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The importance of Environmental, Social and Governance (ESG) values

The importance of Environmental, Social and Governance (ESG) values

By Nicola Broadhurst & Matthew Horth

The average person is now far more environmentally aware and socially conscious than ever before. Stakeholders are demanding transparency and accountability from businesses and expect businesses to operate their businesses to take into account environmental, social and governance (ESG) values. ESG can mean different things to different people. The Government’s focus is on reducing climate change and reaching net zero by 2050. But ESG and sustainability is more than environmental impact. It also includes sustainable growth and development, good governance, better social impact (such as diversity and inclusion) and community engagement.

Businesses may have been able to shy away from these issues previously but there is mounting pressure both socially and in the regulatory pipeline to prioritise ESG issues.

Better ESG profile can bring plenty of benefits including:

  • attracting and retaining customers and talent including franchisees
  • preferential lending terms
  • attracting investment; and
  • enhanced market share

Currently there is a lack of cohesive ESG regulation this is set to change. We have already seen the implementation of the EU Taxonomy Regulation and the EU Sustainable Finance Disclosure Regulation aimed at ensuring better sustainability reporting to assist with investment decisions. Directors are already required to consider the impact their business has on the environment and external stakeholders as part of their directors’ duties under the Companies Act. We have seen the first action being brought against a director on the basis that he failed to do so.  Regulation already requires gender pay gap reporting and Modern Slavery Statements for businesses meeting the threshold requirements).

Franchising is uniquely placed to make a real impact due to the existence of franchised networks. Franchisors can benefit from the knowledge acquired and shared through a franchise network. Contractually, a franchisor can ensure that it can implement ESG focussed changes quickly as most franchise agreements contain provisions requiring franchisees to implement improvements to the system on notice. This enables franchisors to implement new sustainability measures at scale.  Basic measures can such as implementing clear whistle blowing policies, focus on diversity and inclusion and efforts to reduce environmental impact can be introduced relatively easily introducing better governance and accountability. 

Those franchise systems that take steps now to raise their efforts will likely reap the benefits of increased consumer demand, enhanced market share and potentially less legal compliance work later.

Whilst the thought of implementing sustainable initiatives can be daunting; there is clear potential for opportunity too. Some franchise systems are already leading the way with sustainability programmes such as Starbucks and MacDonalds. You don’t have to be big to make a change. What is key is ensuring there is an ESG strategy that informs all key business decisions particularly the handling of the franchise relationship.  

Failure to adopt good governance at all levels undermines an ESG message to little more than a cynical marketing campaign.

© copyright reserved to Stevens and Bolton LLP 4th May 2022

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