Written by Maria Ignacia Flores, Paralegal
Environmental, Social and Governance (ESG) refers to the environmental impact of a business, its treatment of people and communities, and the way it is governed and managed. While ESG is often associated with sustainability reporting or corporate policies, it has become a material commercial issue for businesses operating in Australia and internationally.
Much of the current focus is on ESG clauses in commercial contracts. While these clauses are an important risk management tool, experience shows that ESG risk frequently arises outside the contract itself, often in ways that are less visible and harder to manage once an issue emerges.
ESG Risk Does Not Start or End with a Contract
Well-drafted ESG clauses can help allocate risk and set expectations between contracting parties. However, they do not operate in isolation. Businesses may still face ESG exposure where there is a disconnect between contractual commitments, internal policies, public statements and actual operational practices.
In practice, ESG risk often emerges from how a business operates on a day-to-day basis rather than from the wording of a single clause.
Public Statements and ESG Messaging
Statements about sustainability, ethical sourcing or responsible business practices, whether on a website, in marketing materials or in public reports, can create legal and reputational risk if they are not supported by underlying practices.
This risk is increasingly relevant as regulators and stakeholders in Australia and abroad scrutinise ESG disclosures more closely. Inconsistencies between what is said publicly and what occurs in practice may attract regulatory attention or damage stakeholder trust, even where statements were made in good faith.
Supply Chains and Cross-Border Exposure
For businesses operating internationally, supply chains remain one of the most significant sources of ESG risk. While ESG obligations may be included in contracts with suppliers, this alone may not be sufficient to manage exposure.
Regulators, investors and commercial partners are increasingly focused on whether businesses have taken reasonable and proportionate steps to understand and manage ESG risks throughout their value chains, particularly where operations or suppliers are located overseas.
ESG Issues Can Escalate Quickly
One of the challenges with ESG risk is the speed at which issues can escalate. Environmental incidents, labour concerns or governance failures can quickly lead to reputational harm, regulatory scrutiny and commercial disruption, particularly in a global market where information travels fast.
Once an ESG issue becomes public, managing its consequences is often far more complex than addressing the underlying risk at an earlier stage.
A Practical, Integrated Approach
For many businesses, effective ESG risk management is not about adopting complex frameworks or extensive reporting. It is about ensuring alignment between contracts, internal policies, public statements and operational practices, both in Australia and across international operations.
Identifying potential ESG risk early, and understanding how it interacts with commercial arrangements, can assist businesses in managing exposure while supporting long-term commercial objectives.
Conclusion
ESG risk is no longer confined to sustainability reports or contractual clauses. For businesses operating in Australia and abroad, it is increasingly shaped by operational decisions, public communications and supply chain practices.
Taking a proactive and integrated approach to ESG can help businesses identify and manage risk before issues arise. Early legal input can play an important role in ensuring ESG commitments are commercially appropriate, legally defensible and aligned with how the business actually operates.
Harris Gomez Group METS Lawyers ® opened its doors in 1997 as an Australian legal and commercial firm. In 2001, we expanded our practice to the international market with the establishment of our office in Santiago, Chile. This international expansion meant that as an English speaking law firm we could provide an essential bridge for Australian companies with interests and activities in Latin America, and to provide legal advice in Chile, Peru and the rest of Latin America. In opening this office, HGG became the first Australian law firm with an office in Latin America.
As Legal and Commercial Advisors, we partner with innovative businesses in resources, technology and sustainability by providing strategy, legal and corporate services. Our goal is to see innovative businesses establish and thrive in Latin America and Australia. We are proud members of Austmine and the Australia Latin American Business Council.
Disclaimer: This article is for general informational purposes only and does not constitute legal advice. It does not create a solicitor-client relationship, and readers should seek independent legal advice for their specific circumstances. Harris Gomez Group accepts no liability for reliance on this content.