Can SMEs forget about ESG, and should they? Donald Trump’s barrage of executive orders and use of economic threat as well as uncertainty continues apace, but one issue his administration has been consistent on is its very ‘pro’ position on fossil fuels and energy production.
The pace with which Joe Biden’s environmental agenda is being reversed has concerned many, as have developments like the withdrawal of six of the US’s largest banks from the UN sponsored net-zero banking alliance and the US leaving the Paris Agreement on climate change mitigation (for the second time).
Barclays’ and NatWest’s recent removal of climate targets from their senior executives’ bonus schemes show that a corporate shift on environmental governance is unlikely to be limited to the US, but where does that leave UK SMEs and their own ESG agendas?
In my view ESG remains on the corporate agenda and will stay there.
Digging into Barclays’ and NatWest’s announcements reveals that the climate targets in question have not disappeared altogether but have instead moved into long term share-based investment plans which means that those who benefit from the plans are still measured against the banks’ climate related goals and longer-term green policies have not been jettisoned altogether.
While this may evidence a change of emphasis in how some senior leaders’ ESG performance is measured and remunerated, it would be very surprising if ESG was consigned to the boardroom bin given the public’s wider perception of the need to address climate issues. Whatever may play out in the future though, businesses cannot forget or ignore the ESG commitments they may have already made whether those be in contracts, product or service advertising, internal policies or statements to investors as well as staff.
Ignoring any part of that list carries risk.
Contracts with warranties and other terms that require adherence to sustainability criteria or other KPIs have grown in number over recent years, as have those which make suppliers monitor their own supply chains for compliance with ESG laws and practice. Nothing in current politics will alter extant obligations and businesses should not be lulled into the false sense of security that could develop if ESG comes to be viewed as less important over a contract’s life, especially if margins are being squeezed and cost saving options are being sought.
SMEs may not see themselves as targets for ESG claims in the same way an oil major might, but to put the risk in context ESG compliance provisions protect the party at the top of a supply chain. If that party is selling to consumers off the back of environmental claims for its product, for example that it has a low carbon footprint, it will want to take action where its suppliers’ actions mean it falls short of its own green message.
Away from supply chains, businesses cannot ignore statements about their environmental credentials to investors, staff and other stakeholders either. Not all statements will carry potential liability for misrepresentation claims though, and while such claims can be difficult to win, it’s much easier for staff, investors and customers to vote with their feet if they feel let down on a topic which may well be personal to them and no business is going to welcome adverse ESG publicity arising out of its own shortcomings.
Whatever the rest of the Trump presidency may bring to corporate governance it’s worth remembering three things. First, the next president may undo the Trump legacy as quickly as Mr Trump is looking to laying it out. Secondly, Mr Trump’s talk of ‘clean coal’ and executive orders to expand US efforts to capture and sequester carbon – which were bolstered by an act from his first presidency – shows that the carbon challenge is still on the US agenda. Support for those technologies is perhaps not a surprise and could balance the impact of generating the power America will need to sustain its drive to become the world’s leader in AI. Thirdly, and returning to the UK, by law the UK must reach ‘net zero’ by 2050 which is unlikely to happen without business support.
All told, à la Mark Twain, reports of ESG’s death look premature and it would be a knee jerk reaction to think it can be disregarded just yet. Whatever power presidential pronouncements may have, ultimately there may be more power (and votes) in the fight against the impact of climate change, particularly if the public prioritises that and green technologies deliver jobs.
