UK distressed restructuring – why are ESG issues important?

Companies are under increasing pressure to examine their ESG policies, particularly after the recent COP26 conference. The UK's commitment to achieving net-zero emissions by 2050 has intensified the ESG focus.

What is ESG?

ESG, or Environmental, Social and Corporate Governance, is a term used to describe a set of standards that measure a business' environmental and social impact.

Why is ESG important in a distressed restructuring?

Even in a distressed situation, lenders, buyers and investors will feel pressure to scrutinise a company's ESG policy before deciding whether to lend or invest into a business.

ESG is important to stakeholders for the following reasons:

• Customer retention: in an increasingly more "conscious" world, an ESG-focused business may attract a larger customer base. 
• Value enhancement: as well as attracting customers, it can also lead to a reduction in energy and waste costs. 
• Litigation risk: claims from ESG-related breaches are on the rise, with many large corporates being accused of "greenwashing". An effective ESG policy will help mitigate these risks.
• Directors' duties: directors have an express obligation to consider the "impact of the company's operations in the community and the environment". They could be held personally liable if a company's ESG agenda is not robust enough.
• Divestment: a restructuring may provide an opportunity to divest parts of the business with ESG problems.

Key takeaways

ESG issues cannot be ignored even in a distressed context but a restructuring also presents an opportunity to address these issues, improving the business' resilience overall.