ESG: get the governance right

Combining environmental, sustainability and governance (ESG) concerns offers a tempting simplicity to boards and investors. At a most basic level, it is a simple question of avoiding harms. However, a closer inspection shows clear tensions between these separate concerns. The governance issues presented by the promise of realising environmental objectives are a good example of this. 

In particular, as the drive to decarbonise accelerates, there has been a fresh push in favour of the use of batteries as a key enabler of a low-carbon economy, with the EU identifying batteries as vital to the creation of a carbon-neutral economy by 2050. This push to new forms of energy storage brings fresh reliance on key natural minerals necessary for the production of batteries – in particular, lithium, cobalt and nickel.

The reality is that many of the countries in which these natural minerals are located (the electro economies) are jurisdictions with a weak rule of law and which present real corruption risks to businesses. As measured by Transparency International’s Corruption Perception Index – a tool that ranks countries based on the perception of the corruption within their public sectors – of the top 10 cobalt-producing countries, seven fall below the global average for corruption risk. The same is true for three of the top five producers of lithium. This means that those jurisdictions are perceived to have a higher risk of bribery, state capture, nepotism and ineffective law enforcement. The mining sector has always been perceived as particularly high-risk given the potential for large revenues, and the interplay between the state and private companies in the award of licences and regulation of activity.

The jurisdictional reach of the Bribery Act is wide. If a company conducts business in the UK it falls within the jurisdiction of the act. It holds companies liable for the acts of their ‘associated persons’. Any person performing services for or on behalf of a company may trigger criminal liability for that company, if that person bribes another, with the intention to advantage the company. This can include employees, agents and contractors. The concept is deliberately broad and the legislation makes clear that determining whether a person is performing the role of an ‘associated person’ is to be determined by all the relevant circumstances and not merely by the nature of the relationship.  Companies can be found liable for the actions of associated persons within their supply chain anywhere in the world.   

This creates very real risks for organisations with supply chains that extend into jurisdictions with a weak rule of law where bribery or corruption may be endemic, such as those operating in the electro economies. As demand grows to do business in these jurisdictions, so too does the risk of Bribery Act enforcement.  

There is an element of history repeating itself. A similar dynamic played out in the course of the transition from coal to oil and gas in the 20th century – albeit before the introduction of legislation as sophisticated as the Bribery Act. At the time this led to the expansion by various UK and US companies into the Middle East and elsewhere, giving rise to fresh corruption risks. This energy transition resulted in numerous bribery and corruption investigations, some of which are still working their way through the criminal justice system (both with the Serious Fraud Office in the UK and the Department of Justice in the US).

To address this risk, companies must look anew at their anti-corruption policies and procedures. How does expansion into these new jurisdictions affect that risk profile? What can be done to address these new risks? In countries and sectors where there is a perceived high level of corruption, companies must demonstrate that their procedures match the risk faced. It will never be enough to just have a policy in place, there must be a genuine and demonstrable commitment to preventing bribery.

Our increased reliance on certain jurisdictions for the purpose of obtaining natural minerals necessary to achieve decarbonisation gives rise to companies facing a fresh set of bribery and corruption risks, with the prospect of law enforcement to follow.  

The balancing act in the coming years – which is by no means simple – will be to ensure, in the rush to prioritise the environmental objectives within an ESG strategy, that governance imperatives are not neglected.

Alison Geary, partner, and Christopher Gribbin, managing associate, at Mishcon de Reya LLP, London