Handling soft law and uncertainty in ESG – steps you can take

In the ESG space, best practice is often dictated by principles, frameworks and guidance – so-called ‘soft law’ – rather than black and white rules and regulations. Since soft law plays a leading role in shaping the development of ESG terminology, legislative direction, and corporate policies, keeping close tabs on it can help businesses anticipate likely future requirements and how they will work in practice.

But soft law concepts can be tricky and loosely defined, even when later adopted into hard law in the form of legislation. As a result, companies need to consider ESG terms in their soft law context, and think carefully about how they might apply to them.

A good example is the upcoming EU Corporate Sustainability Due Diligence ("CSDD") Directive on environmental and human rights due diligence in supply chains. The draft Directive, once adopted, will be mandatory (i.e. a ‘hard law’) but it draws heavily on a wide range of ESG terminology and drafting that originated in soft law such as the UN Guiding Principles on Business and Human Rights (“UNGPs”), the UN Sustainable Development Goals (“SDGs”), and the OECD Guidelines for Multinational Enterprises (“OECD Guidelines”).

In looking to understand what the CSDD will require, concepts like supply chain due diligence are open to interpretation, and seeing how the principles, goals and guidelines have been interpreted in soft law might help address some of the uncertainty.

How businesses can handle soft law concepts

The challenge for businesses when using or interpreting ESG terminology is that, because soft law prioritises participation and is generally non-binding, the meaning of some of the most essential terms in these instruments is left open. This has contributed to the inclusion, but also inconsistency around the meanings, of key ESG terms that have found their way into legal documents without being fully elaborated upon. Rapid change in this area compounds the problem, making implementation even more challenging.

These pitfalls are something that company boards and their legal advisers need to be aware of when drafting policies and communicating progress on ESG, both internally and externally. There is a competitive advantage to be gained by communicating clearly on ESG, and striking the right balance in those communications is also important for managing the risk of greenwashing (another loosely defined term).

As physical risks, litigation risks, and transition risks are company-specific, ESG policies should be tailor-made, but they will all likely incorporate soft law concepts and terminology in a variety of ways. This includes external ESG policies, such as policies on working with underperforming commercial partners to improve performance via strategies based on the UNGPs and the OECD Guidelines.

The role of professional advisers

This in turn impacts on the role that ESG professionals will be expected to play in the future. Not only should companies and their legal teams keep up-to-date with hard law, they also need a keen understanding of the soft law of today as it will inform, influence, and in some instances crystallise into, the hard law of tomorrow.

Indeed, they do not need to wait until the legislation comes into force to see evidence of this. Some EU countries such as Germany, France and potentially the Netherlands are already getting ahead of the game and introducing sustainability due diligence legislation in advance of the CSDD.

With that in mind, professional advisers are spending even more time horizon scanning; engaging directly with those initiatives which look to create new pieces of soft law; and doing some crystal ball gazing with the aim of painting a picture for clients to show how future ESG compliance obligations and best practice are likely to look.

Mixing things up

Looking forward, the CSDD and national legislation like Germany’s Supply Chain Act are the latest in a “smart mix” of measures (national and international, voluntary and mandatory) that seek to address ESG in a holistic way that is consistent with the SDG mind-set. We can expect this trend to continue and gather momentum in the years to come, and a deep knowledge of soft law is the best way to stay ahead of the changes in this area. In the words of American civil rights activist Maya Aneglou, if you don’t know where you’ve come from, you don’t know where you’re going.

Éanna Malone is an English and Irish Solicitor with Uría Menéndez