CSR and ESG: the new normal
Why are ESG and CSR so important in today’s society? Get a comprehensive understanding of the challenges this question raises and why it is so critical to the business.
In Luxembourg, Corporate Social Responsibility (CSR), and Environmental Social and Governance (ESG) criteria represent major challenges for any company that needs to adapt its business and meet the expectations of its stakeholders.
Do you see the CSR and ESG criteria as a challenge in today’s society?
SABRINA MARTIN It all begins with the awareness that we need to structure our economic activities differently. Today, standing your ground on social issues is a determining factor for a law firm, which, as a result, becomes a value creator, contributing to and giving visibility to "non-financial" matters. Though we were already aware of the importance of such criteria in the legal world, the pandemic has amplified our momentum. It compelled us to better define our position, to ask ourselves the right questions about the future. This has helped us to, among other things, develop our strategy within the firm to meet specific goals related to our social and environmental impact. There is a genuine willingness to take action, both internally and externally, owing to a strongly established CSR policy. Indeed, obtaining the Luxembourg ESR (Socially Responsible Business) certification label in 2019 was a major highlight for us, and proved our unwavering commitment to CSR and ESG.
MICHAEL SCHWEIGER There is a real generational revolution, in the expectations around this topic. For instance, when it comes to recruitment, these criteria play a decisive role in attracting young talent. This subject is of particular concern to younger people. They wish to be part of a responsible organisation. Thus, it’s paramount to have a credible proposal that meets their expectations.
MARC MEYERS The issues pertaining to ESG, which are already significant in our personal lives, are now as important in our professional life. When we have to submit a proposal for a new client, we detail our CSR and ESG approach. Today, clients no longer only focus on our professional capabilities to answer their questions, but look into our way of inculcating these aspects in our day-to-day management.
Is compliance with these criteria a priority for all businesses?
S. M. It is becoming one. Several clients ask us to demonstrate our own compliance with the same norms which they conform to. This new trend is gradually implemented to all service proposals, as clients demand it.
M. S. We have noticed that ESG criteria are gaining more and more traction in the financial center. However, businesses tend to overemphasize their ecological footprint and social impact. If we take a look at the management committees or boards of directors, we quickly realise that we are still far from achieving a satisfactory level of diversity amongst decision-makers. Businesses tend to ignore the “G”, which stands for governance, and that is unfortunate, because Luxembourg has a lot to leverage. The country boasts many companies, which can have a real impact on issues revolving around gender equality, transparency, or remuneration. It is time to make a greater effort, even before regulations make it mandatory to do so. As lawyers, we have already been encouraging businesses to adopt more inclusive strategies. They are not always legally binding, but they correspond to the market’s expectations, and are therefore in our clients’ best interests.
Are these market players ready to implement them?
S. M. It’s relatively new, and some clients still have questions. They need to be guided and advised. Should they, for example, include a CSR clause in their general terms and conditions? We are part of a true value chain, and we all have a part to play. There is real work to be done by the stakeholders to implement these policies internally. It is moreover worth mentioning that, for other clients such as start-ups, these criteria are already encoded in their DNA.
M. M. Over time, most of the major institutional investors will prefer investing in products that integrate these ESG criteria. A fund is put in place because there is a certain demand from investors. The young people of today are the investors of tomorrow. It thus becomes evident that new investment products will have to be structured from a long-term perspective and in the best interest of the future generations.
M. S. What we have observed is that our clients look for strategies and solutions with respect to their own clients. Every organization realises that it is important to talk about CSR and ESG, but not everyone is willing to actually take action. More objective tools, like the European taxonomy, will certainly help to better evaluate their efforts. It will deter businesses from making a marketing effort only and help the most committed ones to develop a competitive edge.
Within a year, the EU green taxonomy will come into force. What does that entail?
M. S. The taxonomy is a standard, a starting point. It primarily targets financial markets, investment banks and funds, but it will gain traction. At present, there exists no other standard as detailed as this one. So, there certainly will be changes, and it is high time!
M. M. Given the importance of the financial centre for Luxembourg - bearing in mind that for investment funds, Luxembourg ranks first in Europe and second worldwide - taxonomy will be crucial for the financial products sold by Luxembourg economic actors and issuers. If we widen the scope, these norms will be applicable not only to financial products, but also indirectly to the underlying investments of the investments funds. Consequently, companies all over the world will eventually be compelled to enforce these norms, facing otherwise potential loss of significant financial assets. This is how the financial sector will impact the real economy.
In light of this, how do you intend to assist businesses?
M. M. It will primarily involve advising fund managers as well as the funds themselves about their obligations pertaining to transparency in the upcoming months. The regulation for publishing information about sustainability in the financial services sector as well as the taxonomy regulation will indeed require a certain level of transparency from managers when it comes to risk policy as regards sustainability, as well as to promote environmental and social features. Over time, this new regulatory environment will also impact related businesses’ governance and operations.
M. S. Banks and insurance companies will need to rethink their operations and management to incorporate this taxonomy. Even for the granting of a simple loan, the discussion will no longer only revolve around profitability and the client’s solvency, but also around the project’s impact. Where funding has been granted, the taxonomy will provide the possibility to better evaluate and monitor investments. This requires changing internal processes and recruiting well-trained employees with a new set of skills. We propose strategies that will help our clients quickly incorporate these new requirements.
This article was first published in French by Paperjam
Sabrina MartinLocal Partner Attorney at law / Avocat à la Cour
Sabrina Martin, local partner, is a member of the Litigation & Risk Management Practice Group in our Luxembourg office. She focuses on international litigation, employment, real-estate, civil, corporate and contract law, data protection, innovation and commercial litigation.T: +352 466 230 631 E: email@example.com
Marc MeyersPartner Attorney at Law / Avocat à la Cour
Marc Meyers, partner, heads the Investment Management Practice Group in our Luxembourg office. He focuses on the structuring and regulatory work for Luxembourg alternative investment fund structures.T: +352 466 230 306 E: firstname.lastname@example.org
Michael SchweigerLocal Partner Attorney at law / Avocat à la Cour / Solicitor
Michael Schweiger, local partner, is a member of the Banking & Finance practice group in our Luxembourg office. He leads the Luxembourg financial regulatory team and regularly advises banks, e-money and payment institutions, insurers, and other clients regarding financial regulation.T: +352 466 230 520 E: email@example.com