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Corporate law departments key to institutionalizing ESG as an expectation for their outside law firms

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

While many law firms have yet to institutionalize their ESG activities within their firms and with their clients, it may be those clients that will start to push them on it

The implementation of environmental, social & governance (ESG) strategies for law firms is not yet a mainstream issue within the legal industry. Observers of legal industry trends have observed that ESG is where diversity, equity & inclusion (DEI) efforts were five to seven years ago, even with the importance of ESG among clients growing.

Yet, an often-overlooked fact is that there are number of issues at law firms that fall under the ESG umbrella that are critical elements of any ESG strategy. They include pro bono commitments, volunteerism, DEI, recycling, data privacy, and cybersecurity.

Moreover, the support and pushback for a more socially responsible business environment is growing, and law firms are finding themselves struggling to know how to respond to key issues that are becoming important to clients. This is unlikely to change any time soon unless law firms make a concerted effort to address this problem.

To help in creating and executing an ESG strategy, a materiality assessment of key issues is one tool that’s often skipped over. The idea of reviewing stakeholders’ views to determine what’s critical about ESG and what should be prioritized — as well as being able to assess purpose, value, expectations, and priorities — is an important exercise for any organization to undertake.

Role of client demand

Like DEI a few years ago, a key driver of law firm change around a particular item is the demand by clients. Indeed, buyers of legal services are an important stakeholder in law firms’ ESG strategies; and corporate law departments setting an expectation for firms to have an ESG strategy is an important step to advance progress.

Law firms that go through a formal materiality exercise at the request of one client can also scale beyond that, which could play well to firms’ marketing and business development efforts with potential clients. Indeed, several law firms in the United Kingdom, whose ESG strategies tend to be more mature when compared to their U.S. peers, report that ESG is a great engagement tool with clients. Similarly, law firms in the U.S. have shared that collaboration with clients on DEI initiatives — one of many important ESG issues — strengthens client relationships.

For clients, the materiality assessment’s standard framework and benchmark system enables them to analyze across their panel law firms and determine where each firm is on the maturity scale as to their ESG strategies. This process also facilitates the identification of similarities across panel firms and can reveal factors — such as valuable data — that could help the law department to communicate its critical role in the company’s own ESG strategy.

In addition, any widespread push by corporate law departments of their panel firms toward more comprehensive ESG initiatives would greatly help the maturity of law firms’ ESG strategies across the board. And because our research has shown that, among U.S. law firms, completing a formal assessment of material issues with stakeholders is still a relatively uncommon, even one or two major multinational companies mandating that their law firms use a standard process to prioritize material issues would advance collective the overall legal industry’s maturity of ESG strategies a great deal.

Of course, one important consideration for corporate clients in working with each of their law firms to ascertain what goals make sense based on their priority issues — which in turn, stems from feedback from the unique set of each law firm’s stakeholders — is that every law firm will have different priority issues because their stakeholders vary. Indeed, a law firm with a large portfolio of business with the semi-conductor industry may find their material issues to be quite different from a law firm that specializes in labor and employment issues.

Potential for legal ops to have a role

One drawback to corporate law departments making this a priority is the amount of effort it takes. Having a solid legal ops function within the department, however, could provide a team to lead the execution, tracking, and evaluation of the department’s initiative to have its panel firms implement a standardized process for prioritizing material ESG issues. Of course, success in this area will depend on the extent to which legal ops has a role in managing outside counsel.

“If you figure that most departments are bifurcated between the operation side and the practice side, this initiative will fall under more the operation side. By default, legal ops would be the ones helping to administer some of this,” states Bill Josten, Manager of Strategic Enterprise in Thought Leadership for the Thomson Reuters Institute. In fact, legal ops already is closing the gap in helping general counsel communicate back to the company about the department’s priorities and about how it is improving and seeking to drive the broader business forward.

Some critics may argue that the impact of generative artificial intelligence (AI) is a more critical item than prioritizing a consistent, standardized approach to the creation and execution of outside counsel’s ESG strategy. And while there is no doubt that generative AI will transform the legal industry in ways that we cannot foresee, ESG is about looking through an expanded lens of risk and opportunity, which generative AI may just be a subset of that larger lens.

Indeed, generative AI falls under the governance part of ESG — along with cybersecurity, data privacy, and ethics — and as such, generative AI should be seen as a potentially key material issue. Therefore, by prioritizing generative AI, general counsel and by extension their panel law firms are increasing the focus on ESG.

For more on how your law firm can conduct a materiality assessment, check out our starter kit here.