Environmental, social, and governance metrics have emerged as an important tool corporations and institutional investors use to assess risk and ensure compliance with worldwide industry norms. While this framework has exerted significant influence over social impact investing in the last two decades, its widespread importance has accelerated due to a convergence of several global trends. Most recently, the coronavirus pandemic, the resulting economic downturn, and the simultaneous reckoning with human rights across the world have placed ESG standards at the center of the conversation about corporate accountability.
Other events, including the release of a letter from Blackrock CEO Larry Fink announcing the company’s prioritization of sustainable investing, have signaled support for ESG principles from major entities in the financial sector. Particularly in the aftermath of the coronavirus pandemic, as companies with higher ESG scores have performed much better than others through this difficult economic period, consensus has coalesced among investors that ESG funds are here to stay.
ESG standards are informed by other internationally agreed-upon principles and outcomes, including the Sustainable Development Goals, the World Bank’s IFC standards, the Equator Principles, and the UN Guiding Principles on Business and Human Rights. Yet, it is important to note that ESG standards and metrics are still in development. No standard approach to measuring compliance or adherence to ESG standards exists, but investors and banks are gathering an abundance of data, published by a variety of sources, to assign ESG scores to corporations. Currently, in many ways, the burden is on corporations to determine what information to disclose and how to measure their own practices. Without an understanding of emerging ESG metrics, corporations run the risk of scoring low in the eyes of investors looking to finance projects that comply with parameters they have set for ESG performance.
This landscape, however, is shifting rapidly. Regulators, including those in the European Union and at the SEC in the United States, have begun to demand more shared, standardized measures of ESG practices. Legislation may soon require companies to disclose much more information about their activities in each of these three areas, adding requirements to those that investors already demand.
Finally, boards are under increasing pressure to hold corporate leaders accountable for ESG considerations, including integrating due diligence on climate change, human rights, and other impacts into risk management strategies. Particularly for multinational corporations, risk factors have become increasingly complex, dynamic, and interconnected. Responsible boards approach ESG risks proactively, implementing best practices for assessing, measuring, and reporting these challenges in their strategic planning.
Proactive corporations and investors have the opportunity to define healthy ESG practices and stand out among their peers through compliance with ESG standards. Those who do not prioritize assessing their practices against ESG standards, however, risk being left behind in a market increasingly defined by corporate accountability in these areas.
ESG AND CULTURAL HERITAGE: REAL WORLD IMPACTS
Institutional investors are not alone in their attention to ESG practices. Consumers, employees, shareholders, and other impacted communities are becoming more vocal about the values they expect corporations to embody. Now, it is not enough for corporations to comply with domestic regulations governing their projects and products. As we have seen in case after case, when corporations jeopardize a community’s access to natural resources, cultural heritage sites, or traditional forms of ownership, they face a growing set of risks, including reputational loss, project delays, loss of funding, and ongoing conflict with essential stakeholders.
Attention to cultural heritage issues can mitigate risk in each area the ESG framework assesses. Protecting cultural heritage and the interests of indigenous peoples involves improving human rights, reducing environmental impact, and maintaining strong governance practices to increase corporate transparency.
Dakota Access Pipeline
The controversy and subsequent protests over the Dakota Access Pipeline provide perhaps the most prominent example of what can go wrong when developers ignore cultural heritage issues. Ultimately, banks lost billions on this project, and a global coalition formed to challenge pipelines that threaten indigenous lands on an ongoing basis. While other pipeline projects have not produced as many headlines, projects like the Keystone XL Pipeline bear much more scrutiny as a direct result of the attention to cultural heritage and indigenous peoples rights the Dakota Access protests generated.
In another case, Rio Tinto, the world’s largest iron ore mining company, blasted 460,000 year old caves that are sacred to Aboriginal groups in Australia. The ensuing events illustrate the power of public opinion, as shareholders, investors, and industry leaders quickly mobilized to decry Rio Tinto’s actions and demand this type of incident never happen again. This call for accountability occurred in spite of the fact that Rio Tinto acted in full compliance with Australian law when they conducted the blasts. While Rio Tinto had previously maintained a strong reputation for respecting indigenous groups, shareholders are now demanding they change their policies and practices for engaging indigenous peoples entirely, even if these practices remain entirely legal.
Northern Dynasty Minerals
A final example illustrates the powerful role large institutional shareholders are playing in holding corporations accountable to ESG standards. Morgan Stanley, an institutional investor committed to ESG principles, has recently sold off 99% of its shares in Canadian company Northern Dynasty Minerals, under pressure from indigenous and conservationist groups who have called attention to concerns over a mine developed by the company in Bristol Bay, off the coast of Alaska. While Morgan Stanley previously occupied the status of fourth largest institutional investor in the company, it has opted to follow other shareholders who have divested from Northern Dynasty over the project’s growing risk factors. Indigenous groups and other local stakeholders met directly with Morgan Stanley representatives to air their complaints. Seeing resistance to the project mount, the investors have listened.
These cases represent a tide that has already turned toward corporate accountability to multiple stakeholders, rather than to profit alone. Through our experience representing clients mired in these types of conflicts, we have learned that all parties—whether investors, project developers, indigenous groups, or local communities—want to find constructive solutions that benefit everyone. The ESG framework, as a tool for risk assessment, due diligence, and improving corporate practice, provides one shared set of metrics to develop a path forward.
If you are looking to adjust your corporate or investment practices to integrate ESG standards and account for risks to cultural heritage sites and indigenous peoples, please visit our ESG practice page or contact our team leader: Marion Werkheiser.
Image: Marion Werkheiser speaking at the GAPP Summit in Pittsburgh.