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A new player in the ESG scene: governments are now being compelled by local courts to fight climate change

A new player in the ESG scene: fighting climate change

A new player in the ESG scene: fighting climate change

A new player in the ESG scene: governments are now being compelled by local courts to fight climate change

We have witnessed topics associated with environmental, social and corporate governance (ESG) climb up to the top of the agenda for many companies´ boards, mostly due to increased pressure coming from activists, NGOs, professional associations, universities and research organisations. Yet, entire regions and industrial sectors keep falling short when it comes to embracing sustainability standards and emissions reduction targets.

While the causes of this reluctance are complex, many fingers point to a perennially important actor: governments. The lack of political will and enforcement actions have allowed companies to remain idle. Governments are slow to respond because there is no superior body that pose a real challenge on them or hold them accountable beyond pressure from the public. However, that is starting to change.

On 20 December 2019, the Dutch Supreme Court upheld an unprecedented decision within the frame of the so-called ‘Urgenda Climate Case’. Many considered the ruling an historic and game changing step in the fight against climate change. As the first of its kind, the decision of the highest court of the Netherlands not only encouraged but attributed legal responsibility to the Dutch Government in relation to the country’s carbon emissions. By asserting that the government has the fundamental obligation of preserving and protecting the integrity and well-being of its citizens, the Court:

  • established that the Dutch Government is obligated to take real and measurable actions to reduce pollution in the Netherlands
  • set up a quantifiable target by demanding the Government reduces the country’s greenhouse gas emissions by 20 percent (compared with the levels assessed in 1990) by the end of 2020, following the previsions of the Paris Agreement.

So, the Court basically regarded the Dutch Government´s efforts insufficient and demanded further (and measurable) emission reductions.

Similarly, on 31 July 2020, the Supreme Court of Ireland required the Irish Government to outline a more detailed plan for the country’s transition to a low-carbon economy by 2050. The decision was propelled by a complaint filed by Local NGO Friends of the Irish Environment that sought to hold the local government accountable for its contributions to dangerous levels of climate change.

What is most remarkable about these two rulings is that, there was previously no legal mechanism to hold governments (and their politicians) liable for their role in climate change; the consequences for their inaction where only political, not legal. There was a clear lack of stimulus to push for or enforce pro-environmental regulations. The two aforementioned decisions are the first that seek to allocate measurable obligations to those in the government, whose actions are essential, to force the private sector be required to catch up and remediate its failures. When courts demand further emission cuts in the entire country, they do not discriminate between publicly and privately held entities. Those cuts apply to everyone.

As many expected, these decisions have had a domino effect, as they have encouraged environmental groups and citizens across the globe to demand their higher judicial bodies to force their governments to be more hands-on and take serious steps when addressing climate-change concerns. While the decisions only have a local reach, their influence goes beyond borders and creates viral trends, as activists feel that at last they have a way of speeding up action. Similar cases are already being heard by the high courts in other countries, including India, Pakistan and Australia.

But how does this impact the private sector? What kind of changes should companies expect? More pressure on governments and lawmakers could mean more pro-environmental regulations, and more willingness to enforce those regulations. Not complying opens up politicians and officers to real legal consequences rather than just reputational damage and political repercussions (such as decreasing chances of re-elections, public pressure) means that all sort of government officers might be subject to administrative and disciplinary actions, and not only to reputational damage. So, companies should expect heavier monetary fines, greater suspensions, increased inspections, less impunity and a raise of the expectations bar from regulators when it comes to evaluating environmental standards.

In countries where environmental groups have not yet gained traction with political parties (and where real environmental reforms have not been propelled), this represents an unexpected and unprecedented jump forward. It brings countries closer to developing an environmental culture and legal framework and good conservation practices.

A similar approach may be adopted soon in several countries in Latin America, Africa and parts of Asia, where many industrial sectors are behind the times in terms of ESG practices. We are already seeing a sharp increase in the embrace of ESG in Latin America, where the Principles for Responsible Investment (a United Nations-supported international network of responsible investors) has reported a 50 percent growth in the rate of new affiliations.

Many governments were already creating new regulatory agencies or allocating more resources in existing agencies in order to increase their enforcement efficiency and comprehensiveness when inspecting. That would also imply that governments are looking to conduct more inspections and possibly issue fines for breaches of ESG regulations. The global economic downturn is already leading many companies to take measures, both legal (wholesale layoffs and furloughs) and illegal (forced work shift reductions, unpaid overtime and other types of labour abuses). This means that more and more people could be subject to harsh or illegal work conditions. In other words, the typical regulator role of the government might soon see an exponential growth.

Considering how companies will be affected by the further ESG scrutiny of some governments, it’s important to consider the following to ensure proper ESG compliance.

  • Conduct an in-depth ESG risks assessment.
    This first step will provide insights into your risk exposure and create a dialogue for establishing stronger and healthier relationships with your business partners.
  • Perform proper due diligence and screening. 
    You need to have enhanced knowledge about your third parties, to allow you  to take the necessary steps to make your supply chain more resilient, transparent, and less exposed to ESG violations.
  • Adopt an ESG culture
    This is especially true  for your offshore units. Incorporating ESG standards in the most relevant stages of your business cycle would attract the eye of green investors and responsible consumers, while allowing you to meet the always evolving ESG regulations.

Now more than ever, governments and regulators are being called to take a more active role to address the environmental and social concerns. The previously mentioned factors are already accelerating a more widespread adoption of corporate governance standards and practices across the globe, following a similar path that followed the 2008 financial crisis, or events of the Panama Papers and the Paradise Papers that normally end accelerating the already evolving nature of regulations. The increasing pressure from governments will force multinationals to improve their compliance standards, especially of their operations abroad, and lead small and medium sized companies to catch up with the international standards in a way that be feasible to their capabilities.

The Red Flag Group® is helping companies to embrace and implement the higher ESG standards by conducting risks assessments, providing specialised compliance certifications and offering due diligence solutions across all industries and countries, allowing them to not only meet their own statutory compliance obligations, but to also drive up standards and improve our society. For information, email us at info@redflaggroup.com.