The recent controversy surrounding Boohoo plc and modern ESG investment principles has raised some questions about the importance of due diligence for investors.
In July 2020, Boohoo (a £3.2 billion UK based online fashion retailer) lost c.40% of its value in less than one month due to apparent failings in its Environment, Social and Governance (ESG) approach. In the weeks after it had received an ESG rating of 7.6/10 by a leading ESG appraiser, one of its suppliers was accused of paying workers in the UK £3.50 per hour and in unsafe working conditions. The incident highlights the importance of supply chain due diligence and monitoring for corporates seeking or maintaining, an ESG qualification. A negative assessment may not only damage your brand but also your suitability as an investment by ESG compliant funds. Just yesterday, according to the Financial Times, the British supermarket giant, Tesco, dropped one of its avocado suppliers pending an investigation into allegations of human rights abuses at a plantation in Kenya.
WHY IS THIS CASE STUDY IMPORTANT?
The UK government published guidance in April 2020 (the “Guidance”) regarding the slavery and human trafficking statements that certain businesses are obliged to publish annually under the Modern Slavery Act 2015. These statements detail the actions that companies have taken to assess and address the modern slavery risks in their supply chains over the past year. The Guidance also identifies specific areas in which workers may be exposed to increased risks, from a modern slavery perspective, due to COVID-19.
More recently, in early July 2020, the UK implemented its new Global Human Rights sanctions regime targeting those individuals and entities who have been deemed to be involved in human rights violations in previous years. Seen by some commentators as possibly the groundwork for the UK taking a more proactive approach to human rights monitoring and enforcement going forward, it is the UK’s first autonomous sanctions regime launched under the Sanctions and Money Laundering Act 2018.
The European Commission has also announced it will introduce mandatory human rights due diligence legislation in early 2021. Whilst draft legislation is yet to be published, the proposed measures are likely to include a duty of care on companies to conduct mandatory due diligence to identify, prevent, mitigate and account for adverse impacts on human rights. The requirements are expected to apply cross-sector to companies incorporated in the EU as well as foreign companies conducting business in the EU.
WHAT DOES THIS MEAN FOR BUSINESS?
The proposed legislative changes, a change in investor and consumer awareness of social issues, and growing demand from investors and consumers that companies act in a way that upholds strong ESG standards suggests that ESG is here to stay and will grow in importance. This places an obligation on corporates to be aware of their ESG situation and take precautionary or preventative measures to limit commercial, legal, and reputational risk.
It should be noted that the ESG movement is primarily found in Western economies and there will be a divergence of opinions and practices across the globe. However, businesses should consider implementing operational and counterparty policies across their own manufacturing sites, suppliers (and suppliers of suppliers), subcontractors, and other relevant stakeholders in accordance with their ‘global’ company ethos.
Where companies are procuring goods or services, contractual arrangements should include the necessary protections on key ESG matters like modern slavery, human rights, and environmental protection. In some cases, it may even be prudent to elevate such terms to a condition of the agreement, such that breach may permit the termination of the contract.
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Should you have any questions about the topics covered in this article, please get in touch with your usual Rooney Nimmo contact or any of the persons below.
John Nimmo, Founding Partner
+44 (0)7811 458 506
Edward Sloan, Founding Partner
+44 (0)7715 380 367
Dawn Robertson, Partner
+44 (0)7779 939 66
Neil Anderson, Partner
+44 (0)7851 259 052
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