Maitland/AMO Sustain – In the Hot Seat with Rebecca Perlman, Corporate Lawyer at Herbert Smith Freehills

by Zara de Belder | 16th June 2020

Welcome to ‘In the Hot Seat’, a fortnightly series where we tackle some of the biggest questions facing sustainability professionals across a range of industries. We’ll also explore what sustainability means and how it is interpreted across different sectors and geographies.

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This week Zara de Belder, Head of Maitland/AMO Sustain, catches up with Rebecca Perlman, corporate lawyer at international law firm Herbert Smith Freehills and Co-Chair of the firm’s global impact investment and social finance practice, HSF Impact.

1. What are the main legal challenges that entrepreneurs face when establishing a social enterprise?

Starting a new social enterprise can be a daunting process and there are a range of issues for founders to consider in order to safeguard and strengthen long-term social and financial returns. This includes ensuring the business is structured in a way that best suits the venture’s needs. Such decisions are often driven by the type of finance that the business will seek to raise in the short, medium and longer-term.

The term “social enterprise” has many meanings. Most social entrepreneurs wish to embed and protect the social mission of their business and there are various ways of doing this – from including a mission lock in the articles, to adopting a golden share structure. Some legal entities have mission locks and asset locks pre-baked into them, such as registered charities and CICs.

Once a venture is up and running, the key issues that commonly face founders include intellectual property protections, employment issues, key contract terms, data protection risks and board matters, including directors duties.

As a firm, we work with a wide range of social entrepreneurs who are at the forefront of tackling the greatest challenges facing the world today. It’s a privilege to be able to help them overcome legal barriers to growth, so that they can accomplish the impact they set out to achieve.

2. How are social factors, such as supply chain and working conditions, affecting due diligence during dealmaking?

The “E” in ESG attracted the most attention in the months leading up to the outbreak of COVID-19. However, with the social upheaval caused by the pandemic, the “S” in ESG is now very much front-and-centre. This includes issues relating to healthcare, employee welfare, labour rights, data privacy and supply chain management.

In the current climate, many businesses will be looking at asset disposals. For buyers on an M&A transaction, ESG risks arising out of the crisis – and more broadly – must be brought within the scope of both due diligence and post-closing compliance. This includes any adverse human rights impacts in relation to employees and local communities. Such impacts could result in a buyer inheriting reputational costs, a downgrade of the company in ESG rankings and exclusion from some ESG portfolios and potential costly litigation.

On the sell-side, ESG policies, and the potential for post-transaction issues to impact the seller’s reputation, increasingly require “clean and responsible” exits from assets. Even in the current circumstances, sellers that have embraced ESG may seek to assure themselves that the asset will continue to be managed responsibly post-completion. This is manifesting itself in increased due diligence by sellers and sometimes in enhanced post-completion undertakings being sought from buyers.

The challenges relating to ESG due diligence have taken on a new significance in the current landscape, as deals are being done on shorter timelines and constraints on travel prevent buyers from undertaking onsite due diligence, increasing the risk of overlooking ESG issues that may become problematic post-completion. Businesses are therefore having to rethink how they undertake due diligence within these constraints.

3. What are the implications of Brexit on the EU’s Taxonomy Regulation?

The proposed EU Taxonomy Regulation – which seeks to establish a classification system for sustainable activities – forms a key part of the EU’s Green Deal.

During the Brexit Transition Period, EU law will continue to apply within and to the UK, although the UK will no longer be an EU Member State. If the EU’s Taxonomy Regulation passes through the EU’s legislative cycle during this calendar year as planned, the framework for the Taxonomy will become binding on the UK during the transition period. However, the obligations to use the Taxonomy will only start to apply from the end of 2021.

Although this raises the possibility of future regulatory divergence, the UK Government has noted in its Green Finance Strategy that the UK would “match the ambition” of the EU’s Sustainable Finance Action Plan. If the UK does adopt a similar approach to the EU, this could have a number of implications, including the significant expansion of the scope of sustainability disclosures.

Although the proposed Regulation does not require financial market participants to invest in Taxonomy-eligible activities, a stated purpose of the Regulation is to drive capital flows toward environmentally sustainable opportunities. This is likely to have a wider impact, as investors increasingly seek Taxonomy-eligible investment opportunities.

It’s also worth noting that the proposed Taxonomy Regulation would allow the EU Commission (and, in the UK post-Brexit, a UK regulatory authority, such as the FCA) to investigate an extension of the Taxonomy to activities which cause significant harm to environmental objectives (often referred to as the “brown taxonomy”).

4. If you have one piece of advice for someone considering a career in responsible investing, what would it be?

In my view, there’s never been a more exciting time to embark on a career in this area. Responsible investing roles have proliferated in the past few years. There are now so many different entry points – from the structured grad programmes run by financial institutions, asset managers, corporates, UN agencies and industry bodies, to starting your own social enterprise or joining one of the many regional and global social finance intermediaries. Professional services firms (including law firms and consulting firms) are also increasingly offering opportunities in this field.

There are different ways to approach a career in this area. Those who come from a traditional investment background might be more attracted to the finance-first end of the capital spectrum, others might have experience at the grass-roots level and be more naturally inclined to an impact-first approach.

If you’re just starting out, it’s worth trying to get some experience with organisations that are operating at different points on the capital spectrum to help you decide where you want to be for the longer term.

5. Finally, what does sustainability mean to you?

Global standards and definitions are emerging. However, in practice, sustainability still means different things to different people. For some, it means cutting emissions and lowering energy usage. For others, it means sourcing products from fair-trade organisations or achieving gender equality targets.

In its broadest sense, I think sustainability calls for individuals, businesses, organisations, civil society and governments to take a long-term approach and consider impacts across a wide set of stakeholders, including employees, suppliers, customers and communities, as well as shareholders.

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About the Author

Zara de Belder

Zara is Head of Maitland/AMO Sustain and specialises in ESG communications and strategy development

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