By Kirstin Roberts, Director & Shraiya Thapa, Lawyer | Freeths LLP

ESG investments – three points to consider

Environmental, social and governance (ESG) factors have become a key consideration for investors seeking both financial returns and positive impact. These two considerations are not mutually exclusive, and at the same time companies are facing increasing pressure from both their regulators and investors to disclose ESG performance. At Freeths, we advise companies on all aspects of ESG risks and opportunities from a legal perspective. This article sets out three elements which investors should consider when evaluating new and existing portfolios.

Disclosure requirements and greenwashing

Regulators worldwide are increasingly mandating disclosure of ESG-related information. Investors will be able to review more information than they ever could before and evaluate whether a company’s ESG policies align with their own investment policies. Companies will also be facing new obligations in how they communicate and market their sustainability credentials to investors. In the UK for example, a new anti-green washing rule will apply from 31 May 2024 to all Financial Conduct Authority (FCA) authorised firms to ensure any investment product references to sustainability are fair, clear and not misleading to investors.

Governance

As stakeholders in companies, investors are well placed to interrogate whether a company has board level commitments to ESG criteria, for example a climate transition plan backed up by robust shareholder rights to hold any such plan to account. Many companies will still be at the beginning of their ESG journeys so evaluating how much investors can engage with decision making will be a key factor, particularly in medium to long term investment decisions.

Risk management

The vast majority of companies will face elements of both legal and physical climate risk in the next few decades. Physical climate risk will include how well a company can adapt its infrastructure, products, and supply chain to the increasing risk of extreme climate events. In terms of legal risk, pending regulation such as the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) will expose companies to greater financial penalties both at state and a civil liability level for failing to comply with human rights and environmental obligations. Investors should now be assessing the extent to which a company has factored physical and legal risks into its operations.

Integrating ESG factors into investment policies is about making investments into well managed companies. These will be companies which not only have a positive impact on people and planet but are also able to become businesses of the future.