By Greg Moreman
If Halloween left you unfazed, law firms and legal departments should consider a few spooky statistics about Environmental, Social, and Governance (ESG) policies.
Eighty-nine percent of compliance leaders surveyed said they feel responsible for ESG reporting, according to tech research and consulting firm Gartner’s 2022 Legal and Compliance Executive Priorities Poll.
But just 39 percent of lawyers said their departments are prepared to meet their ESG responsibilities. And Wolters Kluwer reports that only 20 percent of law firms believe they can meet their clients’ demand for these services.
The statistical disparity above demonstrates the demand for ESG outpaces the abilities of the legal profession, leaving lawyers wondering how to harness ESG’s potential value and minimize its risks.
So, what should legal professionals do? Don’t fear! The following guide provides a basic understanding of ESG, its potential impact your business, and steps to get started.
What is it? As noted above, ESG stands for Environmental, Social, and Governance and is a way of investing or assessing companies in those areas. In layman’s terms, it’s an approach socially conscious investors, consumers, and employees use to determine the broader impact of organizations in view.
What’s its purpose? Investors, regulators, job seekers, nonprofits, and consumers use ESG to screen entities based on their corporate policies and to encourage them to act responsibly. It’s more than gathering data and reporting; it’s a fundamental shift in the incentives that drive business decisions. Even for matters unrelated to ESG, companies might lose contracts if they lack an ESG policy.
Who owns it in your company? ESG responsibility often falls under the Compliance Department, though some businesses place the function elsewhere. (Unsure if you’re compliant? Level Legal conducts compliance reviews and can ensure you’re on the right track.)
Who’s leading the way? Europe is in the lead, as usually in such matters, according to the latest survey conducted by the Capital Group. Countries like Russia and China will fall behind. The United States and Asia-Pacific fall somewhere in between.
Although ESG sounds like more work for attorneys, the approach can actually provide many benefits:
- Offering a competitive advantage. Socially conscious consumers will pay more money to buy from businesses that implement sustainable policies.
- Attracting investors and lenders. A recent Gallup study found that almost half of investors expressed interest in sustainable investing. Naturally, as ESG-conscious companies boost the health of their policies, their access to capital increases.
- Improving financial performance. Even small steps regarding sustainability can help increase your company’s bottom line and ROI, as tracking key metrics is vital to a healthy ESG program. By keeping track of their financial health, these companies also have less exposure to fines and penalties and may even have an easier path to receiving government subsidies.
- Building customer loyalty. Post-COVID, some customers have shifted their priorities when shopping and seek to support businesses that work toward the greater good. ESG can help companies nurture long-term relationships between themselves and their customers, increasing current and future goodwill.
- Making company operations sustainable. Although currently ESG is only required for publicly traded companies in certain jurisdictions, it’s likely that all businesses will have mandatory reporting obligations regarding their ESG policies. Companies that choose to look the other way now may set themselves on a path wrought with future legal, regulatory, or compliance problems.
The value of a strong ESG compliance program is evident, even impacting company culture and employee satisfaction. It makes sense that most people want to work in a good environment where employees at all levels feel well treated, and the company acknowledges its presence exists outside of its walls.
At Level Legal, we strive for a culture of compliance, and we attract talent with the same mindset. Companies who do the same will mitigate their risk and avoid illegalities, factors that weigh heavily in favor of reducing damages in instances of non-compliance.
Many signs point to ESG as a permanent consideration for some investors. Here’s the “pro” side:
- Younger generations prefer it. Emerging generations focus on how their investments help the planet.
- ESG stocks seem more resilient. Investment research company Morningstar reported that during the pandemic, ESG stocks did better than most, with 66 percent of ESG funds ranking in the top half of their categories.
- ESG-driven companies tend to outperform peers. Although many may have thought that investing in companies with sustainable practices might yield a lower return, the opposite rings true: managers who incorporate sustainability factors into their strategies significantly outperform peers.
- The trend toward regulation. ESG issues are moving from a voluntary disclosure-oriented model to more of a regulatory one with significant implications for how an organization collects, verifies, and implements data. The SEC’s disclosure requirements announced in March of this year signaled the Commission’s heightened focus on ESG issues surrounding emissions reporting. Similarly, Europe is also moving toward regularly published standardized ESG reports for 2023 onwards. Though no federal framework currently exists, some states have developed laws to address ESG issues. In any event, the trend moves toward more ESG.
Unsurprisingly, there is also a “con” side to ESG. Take the “environmental” aspect. Oil and gas companies note that the global warming assumptions of ESG investing would ultimately destroy them. States with thriving energy industries tend to agree: Louisiana recently withdrew $794 million from BlackRock funds due to its pro-ESG investing policies, citing perceived damage to Louisiana’s energy industry. Louisiana Treasurer John Schroder stated that the “anti-fossil fuel policies would destroy Louisiana’s economy.”
Texas lawmakers hopped on board, arguing ESG investing policies like those of BlackRock harm oil and gas companies. They’re not wrong, and lawyers should bear that in mind with their companies or their clients.
With respect to the “social” component of ESG, companies vocal (or silent) on how long-term ESG policies account for abortions face backlash from investors. After the Supreme Court’s ruling in Dobbs v. Jackson Women’s Health Organization, some companies, like Microsoft Corp., stated they would cover costs of traveling to other states to obtain abortions. Others, like Walmart Inc., have been more cautious, with leadership stating they were listening “to many different viewpoints” to craft a plan going forward.
Given these crosscurrents, attorneys should assess their unique situation with ESG and act accordingly.
Mitigating Risk Today
While recognizing ESG’s amorphous nature, companies looking to lower their risk should build their compliance programs around these considerations. We agree with Gartner’s sensible steps to mitigate risk for law departments:
- Determine program scope and objective.
- Map regulatory obligations and implement change management process.
- Design policies and procedures – think about how you can monitor your employees in accordance with your country’s policies.
- Embed policies and procedures into operations.
- Maintain compliance policy governance.
- Maintain a code of conduct.
- Manage compliance service providers, engaging an organization like Level Legal to ensure compliance and conduct reviews when needed.
- Maintain organizational support for compliance.
- Measure ESG compliance program effectiveness.
- Revise and adapt.
The bottom line for law departments: Don’t make the mistake of reporting in a 10-K that you have ESG policies in place when you don’t. And for law firms? Understand the local nuances of ESG to support your clients.
Unsure if you’re compliant with ESG policies? Contact Level Legal to find out.
Greg Moreman leaves nothing to chance. This includes weather forecasts, culinary adventures, and the best time of year to buy a holiday turkey. In fact, if our director of legal compliance services were a proverb, he would be “Measure twice, cut once.” If he were a rapper, he’d be “Lil Inbox Zero.” Greg’s a generalist, a role Level Legal leans on when growth pains bring new problems or when a new strategy means new processes. Greg just handles it. Never complaining. Always willing. His work and his example benefit everyone.