ESG stands for Environmental, Social, and Governance, three central factors measuring the sustainability and societal impact of an investment, company, or business. It is not a new investment strategy but, with the racial and political unrest sparked by the events of 2020 and the worsening climate crisis, more companies realize the benefits of publicly stating ESG goals. As companies increasingly implement programs to achieve those goals, law firms see the business opportunity to advise their clients in those efforts. Moreover, as part of achieving their publicly stated ESG goals, corporate clients expect their suppliers and vendors—including law firms—to adopt their own ESG programs and goals, as well.
Breaking down ESG
- Environment: What is the enterprise’s impact on the environment? Consider for example, carbon footprint, toxic chemicals involved in manufacturing and delivery processes, and sustainability and conservation efforts among its vendors and in its supply chain.
- Social: How does the enterprise improve its social impact, both internally and in the broader community? This can include LGBTQ+ equality, racial diversity from the executive suite to staff, inclusion programs, and hiring practices. This factor also encompasses how a company advocates for human rights, voting rights, and social good in the wider world beyond its sphere of business.
- Governance: How does a company’s board and management drive positive change? Factors can include anti-corruption efforts, executive pay equality and diversity in leadership, and how leadership interacts with workers and shareholders.
ESG investment
Some companies and law firms are treating ESG as “the next new thing,” but the principles have been steering financial decisions for decades. The May 2020 Riverwater Partners blog reported that ESG assets more than tripled in the last 10 years and grew more than ten-fold in the last 25 years.
Millennials and Gen Z are increasingly focused on the purpose and sustainability of an organization. The 2020 Edelman Trust Barometer Special Report: Institutional Investors, which identifies pivotal issues shaping investment criteria, showed that 92% of institutional investors who responded to the survey indicated that diversity and inclusion data will impact share prices, and that there will be a great emphasis on workplace issues such as fair and equitable compensation, work benefits, and flexibility for the next generations of talent.
A combination of stakeholder demands for corporate commitment to environmental and social responsibility, plus instant access to company data via the internet, has made ESG a critical consideration for nearly every industry and financial sector. Companies that do not focus on the ESG issues are at risk of being left behind.
Corporate response
In the past, ESG largely referred to what a company was doing to protect the environment—the “E” in ESG. But the events of 2020 changed that, and investors and consumers now want to see efforts regarding the ‘S’ and ‘G’ criteria, as well. There is a growing expectation for CEOs to speak out on matters of social and environmental impact and strive to eliminate not only their organization’s own active harms to society such as pollution, waste, or unfair employment practices, but also that they take active steps to fight larger societal problems and injustices in the community. Companies recognize this and increasingly include ESG value statements in their advertising and media outreach.
Consequently, ESG has evolved into an important function within a company, involving risk management, reputation, and compliance with new regulations. Companies may risk litigation if value statements included in their proxy materials, for example, don’t manifest in practice. It falls to the GC to coordinate efforts throughout the business and ensure consistency between the stated corporate values and their actual operations. In fact, a February 2021 survey of 83 general counsel by the research company Gartner, Inc. showed that their top corporate governance and board management goals were ESG-related.
Customers, vendors, and suppliers all play a part of a company’s success in achieving its publicly stated ESG goals, as well. To that end, companies are requesting ESG information in RFPs and sending out questionnaires such as the Ecovadis Audit or Integrity Next survey, which score enterprises by industry sector in environment, ethics, labor and human rights, sustainable procurement.
Law firm response
As their clients increasingly focus on ESG efforts, large law firms are building out specialized ESG practices. Early entrants include Gibson, Dunn & Crutcher, Hunton Andrews Kurth; Kirkland, Paul, Weiss; Seyfarth Shaw; and Winston & Strawn. These multi-disciplinary teams attempt to demystify ESG standards and include lawyers with, among others, expertise in securities, environmental, and labor and employment law. Some of the thornier social issues may not necessarily fall squarely in traditional law practice areas but, as strategic counselors, the firms must attempt to flag some of the best practices by similar companies.
Lawyers are especially valuable in helping their clients navigate growing investor and customer demands, as well as an increasingly complex global regulatory environment. For example, internationally, the UN Global Compact has established goals and principles for sustainable business development, while domestically, the Biden administration and the SEC have indicated a demand for increased ESG disclosures, especially related to climate change. In addition, numerous third-party, independent companies and research groups have developed a variety of surveys, reporting metrics, and reports attempting to quantify ESG results.
Walking the talk
While corporations take on more social responsibility and promote their own socially conscious reputations, their law firms can be expected to pursue similar goals. As a supplier of legal services, lawyers are being required to contribute to their clients’ success in meeting the clients’ stated ESG goals and may be asked to submit documents and reports on their own ESG efforts to their clients’ procurement teams.
The events of 2020 changed the way law firms—not just their clients—address social justice, racial inequity, and political issues. In addition to making public statements regarding their values, recognizing larger racial and social justice ills as well as the impact of this injustice on their own attorneys and personnel, law firms increased their financial support to social justice organizations, expanded their pro bono programs, and formed new committees or advisory boards to address ESG issues. Young lawyers and law students also are speaking up about ESG priorities, targeting firms that, for example, represent oil and energy clients or defend clients challenging election results. Thus, ESG has become a recruiting and retention issue not just for now, but into the future.
