ESG – is a business transformation tool, where management strategy and internal company policies are shaped with sustainable development objectives in mind. Yunona Sizykh, Senior Consultant at Alliance Legal CG, described the legal side of the issue and how the agenda is evolving today.
The concept of sustainable development is based on three components – the so-called ESG principles, where E – environmental, is the agenda aimed at protecting the environment by reducing the risks of negative impact on the environment, S – social, social responsibility, respect for labour and consumer rights of citizens, and G – governance, as responsible corporate governance, using saving technologies.
The logic is as follows: business can contribute to solving global problems (primarily those related to ecology) if it operates on the basis of a responsible attitude towards the environment, responsible management and investment, a responsible attitude towards people who have rights.
According to experts, this is the only possible and necessary way to implement the international concept of balanced development of the whole world.
The government, together with the Russian business and legal communities, is actively discussing the ESG agenda, which has been developing rapidly worldwide in recent decades.
At the same time, the business community has several roles to play: firstly, companies that produce goods or provide services are creating new internal policies and tools for their implementation. Other stakeholders include investors, whose interest in “green” finance encourages other business actors to implement ESG-oriented strategies and risk assessment systems in their companies.
In addition to commercial investors, governments have a significant interest in ensuring that business is aligned with sustainable development goals and are willing to invest resources in companies that implement ESG practices.
Previously, sustainable development was seen as more relevant to large companies (industry, oil and gas, banks). Now there’s no doubt about its importance for small and medium- sized companies. Take, for example, manufacturers of ecological goods and products who are themselves suppliers and are part of large production chains.
The ESG agenda affects completely different areas and therefore different companies: the improvement of urban and other areas, including all kinds of construction concepts and solutions, “green” transport, agricultural activities and production, logistics, various industries using “green” technology, tax regulation in the key of sustainable development, intellectual property related to the development of “green” technology, investment activities, tourism, pharmaceuticals and others.
REGULATING THE ESG AGENDA
In Russia, the key long-term issue is the formation of a national “green” standard.
For example, the National Green Building Standard for Multifamily Residential Buildings (GOST R) came into force on November 1, 2022. It aims to implement international and Russian regulations to ensure a favorable eco-environment and combat climate change, such as:
• united Nations General Assembly Resolution “Transforming Our World: the 2030 Agenda for Sustainable Development”;
• paris Agreement on Climate Change;
• decree of the Government of the Russian Federation “On Approval of the Goals and Main Directions of Sustainable (including “Green”) Development of the Russian Federation”.
The standard includes various categories of assessment, including construction organization and management, material and resource efficiency, and water management. The new standard aims to cover several tasks at once:
• reduce the negative environmental impact of the construction and operation of buildings;
• provide citizens with the opportunity to purchase environmentally friendly housing.
• at the same time, a system of incentives and other measures is being discussed, such as:
• loans to companies with positive ESG ratings;
• good green mortgage rates, which will increase the interest of developers and consumers in “green” building.
The adopted standard refers to the overall project for the construction of “green” buildings and facilities, which is referred to in the Decree of the Government of the Russian Federation on Approval of Criteria for Sustainable Development Projects.
It is important to understand that the regulatory framework based on sustainable principles is currently being developed only in Russia.
In fact, to implement the ESG agenda, international standards and principles, which are not required by Russian legislation, are now being applied in many legal relationships.
In a sense, they are subordinating Russian legislation and inevitably changing national law.
On the one hand, Russian business is trying to comply with existing international standards and principles, but on the other hand, it is forced to take into account the specifics of national legislation, where ESG standards are just beginning to take shape.
WHAT ARE THE LEGAL ISSUES INVOLVED IN THE ESG APPROACH?
Of course, the agenda has an impact on legal regulation and requires changes in laws, including trade regulations, construction, tax and other legislation. But if we talk about the legal aspects from the point of view of the company itself, the important issue here is precisely the coordination of the internal and external processes of each individual company. And this is the role that lawyers have to play.
For example, a company may need to draft a contract in accordance with ESG standards or analyze a submitted “green” contract. Since today’s sustainability standards are in addition to existing legal requirements, a lawyer’s role in such a situation would be to eliminate inconsistencies and identify risks, especially the risk of damages. Let’s assume that a foreign investor offers financing on the condition that the company discloses the technological component of the production of “green” products to confirm its compliance with ESG principles, and here the lawyer would have to analyze, on the one hand, to what extent the international principles of sustainable development allow such disclosure and whether the intellectual property rights of the contractor will not be violated, and on the other hand, whether the investor will be harmed if, aft er investing without disclosing technological information, it turns out that the final product does not comply with the environmental agenda…
The issue of disclosure of non-financial information (information about business processes, business model, management principles) as one of the areas of ESG policy is becoming inevitable for companies. In order to understand to what extent and what kind of information the company should disclose, it will be necessary for lawyers to make an appropriate assessment of the company’s activities based on data provided by managers, analysts and other specialists of the company.
It is likely that large market participants will need ESG lawyers on staff. Small and medium-sized companies (as well as large ones) can hire lawyers from consulting or law firms for such a task. The problem is that, at the beginning of 2023 there will be few lawyers who specialize in technical industry issues and have both deep legal expertise in a company’s industry or area of expertise and expertise in sustainable development.
While the legal community deals with this issue, companies are trying to help themselves by joining forces. For example, the National ESG Alliance was formed in late 2021 and already includes 28 major companies in the industry. The Alliance’s “open door” policy allows new members to join.
Another community of ESG-oriented companies is the Russian League of Green Brands. Its members are developing comprehensible criteria for “green” goods. It is expected that they will be used in the future national eco-certification system.
DEVELOPMENT OF ESG PRACTICE
It should be understood that the development of ESG practices in Russia will largely depend on the perception of the importance of sustainable development by business and society. The state, in turn, is willing to invest resources in companies that implement ESG principles.
Despite the current geopolitical situation, it is already important to consider the impact of business activities on the environment, the extent to which they aff ect the economy and society, and the contribution of business to the realization of human values. Integrating the ESG agenda into corporate practice is certainly important for business. But it is worth starting this process with comprehensive legal support.
Russian Business Guide
Author: Sizykh Yunona, Senior Consultant in General Practice