Tag: esg

Foreword

Even before the Covid-19 pandemic altered businesses and society, the environmental, social and governance (ESG) movement was gaining steam within corporate circles. Issues of climate change, consumer pressure, regulatory reform and social movements, were top of mind for investors and executives.

The global pandemic only further heightened the awareness around ESG, and the social impact of severe lockdowns and business instability forced companies to rethink their priorities. As a result, ESG issues such as environmental sustainability, social justice, and emerging reporting disclosure protocols have dominated corporate news headlines around the world.

ESG reporting has been voluntary in many countries, but in the last 12 months the EU – along with many other national governments and regulatory bodies – have issued ESG reporting guidelines. As the move towards establishing a common reporting standard around ESG continues, corporate counsel have been tasked with implementing effective protocols and oversight.

GC partnered with Irwin Mitchell to gauge the ESG outlook of leading corporate counsel across Europe and the United States. With the 26th UN Climate Change Conference (COP26) taking place in the United Kingdom from 31st October to 12th November 2021, the ESG agenda has been cemented as a business imperative for general counsel. This research documents the thoughts and opinions of more than 190 in-house lawyers on ESG, their risk outlook, and how a shift in business focus has shaped their legal agenda.

In-House Legal Research Team
GC magazine

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Are you prepared?

As pressure for sustainable and ethical corporate practices from regulators, investors and consumers mounts, ESG has become the most pressing topic in the boardroom.

From our research, a staggering 96% of corporate counsel reported that their companies have either implemented a formal ESG plan or are in the process of developing one. While this focus is not new, treating ESG as a crucial component of the business and governance framework has increased in recent years.

GCs are placed in a unique position to take the lead, and influence company policy. Increased focus from regulators has been one key driver, explains a survey respondent: ‘ESG has become the main focus of regulators and certain key players in the financial sector. The fact that these players promote ESG best practices means that other market participants should make ESG a priority to keep up with the best practices and improve the chances of better financial return in the longer run.’

Before the pandemic, ESG reporting was a nice-to-have niche. But 2020 saw several major regulatory developments from the European Union:

• The Sustainability-Related Disclosure Regulation (SFDR) lays down the ground rules for financial markets on transparency
• The Corporate Sustainability Reporting Directive sets out legislative goals
• The Taxonomy Regulation (TR) defines what is regarded as sustainable.

Meanwhile, in the United States, although there are no mandatory ESG disclosure requirements, the Biden administration has declared its intentions to make sustainability a priority. In 2021, the House of Representatives passed the ESG Disclosure Simplification Act, requiring public companies to make ESG disclosures in their Securities and Exchange Commission (SEC) filings.

Does your company have an ESG plan?

Echoing this sentiment, the UK government has also indicated its intentions to introduce its own mandatory ESG reporting requirements. Currently, there is no single over-arching ESG regulation, but rather a disparate array of regulations that touch on ESG concerns. The Corporate Governance Code 2018, Companies Act 2006 and the Disclosure Guidance Transparency Rules all set out the current ESG disclosure regulations.

The fragmented legal policies around ESG, and the regulatory notices governments have put forward, signal to lawyers and businesses that a unified ESG framework is in development.

One respondent from the financial sector explained: ‘There is a much greater focus in the regulatory sphere when it comes to ESG. Covid-19 has accelerated this interest and legal teams will play a key role in managing these changes.’

Ignore at your own peril

Whilst regulators work towards legislating ESG obligations, our survey results highlighted that companies have already started prioritising key areas.

Unsurprisingly, it was reported that 42% of ESG plans contained a governance framework. This was closely followed by plans containing published policies and guidelines, identification of ESG related risks, a named senior management sponsor, and KPI monitoring and reporting. Lower on the agenda was identification of ES-related opportunities and setting SMART objectives. In fact, it was alarming to note that almost 90% of respondents failed to take into account all of the above when considering their own ESG framework.

Given the increasing importance of ESG initiatives, responsibility still lies with a relatively small group of people. In 57% of the cases, ESG strategy was led by one or no people, with the majority (83%) of those individuals reporting to either their CEO or CLO. A GC from the transport industry commented: ‘Depending on ESG strategies and targets, the responsibility should lie either with the Chief Executive Officer’s or the Chief Legal Officer’s department.’

When survey respondents were asked what areas they believed needed more investment to improve ESG oversight, 31% indicated the need to invest in a dedicated ESG team. This is reflective of the upward trend of companies creating new ESG-specific roles.

While 26% of respondents pointed to the ability of their organisations to continue operating in increasingly difficult conditions as a significant environmental concern, a larger number of GCs said that issues not directly tied to their organisations’ market performance were top priorities. This included, 31% or respondents saying they wanted to see greater investment in efforts to improve biodiversity or tackle pollution, and 38% saying resource use and the so-called circular economy was their biggest concern.

It is also clear that social issues are now deemed to be risk items relevant to the legal team. While issues such as working conditions or health and safety have long been a potential matter for the legal team, respondents were just as likely to see diversity and inclusion as an area needing their oversight.

What does your company’s ESG plan include?

The growing importance of new types of risk is even shaping GCs’ views on corporate governance. While the staples of fraud, bribery and corruption emerged as pressing concerns, just as many respondents said they wanted to see greater attention to corporate transparency.

Even five years ago, few general counsel would have felt that their role called for ensuring fair operating practices or scrutinising executive pay and boardroom diversity. Now they are seen as key areas of risk.

Nevertheless, legal departments are still expected to play a crucial part in setting the ESG agenda — although other business functions may share responsibility. As one respondent explained: ‘I think it should be sponsored at the highest level but that responsibility should sit across all staff and not just a specific team.’

Another survey participant said that spreading ESG accountability across numerous company functions would lead to better outcomes: ‘Different elements of ESG should have different owners,’ explained an in-house lawyer from the tech industry.

‘ESG should address all stakeholders and touch on all areas of a company’s business. Shared responsibility is especially important given the breadth of topics (operational/facilities, HR and Legal).’

ESG in more detail: where do GCs think investment is needed to improve oversight?

Environmental

Social

Governance

Avoiding pitfalls

General counsel play a unique role as the gatekeepers of good corporate practices and ethical considerations.

As guardians for disclosure controls, company litigation strategy and company compliance practices, ESG certainly falls within the corporate counsel remit. Our data reflected this with 63% of respondents reporting that they believe in-house legal teams play a ‘very significant’ or ‘significant’ role in ESG activities.

When asked in what way in-house legal teams are involved in ESG initiatives, 59% of respondents agreed that they contributed to the development and/or evolution of the ESG plan. Whilst 18% said they were involved in the creation and implementation of policies and their adoptions. Those who selected ‘other’ mainly focused on specific parts of the ESG agenda.

As the sustainability movement grows within the corporate community, GCs are not only important legal advisors to the companies they serve, they are crucial strategic partners. So as the trend towards ESG accelerates, having a broad grasp of the wide extent of its impact has never been more important.
Legal teams have become fully involved in ESG-related matters: analysing risks, developing ESG strategy and working on governance-related issues,’ shares a respondent.

In what way are you or your team involved in ESG activities?

The need to focus

Although governance oversight is essential for corporate counsel, it is interesting to note that GCs are placed in a unique position to take the lead, and influence company policy. As a result of the regulatory push towards sustainably conscious guidelines, ESG has become an essential part of influencing investment decisions.

According to the data collected, a total of 92% of survey participants shared that they had either completely, or to some extent integrated ESG into their companies’ investment decision making process.

For this reason, it was no surprise to see this shift in investment sentiment influence GCs to realign their legal objectives. When in-house counsel were asked what their company’s top motivation was for investing in ESG, just under half of respondents (47%) said improving long-term returns. The second highest motivation was ‘doing the right thing’ (12%) followed by ‘environmental sustainability and resilience’ (11%).

Explaining the motivation behind focusing on ESG initiatives, one survey respondent explained: ‘an increased interest from the public about ESG will drive many more companies towards the adoption of ESG practices.’

Does your business integrate ESG criteria into investment decision-making?

Risk appetite

Since the pandemic, ESG concerns have propelled to the top of the business risk agenda, and corporate counsel have taken notice.

When GCs were asked if they had incorporated ESG issues into their own risk and resilience plans, 85% reported that they had. This shows that corporate counsel understand that failure to address ESG matters have both reputational and financial risks.

‘ESG is transforming from being a reputational risk to becoming a legal risk. This is particularly obvious when we consider the close adoption of EU legislation in the field,’ explains a survey participant.

When it comes to determining ESG risk, GCs were asked what they believed fell wholly within the remit of their legal team. The threat of regulatory sanctions ranked at the top at 47%, with a further 16% of respondents selecting that this risk fell within the remit of their legal team. Other risk areas that ranked highly included the threat of litigation and corporate reputation.

With new legislative reform around ESG on the horizon, the risk for regulatory liability is an anticipated threat. However, the ESG outlook — if appropriately adopted — does present opportunity.

Which of the following risks fall within the remit of your legal team?

Generating goodwill from showcasing sustainable practices will go a long way with stakeholders. On the other hand, doing the opposite may lead to embarrassing disclosures triggering fallout with investors, employees and consumers.

The data collected is undeniably indicative of the pressures felt by in-house counsel to incorporate ESG into their risk and resilience plans. The pace at which regulatory changes are occurring are making some in-house counsel nervous. A GC from the finance sector explained: ‘From month to month, I can see that environmental issues and regulations are becoming more serious, visible and severe. Results, revenues, incomes and dividends are going to be pivotal when light is directed to them.’

So when it comes to risk, should companies be investing more? The majority of corporate counsel believe businesses should be investing more (68%). The question which then arises is, should this investment be directed at systems, people or knowledge and training? As the risk appetite shifts towards ESG, knowledge and training was considered the area in which investment was most required.

As business priorities shift, training teams to understand new legislative protocols is an important company investment. ‘The way of doing business in the future is transitioning and
the regulations are moving in a particular direction. Understanding this will be necessary to avoid legal risks,’ says
a survey respondent.

GCs are often the torch bearers of responsible conduct. When it comes to manging risk, in-house counsel are well placed to ensure adequate protocols and policies are developed and managed. As ESG becomes the new industry focus, our data highlights that in-house leaders are at the forefront of managing the risks and opportunities a new framework may provide.

Greener pastures

As the social and economic impacts of Covid-19 continue to play out on the global stage, 85% of corporate counsel believe ESG will remain a top priority for GCs in the future.

In recent months, the ESG movement has shifted from a non-essential requirement to a vital reporting standard for investors and other stakeholders. Nevertheless, ESG is still in its infancy, with forthcoming legislation on the horizon expected to unify reporting standards.

But for many GCs, there is an even more pressing reason to take these issues seriously: ‘The planet continues to face an existential threat, so ESG must remain a top priority. This will likely be driven by both regulatory (SEC) disclosure obligations and investor interest in sustainable businesses.’

Another survey respondent supported this sentiment by saying: ‘I anticipate we, as general counsel, will become more involved in unpacking the requirements of the various ESG initiatives and support reporting. I also anticipate that there will be an update to legal agreements as ESG becomes more legally binding over time.’

Although ESG reporting isn’t a legal requirement yet, most ESG plans currently enacted are based on feedback from employees (45%). Other important stakeholders include investors and customers who play a crucial role in shaping the current ESG outlook. Going forward, this will likely change as ESG reporting legislation is enacted.

‘In future, ESG issues will likely become more programmatic as consistent standards are developed to allow broader and quicker adoption,’ predicted one survey respondent.

The survey data also indicated that GCs expect their ESG outlook to increase with importance within the next five years, as reported by 88% of respondents. Although 12% believed ESG would retain the current level of importance, it’s vital to note not one respondent thought it would become less important.

The unanimous consensus regarding the future of ESG highlights that the way of doing business is evolving. Although responsibilities around ESG obligations may vary between sectors and jurisdictions, the pressure in-house counsel are feeling from regulators, consumers and employees is universal.

Pre-emptive reporting requirements are reshaping the corporate agenda, with general counsel set to oversee the application of non-financial reporting rules and governance. As policy momentum accelerates, ESG trends are set to raise the corporate profile of general counsel among organisations. With more companies feeling the need to launch more holistic programs, policies and reporting frameworks, one thing is clear, general counsel are pivotal in managing this new focus.