Meet the changing ESG landscape with a Sustainability Charter
Your business is feeling pressure from investors, employees, regulators, customers, and maybe even the media to operate in a manner that is mindful of environmental, social, and governance (ESG) change. There’s no question that ESG, when executed thoughtfully and authentically, makes businesses better. Depending on the policies created and enforced, the business can develop the reputation of being a good steward of natural resources, an advocate for human rights, and a champion for underrepresented groups.
Not shockingly, ESG also helps the bottom line and improves recruiting efforts. In the Harvard Law School Forum on Corporate Governance, Subodh Mishra’s published article, “ESG Matters”, references the ISS ESG Corporate Rating, ISS EVA and FactSet, revealing higher ESG performance is correlated to higher profitability and higher volatility is associated with lower ESG performance.
Adults of all demographics increasingly want to invest in, do business with, and work for businesses that care about the issues. When inquired about the environment, sustainability and climate change are top of mind. Business leaders and the in-house counsel who guide them recognize that establishing a sustainability policy is a critical investment in the longevity of our natural resources and the future of the business. Typically, a sustainability charter is a standard first step.
What is a sustainability charter?
A sustainability charter is many things. It’s a precursor to executing a sustainability initiative or program and it provides a framework for identifying areas of focus, mapping strategy, making decisions, and actionable planning. It spells out the organization’s structure and goals as it pertains to the three main pillars of sustainability: economy, society, and the environment. By structuring your charter around these pillars, you develop a comprehensive approach for a successful program.
Creating such a document from scratch can be a time-consuming effort, especially if your legal department is unfamiliar with sustainability issues. The good news is that a variety of templates and documents already exist. A great starting point is the ESG Disclosure & Sustainability Reporting Frameworks Practice Note in Practical Law. Keep it handy as you incorporate policy details specific to your business, starting with the economy.
Sustainability charter, pillar one: Economy
As economic issues and corporate governance make up the broadest of the three ESG pillars, you’ll undoubtedly have a host of potential factors to address. Commitments for this pillar include:
- Achieving greater board diversity and independence, including changes to board structure and compensation
- Strengthening anti-corruption efforts
- Improving supply chain policies, such as raising ethical, environmental, and compensation standards for business partners
- Addressing competition issues, such as how your company will handle competition law concerns arising from sustainability agreements signed with other firms or trade associations
For example, the global insurer Generali Group lists a set of proposed improvements to dealing with contractual partners and distributors as part of its sustainability charter. These improvements include:
- Leveraging innovation to improve the experience for distributors, “to make it simpler, smarter and deliver digital solutions consistent with their needs"
- Creating long-term relationships with contractual partners, “sharing a culture of integrity, performance and transparency”
Sustainability charter, pillar two: Society
Societal issues, which entail a company’s diversity, equity, and inclusion (DEI) efforts, are of growing importance to stakeholders as well as to state and federal regulators. Your charter should devote a substantial part of your document to your intended commitments in this pillar, including areas such as:
- Improving compensation ratios and hiring rates for underrepresented groups
- Reducing employee turnover from underrepresented groups and increasing promotion rates from such groups
- Pledging specific reductions in employee injury rates and improving employee wellness and safety
The sustainability charter for Blackrock states its social-related commitments, including a pledge to increase representation of Black and Latinx professionals by 30% by 2024. Additionally, it follows those up with how stakeholders should measure its progress. It pledges to publicly list its racial and ethnic employee compensation and other DEI efforts in SASB and Equal Employment Opportunity (EEO-1) disclosures.
Sustainability charter, pillar three: Environmental
For your company’s commitment to environmental sustainability, your charter should spell out how you intend to act and what your environmental goals are. It’s important to provide measurable context for your listed initiatives and note all applicable regulatory and governmental initiatives with which your company plans to comply.
Practical Law’s ESG Disclosure & Sustainability Reporting Frameworks has links to various initiatives that your company can adopt. One of these is the UN’s 17 Sustainable Development Goals, The Climate Disclosure Standards Board Framework, which aims to clearly disclose environmental information to investors. Another is the Sustainability Accounting Standards Board’s accounting standards, using its Sustainable Industry Classification System.
Poland Spring, unsurprisingly, must demonstrate to stakeholders that it’s committed to environmental sustainability. On its website, Poland Spring pledges to commit to a 10-step quality and safety process and lists the steps it takes to ensure its product is accurately termed “spring water,” maintains that it’s in compliance with U.S. Food and Drug Administration standards, and commits to long-term preservation of its water sources.
The charter for live entertainment provider, Live Nation, lists eight priority areas: reductions of emissions and energy, resource use and waste, water, food, public engagement, procurement, transport, and local impacts. It states, "Each area has been assessed in the context of their impact on, and contribution to, the relevant UN Sustainable Development Goals."
Key sections of a sustainability charter
A sustainability charter has a few primary sections. A company may open with a values statement, listing its guiding principles and core priorities. These range from making a greater dedication to environmental sustainability or improving diversity in the board of directors. Live Nation, for example, opens by pledging to “demonstrate leadership on climate action,” and affirms that it believes climate change is real and ongoing.
What follows is often a list of specific sustainability commitments, entailing the major action items on each tier of a company’s ESG agenda. The International Fragrance Association’s sustainability charter breaks down its signatories’ commitments into five broad areas: ensuring responsible sourcing, reducing environmental footprints, enhancing employee wellness and diversity, improving product safety, and furthering industry transparency.
Finally, companies may offer a mission or vision segment, wherein it commits to actions to further improve its sustainability efforts in the future. It’s here where longer-term goals — such as a push to reduce carbon output or increase staff diversity by a certain percentage — could be listed.
Remember: Keep your charter current
Once your charter is completed and publicly accessible, commit to regularly updating it — which is as important as drafting the initial document.
Leaving your sustainability charter on the shelf for years carries serious reputational risk. A stagnant charter may communicate to stakeholders and customers that your sustainability commitment is a low priority item and that it may not be up to date with ESG-related developments or in compliance with new regulations.
Horizon scanning is critical to maintaining a sustainability charter. Practical Law’s Practice Note: ESG horizon scanning: policy and legal measures summarizes key legal and policy drivers on ESG issues but, just as crucially, looks at what’s coming down the road, such as what legislation is being introduced, what regulations are being considered, and what new steps industry groups are taking.
Given the pace of new regulations, a sustainability charter may need a semi-annual update or review. A charter, after all, is just the first step of many that a company takes to improve its sustainability program and demonstrate results.