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ESG Legal Experts on Regulatory Upheaval: ‘Know What Is Coming Your Way’

Forced labor and greenwashing are some of the biggest ESG issues companies face today.

When it comes to forced labor, attorney Matthew H. Clark said companies must prioritize due diligence to ensure they know their product and vendor supply chains inside out.

There are ways to be proactive, said Clark, a shareholder at Dentons and co-chair of the multinational law firm’s U.S. ESG practice. “You want to know what is the impact on your business,” he said, but that’s not possible “if you don’t know what is coming your way.” Reporting frameworks—including out supply chains—offer guidance on whether companies are sticking to the United Nations’ guiding principles on business and human rights. “This is an area where you need to understand where your product is coming from and where your vendor is obtaining their product,” he said, urging companies to focus on reporting, remediation and mitigation.

“You want to make sure that you have a process in place to actually address these issues. And then training, training, training, making sure that you’re testing your process,” Clark said.

“The scope of ESG and sustainability-related advice—ESG is overwhelming—is really big; it’s really broad. It touches every aspect of your business,” Clark said. Dentons, he continued, suggests focusing on growth, protection, operate and finance.

As a company grows, “ESG needs to be woven into the fabric of your expansion,” he said, explaining that ESG must be part of the due diligence companies conducts on their vendors, included in how they evaluate targets for acquisition, and in all commercial agreements. Protect addresses reducing risk, such as having a common sense approach to reducing greenwashing claims. And businesses must have a system in place so employees and vendors can report non-compliance. Operate means companies must not only have a robust compliance program but should also test it every day. As for financing, Clark said banks are looking for companies that bake sustainability into their operations. “It is easier to run a business that is promoting sustainability,” he said.

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Clark pointed to the hard and soft laws related to ESG, saying companies must be aware of both. Taxable regulations, laws and other regulations control the market at the federal level, while companies should keep tabs on individual state laws and regulations as well. Regulatory guidance such as the FTC’s Green Guides, and its supplier and vendor code of conduct, is one example of the “soft laws”.

“We’re seeing that these codes of conduct are changing, reflect initiatives that are important to customers, and results [that] suppliers have to commit to, for example, protecting local communities, new asset testing, access to public information,” Clark said.

Dentons associate Jessica Argenti said the firm created an ESG Statements Checklist for clients. While not industry specific, it does offer greenwashing guidelines.

“The first thing to think about is [whether] the data first of all is accurate. Is it ambiguous, using words like ‘green’ and ‘sustainable’? Without a little bit more, accountability could be deemed misleading,” Argenti said. “Does your claim over exaggerate? Does it over exaggerate future performance? Or maybe [the claim’s] under exaggerated, cherry picking information and leaving something out?”

Argenti noted that if comparisons are being made, companies must be sure they’re not being selectively self-interested in sharing only certain data, as well as whether the claim looks at a “fair sample” when making the comparison. The claims also need to be substantiated.

“This is where internal controls and very robust documentary evidence is super important, and not just when the claim is made [but also] keeping other processes in place during the life of the claim,” Argenti said. Substantiation should account for the full lifecycle of the product or service, she said, and companies must ensure disclosures are consistent across the organization, including social media platforms and global communications.

These efforts will help mitigate against greenwashing, she said.

Argenti also touched on proposed legislation in the pipeline, such as the New York Fashion Act. “It currently is in committee [and pending in the New York State] Consumer Protection Committee, and if it’s passed, it will require very extensive environmental disclosures and penalties for non-compliance for any company doing business in New York. It is incredibly broad [and applies to firms generating] $100 million or more in revenue,” she said.