What is ESG? A Guide for Legal Teams

ESG has become an important topic for in-house legal teams globally. But what exactly is it? This article acts as an introduction to ESG for in-house legal.

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When you think of an in-house lawyer or legal team, it’s fair to first associate these roles with traditional legal work. Yet, as the world of business evolves and global priorities shift, the role of in-house legal continues to evolve.

Whether it’s out of peaked interest or as a matter of strategic and ethical importance, one area consuming an increasing proportion of in-house legal teams’ time are the topics of environment, social, and governance; better known as “ESG”.

In fact, as of 2020, 88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies had ESG initiatives in place. This commitment indicates the rising strategic importance of these topics.

For in-house legal functions, it is critical to deliver on these new responsibilities if they are to suitably protect the company and contribute to strategic growth.

But what exactly is ESG? And what does it mean for in-house legal functions? Below, we share an introduction to ESG for in-house legal teams.

In this article, we will cover the following:

What is ESG?

ESG is a set of non-financial measurements around environmental, social, and governmental performance.

It has become a hot topic for legal departments across the globe over the last five years and it has not come without a degree of confusion and hesitation.

General Counsel (GC) report significant pressure from their employee base, institutional investors, customers, and advocacy groups to increase their company’s commitment to ESG, with 78% of GCs having faced such pressure in the past three years.

The surmounting pressure to see positive action taken on environmental, social, and governmental matters has resulted in ESG becoming a legal issue requiring a sensitive yet strategic approach.

While it might seem daunting, tackling ESG is a great opportunity for legal teams to position themselves as strategic business partners. This is thanks to a focus on these topics often uncovering more effective, more efficient ways of operating as well as establishing a stronger company reputation.

Why is ESG important?

Take a look at your personal life or the consumer market. The rise of reusable bags. The banning of plastic straws. Low-emission zones popping up in cities across the world. There’s no denying the global shift towards a more environmentally friendly and fair society, which has flooded into the business world.

Implementing ESG  practices has proven to be good for business, so much so that

investments in companies with good ESG performance have generally yielded higher returns than the average within their broader market.

Inflows into sustainable funds rose from $5 billion in 2018 to nearly $70 billion in 2021. This has likely contributed to investors demanding additional non-financial reporting to measure risks like climate change.

Moreover, customers and employees are now actively looking for companies demonstrating strong ESG values. These heightened expectations have raised the bar for environmental and ethical standards in business.

While ESG is important for many reasons, an undeniable push for companies to implement ESG programs is the introduction of regulations from governments across the world. For example, governments have introduced strict regulations on company carbon emissions following The Paris Agreement in 2015 and the EU CSRD requires broad ESG reporting from both EU companies and companies with substantial EU operations.

And these regulations aren’t for show; companies are required to transparently report on ESG factors and the actions they take to address inadequate matters. So, whether we like it or not, regulations are coming, and in-house counsel must prepare to accommodate them.

So whether your company is trying to attract and retain the best talent, improve the bottom line, or meet regulation requirements, there’s no denying the growing importance of ESG and its place in the legal function.

The ‘E’ in ESG: Environment

The world has seen the devastating outcomes of climate change over the last few years, which has put mounting pressure on companies to bring environmentally friendly and sustainable practices to the forefront.

When it comes to the environment, the best place for in-house legal teams to start is by thinking about carbon, water, and waste.

These are the three key environmental areas that the legal team can explore and impact.

While one might assume that an in-house lawyer is distant from the environmental impact of day-to-day business activities, the legal department controls the contracts and boundaries in which the company operates.

Therefore, as a common entry and exit point of business dealings, it is the legal team that has the ability to specify, regulate, and monitor the environmental standards of the business.

The ‘S’ in ESG: Social

Social is an increasingly important – and increasingly visible – pillar of ESG. On the surface, you might assume that social matters are limited to the likes of labor law, working practices, diversity, equity and inclusion (DE&I), social benefits and human rights.

These topics are certainly still a high priority.

53% of companies still currently have no diversity initiatives in place and 49% currently do not use diversity data in counsel selection.

However, ESG shines a light on the full spectrum of social challenges that a company faces and has the ability to impact. For example, increasingly, well-being and mental health, employee feedback and work/life balance are landing in the realm of legal. Why? Because the baseline expectations for each of these matters have changed – not to mention their impact on company performance.

But it doesn’t stop there. While it’s common to first think about your employees, the social aspect of ESG extends to your supply chain and the communities in which your business operates. Do your subcontractors have adequate working conditions? Do your physical premises attract or detract from their local communities?

What are the biggest levers available to your company that can impact social issues for the better?

The ‘G’ in ESG: Governance

To date, conversations around ESG have focused heavily on environmental and social matters. Perhaps this is a result of topical challenges arising that have required urgent addressing, or perhaps it is because these themes are often easier to articulate.

Nevertheless, governance is a key pillar that cannot be overlooked. Governance refers to the structures, policies, and processes that businesses use to deliver their day-to-day activities and achieve their objectives. It refers to the structure and execution of decision-making as well as the distribution of responsibilities across the company – whether that be the board of directors, managers, employees, or wider stakeholders.

Good corporate governance is all about getting the aforementioned structure and execution right. It’s about working towards company objectives in a way that is fair, right, and aligned to company commitments and expectations as far as the environment, social, and performance are concerned.

As ESG advocate Christine Uri said, “the “G” is not sexy”; and she’s right. Outside of corporate scandals – such as with Lehman Brothers or Enron – governance doesn’t tend to offer clear evidence or stories to secure buy-in and engagement.

That said, both environmental and social performance is dependent on appropriate, effective corporate governance, so it should not be underestimated.

How to achieve best-in-class Governance

We recently had the opportunity to speak with Patricia Lenkov, a New York-based corporate governance expert with over 25 years of experience as an Executive Search professional, Board Advisor, and Board Member. Patricia shared with us valuable insights and best practices to help in-house legal teams achieve effective governance.

The foundation of good governance is having a diverse board with a heterogeneous composition of expertise including strategy, business, risk, legal, cybersecurity, and finance. When first embedding diversity in your board,  you may experience longer decision-making processes as you adjust to more perspectives around the table but, ultimately, it results in better decision-making and more impactful outcomes.

Regarding governance in ESG, Patricia has observed a significant shift in practices over the last two decades. In her early career in the early 2000, board meetings were often seen as a “meet and greet” opportunity for members who had known each other for a long time. Nowadays, boards play a more significant role and are accountable to stakeholders and shareholders. Every member must bring specific expertise to justify their position in protecting and propelling the business forward.

The board must now be up-to-date, informed, have opinions, and be capable of tackling various challenges while being subject to performance reviews. While the quality of these reviews is still open to debate and can be quite inconsistent, Patricia has seen as a major improvement in corporate governance.

The best practices for achieving effective governance are those that meet the expectations of shareholders, such as institutional investors, while also taking into account and managing the increasing stakeholders’ pressures of employees, customers, and suppliers.

Patricia emphasizes that human capital has become a crucial pillar of governance, especially after the Covid-19 pandemic. Where before it was a matter of compensation for C-Suite and particular senior leadership, she has since witnessed the cultural shift towards the need for a more flexible and mission-driven work environment, particularly from Gen Z. Those needs have become a critical aspect of modern corporations to attract and retain the best talent. The importance of human capital can be acknowledged in its ability to impact M&A activities. For example, a potentially lucrative M&A deal can be threatened if the consolidation of different companies, people, and cultures is not handled with care.

How to get started with ESG, an action list

Okay, now you know what ESG is and why it’s important for in-house legal teams. Here are five steps to help you begin to shape your ESG program.

Find your ESG allies

Legal is not the only stakeholder when it comes to ESG. Identify your key internal stakeholders and start the conversations. You’ll likely want to start with Finance, Operations and HR.

Identify your key risks and opportunities

ESG is a big topic and, understandably, you can’t tackle it all at once. In collaboration with your stakeholders, identify the top ESG risks and opportunities present for your company. Are there severe labor risks in your supply chain? Is your business lacking diversity? Are your carbon emissions through the roof?

Establish the baseline

Monitoring is a big part of an ESG program. Gather data on the top risks and opportunities that you have identified to establish your baseline. When you know your starting point, you can track how your actions are impacting the topic.

Make a plan

Actions speak louder than words. From your key risks and opportunities, choose two to five areas that you’d like to focus on (depending on the size of your team and company). Agree on your key performance metrics (KPIs) and map out what actions are required to achieve them.

Share the journey

Your business and the wider business ecosystem don’t expect perfection when it comes to ESG. It does, however, expect progress. Report your plans, actions and performance transparently. While this might be or become a regulatory necessity, it is also a great opportunity to develop internal engagement, build brand reputation, and shine a light on the great work you’re doing!

Repeat

ESG is an iterative process. It is only one part of the legal workload, so be strict with what you take on. Start with what will be most impactful and review and reprioritize accordingly every year or two. ESG is a transformational change, and it doesn’t happen overnight.

Extra tip

In summary

At first, ESG might feel like a big undertaking, but when you break it down into manageable, collaborative steps, the legal team can have a real impact on environmental, social, and governmental matters, as well as the bottom line!

The best place to start is simply by assessing your company’s biggest risks and opportunities – something that you’ll already be used to doing in your role.

Of course, ESG is encompassed under the wider legal operations umbrella, which you can learn more about on our blog.

Where does NEWTON fit into all of this?

NEWTON delivers an easy and intuitive platform to manage and automate your legal entities’ information, governance, and compliance. With governance being the foundation to all ESG matters, be sure to get in touch to explore how Newton can help you have everything you need to be in control of your entity portfolio.

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About this article

Sources

Navex (2021). Global Survey Finds Businesses Increasing ESG Commitments, Spending
Trinity Business Review (2020). The Greatest Governance Failings of the 21st Century
United Nations (2016). What is the Paris Agreement?
McKinsey (2022). Does ESG really matter—and why?
Harvard (2021). The General Counsel View of ESG Risk
European Union (2023). Corporate sustainability reporting
Thomson Reuters Institute (2022). 2022 Legal Department Operations Index

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