Photo author: Elena Glomazdo

ESG – Environmental Social and Corporate Governance is an important set of standards that provide information on company environmental and social impact. ESG is not only important in regular business activities, but also in insolvency and restructuring. What are the reasons for taking care of ESG in company distress?

Firstly, this might be important for potential lenders to the distressed company. The financing of the debtor in possession may be crucial for the feasibility of the reorganization plan and it’s further realization. Besides the payment of pre-petition debts, there are many costs on which the debtor in possession must count, such as ordinary business expenses, taxes, consultant’s fees (lawyers, accountants, tax advisors, supervisor of the reorganization plan), post-petition creditors. Therefore, the potential for obtaining new lending may be compromised if the company does not adhere to ESG standards.

Secondly, as the importance of ESG is growing, to retain or attract customers, ESG can play a role in the company’s further business activities. Breach of ESG standards may influence company solvency, market image and endanger performance of the contracts.

Thirdly, compliance with ESG standards can contribute to cost reductions, for example in energy costs, waste management, avoidance of pollution related costs and fines.

Fourthly, the long-term success of the company is dependent on identification of systemic risks and unexpected shocks and companies “should ensure that they have expertise, information channels, analytical tools and practices that are specifically tailored to assessing their ESG risk factors”. *1

Fifthly, the evaluation of company assets can be related to ESG, such as contaminated land owned by the debtor. Furthermore, pollution liability may also lead to risk of insolvency of the company, which is a polluter, in accordance with the principle polluter pays.

Examples of ESG factors which are important for insolvency:

1) Environmental – climate change and carbon emissions, pollution, energy efficiency, waste management, water scarcity;

2) Social – customer satisfaction, GDPR, Human rights, Gender, Labour standards;

3) Governance – accounting standards, corruption, compensation of insolvency administrators and management of debtor in possession, litigation risks.

Ivan Todorovic

*1 – OECD (2021), The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis,
Corporate Governance OECD Publishing, Paris, http://doi.org/10.1787/efg2013c-en