Russia-Ukraine War Triggers New ESG Considerations

Russia’s unprovoked, brutal attack on Ukraine in February prompted a global crisis with far-reaching impacts, reverberating into the C-suite at businesses across the United States. Shareholders and consumers now expect companies to account for any ties they have to Russia or Russian affiliates. Executives have been forced to navigate a new world order that emerged overnight.

As we have seen from the Russian invasion, there is often little time to respond, and delay is not an option. One day it was acceptable for companies to invest or operate in Russia, and the next day, companies were grappling with whether and how to divest their Russian operations. Some organizations were required to cut ties with Russian interests because of prohibitions imposed by the U.S. sanctions list, while many other companies quickly pledged to pull out voluntarily.

But for some businesses—such as those that make necessities including diapers, baby formula, and medical supplies—withdrawal was more complicated, posing ethical dilemmas and risks. Ceasing business in Russia entirely might expose employees to risk. And how should companies respond if they are the sole source of provisions used in nurseries, schools, or hospitals, for example?

Companies must consider how their actions will affect not just their global brand, business, and reputation, but also their employees and innocents affected by whatever decision they make. At the same time, companies may have difficulty getting reliable human rights information from Russia or the war zone. Even if a company’s actions are technically lawful, the question of morality must be addressed, in circumstances that starkly pit “good” versus “evil.”

Scenario Planning

As the war drags on and as atrocities are chronicled daily, companies can expect the microscopic scrutiny on their actions to intensify further. Scenario planning can help companies respond nimbly and strategically.

Another wise approach is to pressure-test data. Pressure-testing ensures that companies have an accurate picture of the current situation, giving them sound information to make important decisions about human rights in Russia and other environmental, social, and governance (ESG) considerations.

Pressure-testing can also be used to validate that a company has followed through on an ESG commitment such as severing ties with Russia. A diligent risk manager can make sure there are no unexpected surprises hidden in a merger or acquisition (M&A) contract, supply-chain agreement, or human rights questionnaire. A company’s reputation is only as strong as its weakest link.

Revisiting ESG Priorities

Against the backdrop of Russia’s war against Ukraine, most companies are finding that they not only need to respond quickly and forcefully, but also need to proactively revisit their overall ESG priorities.

When it comes to human rights, a company’s risk management team can help by working with the legal department to review the promises and commitments the company has made and evaluate whether it is living up to them. For example, if a sustainability report declares the company is using ethical vendors and suppliers, the risk management team can ensure the claim is substantiated to avoid the blowback and downstream consequences if those statements turn out to be inaccurate.

When it comes to governance, the team involved in screening board members would be wise to check for Russian connections, even lawful ones. That way, if an oligarch’s boat turns up in the company’s harbor, the company can react before it sinks the company. Instead of waiting for media questions to come, companies should anticipate those questions now and role-play a response.

Staying Ahead of the Ongoing Crisis

Companies can expect to encounter new ESG challenges as the war progresses. Risk management teams should keep an eye on the war-related challenges the company’s competitors are facing, to avoid the same fate. Be on high alert for blind spots. As we saw recently, even ratings agencies trained to look for ESG vulnerabilities misjudged Russia’s belligerence.

Risk managers will continue to play a key role in guiding their organizations through uncharted territory. They can work with the company’s legal advisers to ask probing questions and insert themselves into areas that have traditionally been the purview of marketing, public relations, and HR professionals. They can also draw on their visibility across an organization to help leaders spot and correct any inconsistencies.

See also:

• Emerging Risks: Get Ahead of the Unexpected

Finally, risk managers can evaluate multiple zones of engagement to monitor for the possibility that conduct which is lawful today could become an ethical dilemma tomorrow.

Be on the lookout for geopolitical or other clues that the ground will shift once again, and update scenario plans frequently. As the Russian invasion has shown, the lens of scrutiny has gotten sharper. There will be no grace period. And the consequences of a mistake in this environment are incalculable.

Dave Curran is co-chair of the sustainability and ESG advisory practice at Paul, Weiss, Rifkind, Wharton & Garrison and executive director of the ESG and Law Institute, a forum of solutions-oriented ESG intelligence. Brad Karp has been the chairman of the firm since 2008. Karp has successfully guided numerous Fortune 100 companies, global financial institutions and other companies and individuals through litigations, regulatory matters, internal investigations, and corporate crises.

From: Corporate Counsel