Businesses are increasingly responding to a growing number of disclosure standards including, most recently, those proposed by the Task Force for Nature-Related Financial Disclosures, a market-led and science-based initiative supported by governments, companies, and financial institutions. Yet this shift towards transparency might be obscuring deeper changes happening in the relationships between companies and their investors.
Climate change, a systemic threat to the economy, affects the legal obligations of those managing companies along with the institutions that invest in them. This applies to areas such as company and pension plan legislation, for instance. Furthermore, the integration of material environmental, social, and governance (ESG) factors into business strategies has become a staple in firms during the past decade.
Despite their popularity, incorporating these ESG factors have not made significant strides in addressing global challenges. This is partly because the ESG investment strategy mostly focuses on helping investors choose assets that they believe will give high returns and present less risk, but it does not target the root causes of systemic risks that these investments face. Addressing these systemic risks necessitates an approach that simultaneously considers long-term financial value, economic resilience, societal well-being, and environmental health.
The adoption and encouragement of sustainable business practices can help negate these systemic risks. This, however, requires a shift in the way companies create value. It might mean accepting lower returns from certain companies in the short term to achieve more long-term gains in portfolio value.
For example, embracing regenerative agricultural practices among agricultural producers could help counter soil degradation and loss of biodiversity, which, in turn, benefits other sectors of the economy and the overall value of a diversified portfolio.
It is critical to recognize that systemic risks are a shared challenge and call for a comprehensive response. Not one organization or entity can tackle these risks alone. Hence, legal duties must be seen within this context. United action mitigates the risk of a first-mover disadvantage and supports collective intelligence, more extensive impact, and distribution of the costs of action.
Both companies and investors can encourage policymakers to advance sustainability-based policies, rather than lobby against them. Corporations and investors can use their capital allocation to achieve positive outcomes and spark corporate engagement that supports and leads on sustainability issues.
While the headlines often highlight perceived conflicts between corporations and investors over sustainability; in reality, these two groups have a shared interest in dealing with fundamental sustainability risks and building a prosperous economy. Their legal duties underscore the importance of doing so.
This discussion was presented by David Rouch, an international financial services regulatory lawyer, and Jake Reynolds, head of client sustainability and environment at Freshfields Bruckhaus Deringer, as found in their article.