Environmental, Social and Governance Factors Enter the Mainstream | White & Case srl
Global concerns about climate change and inequalities highlighted by the COVID-19 pandemic have contributed to the growing demand and importance of societal expectations regarding responsible business practices. As governments, investors, interested communities and other stakeholders shed light on environmental, social and governance (ESG) concerns, companies across all sectors sought to balance efforts to measure, report and address these challenges while maximizing long-term stability and growth.
We have advised clients, including corporations, sovereigns and investors, on issues ranging from evolving ESG reporting and regulatory requirements to sustainability-related financing. Below, we discuss some of the concerns that were top of mind for our customers in 2021.
Social factors carry more weight
Climate change and regulations and policies designed to mitigate the effects of industrial activity on the climate have underscored the importance of environmental protection, often overshadowing the importance of the “S” in ESG. But it is increasingly recognized that a company’s failure to consider social factors, including human rights, labor practices, community relations, diversity and inclusion, has serious risks. For example, supply chains can expose companies to risks that can negatively impact ESG objectives, creating the potential for reputational damage, which can impact share price.
Legislators are also increasingly intervening to encourage action, particularly in Europe. As the regulatory landscape continues to evolve, so too do the considerations for companies wishing to meet their social obligations.
Mining and Infrastructure Investors Take Note
Across a range of sectors, investors are looking for projects that make sense from both a financial and sustainability perspective. For example, ensuring that borrowers take ESG considerations into account has become a priority for many investors and financiers in the mining sector. As a result, mining companies routinely identify ESG issues, including environmental risks, community relations and their social license to operate, as among their most significant challenges.
Infrastructure investors surveyed in 2021 told a similar story. In the United States and the Asia-Pacific region, a clear majority of investors said that ESG considerations are important when selecting infrastructure projects.
In the United States, where the infrastructure bill paved the way for large-scale spending, investors planned to support more social infrastructure projects, including schools and health facilities, in addition to projects more traditional roads, bridges and tunnels. Aided by lessons from COVID-19, ESG concerns also influenced surveyed investors in the Asia-Pacific region, who similarly described social infrastructure investment projects at an increased pace.
Business and competitive challenges await you
Agreements that regulate international trade largely assume that companies operate solely to make profit. Companies focused on broader benefits, including ESG goals, will need to assess how current trade laws can help or hinder them, both in trade disputes and in their ability to stay competitive while pursuing ESG goals.
Some countries have trade policies that support ESG principles by offering incentives that may violate US trade laws, including anti-dumping laws, which are intended to prevent the sale of products in the United States for less than their fair value. On the other hand, many companies in the United States and elsewhere may be at a disadvantage because they do not receive ESG-related incentives from their governments and instead must incur additional costs to comply with international ESG standards. .
On the U.S. antitrust front, amid intense merger scrutiny and political calls to use antitrust laws to drive social change, companies should weigh social factors — such as the impact of a deal on the environment and employment – when applying for permission to merge. While social factors alone are unlikely to determine the outcome of merger clearance, they could play a role in US law enforcement decisions about which transactions to investigate.
Sustainable finance is accelerating
In 2021, ESG characteristics have become increasingly important in transactions and investments across all asset classes. The growing attention to ESG has spilled over into debt markets, as borrowers have recognized that presenting a clear ESG strategy to investors opens up access to new pools of capital and opportunities. to lock in favorable prices. The transactions included the largest sustainability-related financing ever. Although European and North American issuers account for the bulk of ESG-related issuance, ESG sustainability and debt is rapidly gaining traction in all regions, including Latin America and Asia-Pacific.
A range of ESG-related debt products made progress. Green bonds, which raise capital specifically for climate and environment-related projects, and sustainability-related bonds and loans, which are not tied to specific green projects but are issued to incentivize performance targets in terms of sustainability, have all attracted growing interest from investors throughout 2021. -linked financing products are on the rise, the next challenge for borrowers and issuers will be standardization, to allow the value of transactions to be compared covering different environmental and social impacts.