for concealing dam collapse risks and environmental damage. (This case highlights ESG concerns beyond climate change)
• SEC v BNY Mellon: The SEC penalized an investment advisor for misleading statements about ESG considerations in its funds.
• Deutsche Bank Raid: German authorities suspected the bank of falsely claiming adherence to ESG criteria in its investments.
Greenwashing litigation is a growing concern for financial institutions. Regulatory bodies and shareholders are increasingly holding companies accountable for accurate and transparent ESG reporting. Additionally, there is no single, universally accepted standard for measuring ESG performance. This can make it difficult for investors to compare companies and assess their true ESG commitment.
