By Nathan Carr, Chief of Staff, Head of Legal & Sustainability at Absa Bank (Mauritius) Limited
So much has been communicated on Sustainability and ESG, but still, ambiguity and confusion remains. This vacuum, exacerbated in the context of changing political regimes and shifting attitudes towards both, is diluting progress in redirecting the current trajectory of climate change and social inequality.
While often used interchangeably, "sustainability" is the holistic doctrine tied to the long-term health of the planet and society at large. At the root of sustainability is the well-coined challenge (and opportunity) of meeting our present needs without compromising the ability of future generations to meet theirs. It is all encompassing and can be overwhelming in terms of the breadth and depth of scope.
ESG, Environmental, Social, and Governance, is the tool in the sustainability box to co-ordinate efforts and contributions at an organisational level towards a sustainable future. It is essentially a measuring and reporting framework organisations adopt – to varying degrees of effectiveness – to track their sustainability impact across the elements of Environment, Social and Governance spheres.
Think of “ESG” as an organisation’s report card reflecting their journey towards being more “sustainable” - both internally across their operations and externally in terms of how they face the market and engage with the communities in which they operate.
For banks and financial institutions, sustainable finance is a key element of their ESG agenda, across primarily the E and S pillars. It is where sustainability challenges and opportunities intersect, presenting both a responsibility to support the market in new ways of financing, alongside a commercial opportunity to grow revenues and market share in a relatively new and niche play. It is the banking stage of “doing well by doing good.”
But with sustainability and sustainable finance, comes all the dirty laundry of “greenwashing” (the misrepresentation, intentionally or unintentionally, of green credentials), “green-wishing” (the communication of fanciful green ambitions) and – most recently “greenhushing” (the conscious receding of green reporting or communication, sometimes for fear of greenwashing and green-wishing).
Not that long ago, prior to regulation and scrutiny, many organisations were quick to turn their ESG agendas into marketing glitter – adding gloss, and hyperbole to create an embellished lens of reality. This has, understandably, resulted in a spate of law, regulation, and ensuing litigation to ensure that what companies say and suggest they have done or are doing or will do is verifiable and, well, the truth…
Enter the world of green taxonomies. What are green taxonomies, why are they important and what is the role of lawyers and in-house legal in the ESG realm?
“Taxonomy” is the science of classification, and a “green taxonomy” is a classification system that defines which economic activities and assets are ‘green’ or qualify as being “sustainable” – and, conversely, those that do not. Simply put, a green taxonomy is a dictionary of terms and definitions that bring clarity to investors, intermediaries, and financial institutions. They are the rules of the game – increasingly refereed by regulators, governments, and courts - to ensure transparency, a common language and level playing field.
However, achieving these noble objectives regionally and globally is not straightforward. Cue lack of uniformity in taxonomies. ESG legal and regulatory frameworks are asymmetric across many jurisdictions. There is fragmentation between guidelines and codes of conduct and vagaries depending on business sectors and locations.
Whilst the EU’s taxonomy for sustainable activities is arguably the most established and well known, there are currently over 45 taxonomies either in place or under development across the world. This promulgation of divergent green taxonomies has created challenges given inconsistent – and sometimes contradicting - stances.
Taxonomies differ in several respects including diverse methods to classify green activities, some create binding legal rules whereas others are voluntary, and some have specific sectoral codes, whilst many are based on a “one size fits all” application. These nuances can lead to activities being classified as green in one jurisdiction, but not in another – which is particularly challenging for international and regional banks with offshore and cross-border portfolios.
The prevailing landscape of growing legislation, regulation and divergent taxonomies provides fertile ground for the legal profession and, particularly in-house legal counsel within banks, to evolve and play a value adding role. The enduring need for lawyers to partner with their clients and organisations in navigating the complex landscape of ESG is ripe.
Beyond mere compliance to avoid penalties, litigation, and reputational damage, in-house counsel needs to proactively engage, consult and shape the drafting of the new rule books – or at least the supporting regulations and guidelines on their application. But consultation and thought leadership are just the front end. To become “sustainability relevant”, lawyers and in-house legal counsel need to ensure an integrated approach to ESG adoption across key banking disciplines including:
• Due diligence
A robust assessment of ESG considerations, opportunities and risks inherent in mergers and acquisitions has become essential to evaluating overall inorganic growth transactions holistically.
• Credit risk and risk management
The significance of risks linked with climate change, resource scarcity, and environmental disasters in the evaluation of credit risk and how that needs to be mitigated, both in individual exposures and on an aggregated, sector and industry basis is now a growing priority.
• Social and governance risks
Employment relations and labour disputes, data privacy breaches, and governance failures will impact ESG efforts and overall credibility.
• Corporate strategy
How businesses prioritise, integrate and execute their ESG agenda’s into their overarching strategy needs legal insight into both the conformance aspect as well as the development of sustainable finance propositions that are legally sound.
Sustainability and ESG have brought about a new play book for banks and the sooner in lawyers and in-house legal teams upskill and embrace the shift the better for both them and their organisations.
For lawyers to transition from a defensive, compliance-centric mindset to an integrated, strategic, and forward-thinking role that allows business to make legally sound, impactful change, requires a multi-disciplinary approach. Legal needs to be at the forefront of adoption to integrate ESG into the full spectrum of banking: across regulation consultation, risk assessment, lending and security, contractual documentation, ensuring a just transition in lending portfolios through to data management and governance.
Are we ready?
