ESG Governance
With a Focus on the "S" (Social) in ESG
In today's business world, Environmental Social and Governance (ESG) is an integral part of a business corporation's strategy to align its objectives with future societies. Although corporate board rooms have initiated ESG initiatives, the social dimension (the S of ESG) still receives less attention compared to environmental issues.
Compliance with the environmental element of ESG is pushed as the first priority. Social and human rights elements are currently included in the bucket "my business does not significantly negatively impact human rights issues." At Luxembourg Freedom Initiative, our focus will be on the social component.
In the context of Europe, ESG is currently at the forefront of a series of legislative efforts that are forcing companies to align their business strategies to the legislative mandates. This legislation would require transparent communication in their financial statements including, fund prospectus or other fund offerings and marketing documents aimed at informing investors about their business.
The European Union Non-Financial Reporting disclosure directive states that companies falling under the scope of this regulation must report on "environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters."
Firms, therefore, need to consider ESG developments in the context of the broader ESG reforms. Disclosure and taxonomy regulations include a complex concept of what constitutes a "sustainable investment."
ESG conversations at the core constitute the following:
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What products do we offer?
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What obligations are to be complied with?
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How can we frame data information requests?
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What data do we need for disclosure?
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How do we receive data and the analysis prior to disclosure?
From a Western-world perspective, the complexity of supply chains in the global economy makes it difficult to understand the seriousness of modern slavery. We consume and use products produced in long, complex, and opaque supply chains. Made in a Free World has introduced us to the concept of Global Slavery Footprint, which states that our consumption of goods and services patterns are forcing 50 slaves to be working for one person.
The Challenge in Data Collection
While we are starting to see increased efforts on obtaining data on the environmental aspect, the data related to modern slavery and the social dimension in ESG is lagging and deficient. The difficulty is that human rights by nature is a vast topic; we often think of diversity, and forced and child labor, but topics like domestic abuse, human trafficking, and those living below the poverty line do not come to the forefront of conversations and business intent.
New Sustainable Corporate Governance Requirements on the Horizon
The importance of sustainable corporate governance is a central topic of the European Union's sustainability action plan.
According to the European Commission, many companies still focus too much on short-term financial performance compared to long-term and sustainability aspects. For this reason, mandatory supply chain due diligence and clarification of directors' duties of care and ESG considerations in decision-making are on the commission's agenda.
Challenges for Directors
Good corporate governance is about understanding roles, responsibilities, and accountability within the company's organization. Directors' duties are to act in the best interest of the company. Decisions that do not take into account the voice of critical stakeholders and societal concerns could be proven later as uninformed or poor decisions.
Our Objective
Our focus is to encourage companies to consider going beyond their strict regulatory requirement and include the fight against modern slavery as part of the social element of ESG.