Environmental, Social and Governance (ESG) policies may soon creep down the project ladder to designers, contractors and possibly subcontractors. To understand what’s at stake, the Daily Commercial News asked legal experts Sahil Shoor, a partner with Gowling WLG, and McMillan LLP partner Annik Forristal and associate Kailey Sutton, to address key issues.
Should an ESG framework be reviewed by legal experts before being committed to, either corporately or in a contract agreement?
Shoor: Legal experts well-versed in ESG advisory services understand the various ESG requirements and developments that can help organizations develop risk assessment processes for adherence to global standards, frameworks, policies, protocols and guidelines. Legal input is critical to ensure operational systems and reporting frameworks are crafted to minimize risk.
Forristal/Sutton: A company’s ESG framework – whether company-wide or project-specific – should be treated very similarly to any other company policies. As such, they should involve input from a number of perspectives, including legal. For example, certain metrics or information required as part of the framework may engage privacy or labour law implications and should be drafted or at least reviewed by the company’s legal team.
Parties will want to ensure that parameters are clearly laid out for measuring such outcomes and what “success” looks like. Certain materials or products will perform at certain measurable levels and what the mechanism is for correcting “defects” in performance.
If determined that a project partner has not met its ESG obligations, what are the risks and possible penalties?
Shoor: There are potentially serious legal and reputational consequences should a contractor fail to adhere to their ESG expectations, which is contingent on the standardized framework in place. The primary liability risk is that of a potential lawsuit alleging the lack, inaccuracy, or inadequacy of disclosure of ESG issues and/or the failure to prevent adverse climate change impacts.
The risk of greenwashing becomes a real and material issue when companies do not set meaningful, transparent, ambitious and measureable targets. Assuming ESG standardized and mandatory reporting processes are implemented, the legal implications of failing to adhere to the collection, assessment and public reporting of relevant and accurate data would increase pressure on companies to show positive advancement in the metrics being disclosed.
Forristal/Sutton: There are generally two main categories of risk. There are potential risks of non-compliance with applicable law and then there are private risks between the parties. Where a contractor or developer has failed to comply with applicable law, then the risks include prosecution in accordance with that law and imposition of the penalties set out under that law. With respect to the risks between contracting parties, such risks and penalties will be very similar to any other type of contract and will depend on the terms of the contract itself.
For example, if the contract required use of certain materials or achievement of certain performance standards and the contractor failed to adequately deliver such contractual requirements, a claim could be made, for example: 1) under warranty, requiring re-performance or replacement, 2) under an indemnity provision, in the event that losses were sustained as a result of the failure in performance, or 3) for breach of contract and thus result in termination.
There are also risks beyond such statutory and contractual liabilities and penalties. For example, there may be reputational or professional association implications.
Any concluding comments?
Shoor: Increased use of sustainable materials in construction and development projects is anticipated as ESG strategies become more prevalent, creating potential opportunities for those industry players ready, willing and able to use such materials. Crafting an ESG framework which utilizes low-carbon opportunities and ultimately seeks to achieve net-zero carbon emissions will provide greater business opportunities and help mitigate future risk.
Forristal/Sutton: As investors and other stakeholders in the industry become more focused on ESG considerations, those who work in the industry will likely be disadvantaged if they cannot meet ESG requirements or are not able to show how their companies take such considerations into account.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.