With the 2021 United Nations Climate Change Conference, also known as COP26, held in Glasgow, Scotland, the important topic of climate change comes front and centre. As we set the tone for 2022, let’s re-look at the key outcomes of this summit, and its impact on the global corporations.
Climate change is just one central factor of the acronym, ESG that companies are becoming increasingly familiar with these days. That acronym being “ESG,” stands for Environment, Social and Corporate Governance. These factors measure a company’s collective conscientiousness for social and environmental impact. And these factors are becoming ever more important to a company’s bottom line and brand.
These three key factors encompass numerous areas of concern:
- Environmental measures, which examine how a business performs as an agent of the natural environment, can include (but are not limited to) waste, pollution, greenhouse gas emission, deforestation, and climate change.
- Social measures, which look at how the company treats people, can include working conditions, including forced labour and slavery, conflict, health & safety, employee relations, diversity, and community involvement.
- Governance measures, which examine how a corporation polices itself can focus on tax strategy, executive compensation, corruption, bribery, and board diversity.
Failure for companies to embrace ESG practices as part of their core values can result in negative impacts, whether that comes in the form of monetary penalties for non-compliance with existing regulations, damage to the brand’s reputation, or lost customers.
The list of regulations (existing and pending) surrounding ESG components is a lengthy one. The following are just a few examples of issues that are becoming top-of-mind for business executives and should be monitored closely for potential impact.
- Numerous regulations in this area of risk requiring corporate due diligence already exist and additional instances of legislation tightening requirements even further are pending with multiple countries.
- US Customs Withhold Release Orders (WROs) and detentions on imported cargo based on forced labour allegations have increased 300%, while value of the detained cargo is up over 900% in 2021. The latest WRO was just issued on 11/4/2021 on Malaysian glove producers.
- A new workforce safety labour law in South Korea (Severe Accident Punishment Act) goes into effect January 2022. Under the new law, senior executives can be held criminally liable and will face fines and a minimum 1 year in prison if convicted. The law applies equally to Korean or foreign companies.
- The EU and US have entered into an agreement (announced this week during COP26) to curb imports of “dirty steel” by restricting access of steel from countries like China.
- The EU Carbon Border Adjustment Mechanism (CBAM) proposal (adopted July 2021) will put a carbon price on imports of a targeted selection of products so that ambitious climate action in Europe does not lead to ‘carbon leakage’. The CBAM will equalize the price of carbon between domestic products and imports to ensure that the EU’s climate objectives are not undermined by production relocating to countries with less ambitious policies. This could come in the form of an additional import tariff.
New IFRS/ISSB International Accounting Standards
- Announced this last week in Glasgow, the International Sustainability Standards Board (ISSB) is developing baseline sustainability disclosure standards/requirements for assisting auditors with assessing companies’ net zero plans and tackle the issue of greenwashing.
Creation of ESG-specific investment funds
- Invesco recently announced the creation of a new version of its largest EFT fund ($200bn) covering the NASDAQ-100 that will include weightings for how well a company manages its ESG risks. There is a rapidly growing interest in investors looking for ESG funds and holding companies accountable to their practices in this area. A good example is Apple currently fighting an effort by its shareholders to call a vote at the next shareholder meeting on transparency into its use of forced labour.
But all these regulations are not the only thing driving change in the ESG space. One of the biggest catalysts is the consumer. We live in the age of “ethical consumerism” and those purchasing goods and services (specifically millennials, Gen X, Y, Z) are putting their money where their values are. They are driven by making purchases based on positive social and ethical impact.
A 2021 ESG consumer survey* support this, showing that overwhelming majorities of both consumers (83%) and employees (86%) said they are more likely to buy from or work for companies that share their values across the various elements of ESG. Seventy-six percent (76%) of consumers stated they will discontinue relations with companies that treat employees, communities, and the environment poorly. The survey noted “there is, however, a glaring disconnect between consumer and management perception. Many more executives than consumers believe that companies are increasing investments across ESG issues. Consumers make it clear that corporate actions matter more to them than words.”
As companies strive to manage this rapidly changing landscape, they should consider technology solutions that can provide them with tools to assist with ongoing due diligence. Thomson Reuters is uniquely positioned to offer an array of products to that can touch on many aspects of ESG due diligence – whether is it complying with the new accounting standards, tracking regulatory/legal requirements or conducting due diligence on business partners/suppliers, or assisting with analysing sourcing options when red flags are identified in the supply chain.
In closing, I am reminded of the impressive work that is done in this space by many nongovernmental organizations, including the Thomson Reuters Foundation.
About the author
Senior Manager, Product, ONESOURCE, Thomson Reuters
Karen has responsibility for multiple products on the Thomson Reuters ONESOURCE Global Trade platform across all markets. Her focus is providing products that assist companies with maximizing the efficiency of their supply chains and mitigating risk to enhance their overall business performance. She brings over 25 years of experience from the trade where she focused on Supply Chain Risk Management, concentrating on government regulations, policies and initiatives affecting customers operating in the global markets, while providing guidance on how to use technology to enhance risk management. She is a licensed US Customs Broker and additionally completed two terms as an appointed member of the Departmental Advisory Committee on Commercial Operations of US Customs and Border Protection (“COAC”) to the Department of Homeland Security and Department of Treasury, as well as being a member of the COAC Forced Labor Working Group.