Sustainability, net zero, ESG. All topics that are (or should be) at the top of every organisation's agenda. But many are confused about what they should be doing and indeed what is ESG.

ESG, or environmental, social and governance, is a broad set of issues which underpin the move from a purely short-term, profit driven model of doing business to one that considers the longer term impact of its actions on all of its stakeholders. Taking ESG into consideration can enable organisations to mitigate legal, financial and reputational risks and to create a more sustainable business.

ESG investments have seen record inflows in the past year and we are seeing increasing evidence of the benefits of ESG in investments, with more investors and funds divesting from ESG unfriendly investments.

Environmental

Environmental includes air, waste, water, pollution and biodiversity. However, climate change, net zero and carbon emissions feature prominently on most organisation's key priorities given that we are in a climate emergency and the general response from most environmentalists and climate change experts is that it is time for action.

The UK government has targeted 2050 for net zero emissions (along with the Welsh and NI Assemblies, and Scotland earlier at 2045), with a target of a 78% reduction in carbon emissions by 2035 announced in April this year. Many local authorities and public bodies have set targets earlier than 2050.

The NHS has committed to reaching net zero carbon emissions under its direct control by 2040, and net zero for emissions it indirectly controls (such as the supply chain) by 2045.   Some Integrated Care Systems (ICSs) eg Cornwall and Bristol plan to achieve net zero by 2030. NHS Trusts are moving from anaesthetic gas desflurane to lower carbon alternatives. NHS trusts have been told to develop net zero plans by January 2022, which ICSs will then collate into system wide plans by the end of this financial year.

For health and care organisations, whilst there is a difference between what is legally required and what is best practice given the use of terms such as the "green premium" versus a "dirty discount", the balance is weighing further and further towards best practice. However there is a divergence in values with older assets being more difficult to repurpose and meet the environmental criteria in ESG.

Simon Sherwood, partner at Mills & Reeve (who has a particular expertise in dealing with healthcare real estate investments and developments) has observed how investment funds are looking at the energy efficiency of premises and "green" lease provisions.  He comments that:

"whilst investors, developers and end users are paying greater attention than ever to the environmental credentials of buildings and their use, some have been ahead of the curve for some time with innovative new developments incorporating a range of energy efficient and environmentally friendly features as standard such as solar panels, green roofs, ground source heating and rainwater harvesting.  The gap between these modern environmentally aware developments and old out of date healthcare premises serves to emphasise both the need for continued investment in such vital facilities and the attractiveness of new premises to ESG aware investors."

Just in the same way that health and care leaders are developing climate strategies we are also witnessing corporates responding to their environmental commitments, particularly with shareholder activism in relation to climate change also increasing.

Earlier this year investors ousted two directors from ExxonMobil's board following criticism of its climate strategy - and "a failure to consider how its role might change in a carbon-free society".

Social

Social includes employment practices, human rights and supply chain, diversity and inclusion, health and safety, and the community in which an organisation operates.

In the private sector, we are seeing investors and shareholders paying greater attention to the ethical and sustainability credentials of their investee companies. Consider the Boohoo scandal. This was revealed by a Sunday Times exposé in July 2020 which identified very poor labour practices in Boohoo's supply chain, including in factories in Leicester.  Boohoo's share price dropped by 25% within a day of publication. 

We have also seen investors push back on Deliveroo's IPO amid concerns of its employment practices - and its monetary reserve for employment claims, such is the importance of "S" in ESG.

Investors have continued to take a public stance on pay practices, with the chairman of JD Sports Fashion's remuneration committee voted off the board by shareholders protesting against its bonus policies whilst the company received furlough monies.

Governance

Governance includes corporate governance, ethics and culture. 

Adopting ethical behaviours and seeking to ensure the implementation of sustainable practices makes good business sense. It can attract consumers, enhance consumer loyalty, engage and motivate employees and deliver shareholder value. It is good governance.

For health and care organisations this means adopting an ESG framework specific to the sector as stakeholder expectations, the sector and ESG itself evolves.

Health and care leaders and their investors are paying greater attention to the ethical and sustainability credentials of their investee companies.  ESG is now top of the agenda at board meetings, with discerning shareholders advising corporate investees to take it very seriously as the negative impacts of not considering ESG, as well as the benefits of taking ESG into account, become ever more apparent.

For example, following on from the BooHoo article published in The Sunday Times, Alison Levitt QC was appointed to conduct an independent review. Her report will have made for uncomfortable reading for the Boohoo board of directors. Levitt QC comments that many of the failings "...are attributable to the fact that Boohoo's governance system has failed to keep up with the growth of the company." Another observation, which it's fair to assume would be of concern to investors, was the observation that no Board member commented on their duty to shareholders to avoid a situation developing that causes "severe reputational damage".

Mills & Reeve Corporate Partner, Natalie Wade comments that "as the focus on climate change intensifies all of these actions show that companies can no longer just "green wash" their actions - they have to live and breathe ESG concerns."

Mills & Reeve, ESG Building towards net zero

Many of our clients are asking about sustainability, net zero and ESG.

And it's an issue we've been working on for some time.

For instance, our construction team have sponsored some revealing research into sustainability in the construction industry with their report, Building Resilience towards net zero, with the assistance of Professor Sean Smith, Chair of Future Construction, School of Engineering and Director of the Centre for Future Infrastructure, Edinburgh Futures Institute at the University of Edinburgh. You can download the overview report here or register for your copy of the full research paper here.

Sustainable finance and green bond issues are keeping our lawyers busy. Most recently we supported Flagship Group in issuing its debut £250 million sustainable bond, with a 40-year term at 1.875% coupon.

On a firm-wide level, we have recently appointed Neil Pearson as head of ESG and social value. Neil, previously a partner in our corporate tax team specialising in impact and social investment, will be heading up our own ESG initiatives and strategies, to put ESG and social value at the centre of how we run our own business. Neil explains:

"ESG is no longer a "nice to have". All organisations, large or small, and whether public or private sector, need to look at how they could embed ESG into every aspect of their operations. However, whilst this is a real challenge for all of us, the benefits of getting this right are huge, both for us as organisations and businesses, and for society as a whole."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.