ESG increasingly a top priority for consumer-facing businesses

Introduction

In recent times, Environment, Social, and Governance issues (ESG) have become a significant priority for consumer-facing businesses. While ESG issues first gained particular attention from would-be investors and stakeholders in significant projects and capital raises, ESG is now equally important to consumers who are increasingly making purchasing decisions for ethical reasons. Many consumers are more likely to purchase ethically-sourced and sustainable products, while actively avoiding companies that score poorly on human rights and ethical supply chain metrics, or are perceived as having negative environmental impacts.

Suppliers, distributors, contractors, and marketing agencies are also deciding which companies/organisations to do business with based on ESG factors. Further, Governments are rapidly regulating companies’ ESG compliance responsibilities. From Net Zero targets to human trafficking diligence, ESG has been firmly cemented as a central feature of the modern consumer markets enterprise.

These growing demands for action have increased pressure on businesses to develop meaningful ESG-related corporate policies and to disclose credible results.

What are the key ESG issues in consumer markets?

The most significant ESG issues for consumer markets enterprises will depend on the particular industry in which the enterprise operates and the key countries or regions in which its products are manufactured or sourced. Some of the issues relevant to most consumer markets enterprises include:

• Carbon emission reduction targets and transitioning to alternative energy sources
• Managing physical climate change risks in key production sites
• Resource and waste management
• Developing alternate and sustainable product ranges
• Supply chain due diligence
• Workplace diversity, inclusion, and non-discrimination
• Responsible use and management of customer data
• Creation and maintenance of ethical corporate governance policies

How are ESG issues being addressed in consumer markets?

The growing societal focus on ESG has catalysed new legislation and regulations worldwide, often requiring businesses to address specific ESG-related concerns and publicly disclose the concrete steps the company is taking to identify and mitigate ESG risks.

In Australia, modern slavery laws require larger companies to report annually on modern slavery risks in their operations and supply chains. The laws are currently subject to a statutory review, which will be delivered in March 2023. The recently elected Labor Government have committed to strengthening the regime, including establishing the role of a Commonwealth Anti-Slavery Commissioner. It is also likely that some form of penalties for non-compliance will be introduced. Australian Federal law also requires certain companies that meet threshold criteria to report on greenhouse gas emission reduction efforts and workplace diversity.

The EU requires certain companies to report annually on the social and environmental impacts of their activities. However, these requirements will be significantly expanded by the newly adopted Corporate Sustainability Reporting Directive (CSRD). The CSRD will have sector-specific standards, and companies will be required to report third-party verified sustainability information in a dedicated section of a publicly available report. Further, the CSRD will apply to a much broader range of entities. Non–EU companies with a significant presence in the EU or with securities listed on an EU-regulated market will become subject to these ESG requirements.

This contrasts with the US regime, where ESG disclosures at the federal level are not yet mandatory. However, this year the Securities and Exchange Commission (SEC) proposed new climate disclosure requirements. Public companies would be mandated to disclose detailed information about environmental-related issues, carbon emissions, risk management processes, etc. While the public comment period has not yet ended, it is expected that some form of these proposed rules will eventually come into effect. In addition, the California Transparency in Supply Chains Act of 2010 started many consumer markets companies on a path to enhanced supply chain due diligence, and the Rubio-Merkley Uyghur Forced Labor Prevention Act of 2021 has established concrete requirements for modern slavery policies and procedures and supply chain mapping and due diligence.

Legal challenges relating to ESG

ESG issues also present a range of new legal challenges for consumer markets enterprises. These challenges include ensuring compliance with the increasing number of legislative reporting and other responsibilities (some of which are referred to above). However, a range of other strategic issues may also become relevant at various times, including for example:

• Asset management and restructuring to manage environmental and sustainability restraints on future cash flows
• Developing a sustainable M&A acquisition strategy and managing possible divestitures or cessations of unsustainable product ranges
• Implementing emission reduction and offsetting targets and developing action plans and policies to achieve them

Another important legal issue is how an enterprise represents its ESG actions and commitments in the market, including to business partners, customers, and its employees. Companies cannot make ESG-related representations that are unfounded, misleading, or embellished (i.e., “greenwashing”). Regulators and private enforcers around the world monitor this because such claims may constitute fraudulent marketing of products and/or services. For example, the Australian Competition and Consumer Commission (ACCC) has recently announced that scrutinising climate claims will be among its enforcement priorities in the coming years. In the US, greenwashing litigation brought by consumers and investors are significantly on the rise. Consumer-facing firms must therefore carefully manage their ESG-related claims in all contexts, such as public reports, product packaging, website pages, and marketing materials.

Because ESG policies are commonly ethics-based, firms must carefully avoid a coordinated approach with their competitors and should make independent decisions to meet such policies to comply with antitrust laws. For example, firms should avoid participating in group refusals to deal/boycotts of certain companies with insufficient ESG policies or allocation of customers and/or territories among competitors with ESG-compliant policies. Collaborative conduct in the ESG context may be well-intentioned, but it will be important to consult with antitrust counsel before engaging in certain business behaviours.

Ultimately, as ESG increasingly becomes a compliance-related field, companies will need to incorporate multi-faceted and adaptable ESG policies into their long-term business plans.

Norton Rose Fulbright’s consumer markets group has been working closely with commercial enterprises across every continent in respect of a wide range of ESG related issues relevant to consumer-facing businesses and is uniquely positioned to guide global businesses as they set their approach to ESG issues at a global level.

The transition to a sustainable future is gaining tremendous momentum, and environmental, social, and governance (ESG) considerations are now being adopted in the decision-making process to not only mitigate risks but also identify opportunities.

While many large companies set sustainability goals and published ESG-related data in 2021, investors, regulators, and the broader public are exercising greater scrutiny of corporate sustainability efforts.

In 2022 and beyond, corporate boards and government leaders will face rising pressure to demonstrate that they are adequately equipped to understand and oversee ESG issues — from climate change to human rights to social unrest.

Investors, corporate boards, and government leaders have raised expectations for progress on climate pledges in 2022. Alongside climate, biodiversity, and other environmental concerns, social issues — like diversity, equity, and inclusion and worker wellbeing — appear poised to remain in the spotlight, particularly as they are increasingly woven into broader ESG discussions.

Rising demands for action will likely increase pressure for more accountability, greater regulatory scrutiny, and credible disclosure backed by better data.