ESG in the UK: A shift to mandatory corporate responsibility?

Globally, we are witnessing a significant re-set of stakeholder expectations on corporates to take responsibility for their ESG impact. This has manifested in consumer and investor purchasing decisions and shareholder voting (for example, a rapid drop in Boohoo’s share price following allegations of modern slavery and the change to the Board of Directors voted by ExxonMobil’s shareholders for the company’s failure to take into account the financial risks posed by climate change).

In the UK, until recently, taking such responsibility remained a voluntary choice for each company. However, lately we have seen a legislative push towards corporate accountability for ESG issues, as well as the English Courts paving the way for companies to be held legally responsible for the ESG impacts of their subsidiaries, and even the third parties in their supply chain.

Although this article will focus on the UK, this shift is also occurring in other jurisdictions.

Legislation

The Modern Slavery Act

The Modern Slavery Act 2015 made the UK the first country in the world to require large businesses to report on how they work to prevent and address risks of modern slavery in their operations and supply chains. Since then a number of states have introduced similar and, in some cases, more onerous requirements. By comparison, and with a growing global focus on ESG, the Act has been criticised for being out of date and lacking ‘teeth’.

In September 2020, the UK Government committed to bringing forward measures to “strengthen and future-proof” the Act, and to “ensure that large businesses and public bodies tackle modern slavery risks in supply chains.” Although a lack of Parliamentary time has hampered progress, a private member’s bill proposing radical changes for enforcing the Act was recently introduced. This, alongside legislative developments in mandatory human rights and environmental due diligence requirements across the world, and the continuing focus on corporate responsibility for ESG issues, means that we can expect modern slavery reform in the UK.

The Environment Bill

The Environment Bill proposes a mandatory supply chain due diligence requirement for those companies that use a forest risk commodity, or a product derived from that commodity. The purpose of the Bill is to “clamp down on illegal deforestation”, a key driver of climate change and biodiversity loss, as well as often involving the displacement of local communities. Following delays, the Bill has now returned to Parliament.

What's next?

On 10 March 2021, the European Parliament adopted a resolution with recommendations to the Commission to “adopt binding requirements for undertakings to identify, assess, prevent, cease, mitigate, monitor, communicate, account for, address and remediate potential and/or actual adverse impacts on human rights, the environment and good governance in their value chain”. It is unclear whether the UK Government will implement similar legislation but, at least, it may bolster the UK Government’s approaches to the Modern Slavery Act and the Environment Bill.

The Courts

The landmark decision of Vedanta v Lungowe [2019] UKSC 20 held that a UK parent company can owe a direct duty of care, and so be liable, to third parties affected by the overseas operations of a subsidiary. This was reaffirmed in Okpabi v Royal Dutch Shell [2021] UKSC 3. Each case was brought by a local community impacted by environmental damage caused by the non-UK subsidiary’s operations.

In Hamida Begum v Maran (UK) Limited [2021] EWCA Civ 326, it was held that a UK company’s duty of care could, in certain circumstances, extend to the actions of third parties in its supply chain. In that case, the Claimant’s husband was killed whilst working in unsafe conditions on the demolition of a ship sold by the UK company.

What's next?

Although all three decisions turn on the specific facts of those cases (as emphasised by the courts), those facts are by no means unique and could fuel the interest of litigation funders and claimant law firms, encouraging equivalent claims, particularly in the current ESG-focused climate.

However, all three decisions were either made in relation to a jurisdiction challenge or strike out/summary judgment application, and therefore the duties of care considered were held to be arguable rather than actual. The attraction of the English courts to overseas claimants is ultimately likely to depend on whether an actual parent company duty of care is established once this type of case is considered on its merits. Vedanta settled in January 2021. The substantive trials of Okpabi and Hamida Begum are yet to be listed.

What does this mean for businesses?

• There is growing pressure on companies to manage ESG related risks effectively across their corporate groups and supply chains. In addition to potential action by consumers, investors and/or shareholders, a failure to mitigate these risks could create legal liability for companies, result in litigation and (subject to legislative developments) give rise to enforcement risk.
• Companies should conduct internal due diligence and supply chain or operational audits, anticipate risks and put in place robust processes and data management.
• Companies may need to implement quality controls and governance mechanisms to ensure that they adhere to their human rights and environmental due diligence and/or disclosure obligations, as well as any ESG related standards or targets they have adopted.
• Care must be taken with group-wide policies or standards. In Okpabi the Supreme Court rejected the suggestion that a group-wide policy or standard could not give rise to a duty of care for the activities of a subsidiary. The existence of that duty will be a question of fact in each specific case. Whilst this may deter some companies from taking group-wide steps to protect environmental and human rights, conversely, one of the better ways to avoid parent company liability is to ensure that risks are effectively monitored and mitigated across the group. Ultimately, every company will need to consider how it balances these competing risks.
• ESG-related obligations in supply chain agreements could be used to manage supply chain risks. Those obligations must be measurable and have real force, however. Companies should consider building in leverage, such as linking payment arrangements to the ESG-related obligation(s).

The shift towards mandatory corporate responsibility for ESG issues in the UK is not slowing. The time for companies to review their risks and implement changes is now.