ESG in focus: Dispute Resolution – Part 4 of 4

ESG will continue to be a top priority for business, as scrutiny from a broad set of stakeholders intensifies and companies increasingly correlate the close connection between performance against these high-level metrics and the need to transform many day-to-day business processes and operations.

The rewards for doing so – stewardship, intrinsic and external value – are significant for those that truly bring their purpose and values to the fore, not just for the organisations themselves, but also the many other stakeholder groups that they serve.

In our final post of this series, we examine how ESG principles apply to the area of Dispute Resolution.

DISPUTE RESOLUTION

Large-scale ESG disputes go to the heart of a business’ relationships with its stakeholders and can have a major impact on its reputation. To date, this has been most apparent in the context of environmental disputes, but increasingly we are seeing social issues coming to the fore. The way in which companies choose to resolve disputes is a vital part of the risk management process.

However, disputes don’t need to be about ESG issues to have an ESG risk impact. Disputes are an integral part of every business and will have always occurred across a range of issues, only some of which will be identified as specific ESG risks within the ESG risk management process. 

The disruptive influence of the pandemic, coupled with increasing awareness of the benefits of aligning strategy and operations with ESG goals, means that few major disputes will avoid being viewed through an ‘ESG lens’ by a range of different stakeholders.

Consequently, businesses that hold themselves out as strong ESG performers, yet then cast their stated ESG principles to the wind when a crisis hits, risk destroying trust in the whole organisation. This loss of reputation can severely impact an organisation’s brand, which inevitably will have cost a great deal to build over many years. This is why dispute resolution processes are an essential element of ESG risk management.

There is much written about ESG-related disputes stemming from increased regulation, reporting requirements and shareholder activism, but it is vital that organisations understand how dispute resolution – regardless of the subject matter – can impact ESG goals and reputation.

Businesses faced with a major dispute need to manage the related risk in the context of the organisation’s purpose, values, beliefs, and strategic direction. No dispute should be handled in a vacuum. No matter how unreasonable the substance of the dispute – or the other party’s stance – may appear, it is critical to consider:

• What are the business’ core values and beliefs? Will this dispute expose weaknesses in the ESG strategy set forth?
• What is the stakeholder environment? Who will care about this and what do they think now?
• What else is happening in this industry? What is the business’ reputation in this context?
• What are the dispute resolution options and the pros and cons of each?
• What could be the real costs – both monetary and reputational? Consider the transparency of the dispute resolution process, the case being presented, and its strengths and weaknesses.
• Will the proposed approach damage business relationships, customer loyalty, or investor interest?
• How much negotiation power is there? Understanding the value of any chosen course of resolution, as well as the associated risks, can help inform whether or not to take a more conciliatory approach.

The British Institute of International and Comparative Law (BIICL) has developed a set of practical guidelines designed to encourage a more conciliatory approach to the resolution of contractual disputes, regardless of their subject. Their aim is to avoid or minimise protracted legal disputes without altering the parties’ legal rights. The guidelines set out how corporations who are conscious of ESG requirements can manage disputes responsibly while protecting their reputations.

It is hoped that these guidelines will be adopted universally as companies around the world struggle to recover from the impact of the pandemic and disputes continue to develop relative to ESG disclosures, misstatements and omissions, ESG performance and ethical considerations, and ESG regulations. Importantly, companies with good ESG performance need to be aware that they can quickly reverse their ESG ratings if they fail to behave in accordance with their stated values when resolving disputes, regardless of what those disputes relate to.

Click here to read the full report: Who Cares? Why the right ESG strategy can spell business success