Law firms have a unique opportunity to leverage their work in the ESG area to increase their value to clients, but pitfalls are prevalent as well
The influence of environmental, social & governance (ESG) factors on legal organizations rose sharply in 2022; and now, looking ahead into 2023, the pace of acceleration is only expected to sharpen.
We spoke to several experts working in the ESG arena within the legal industry across the world to see what developing issues they see as critical ones to watch. These are what they considered the five most important themes for the year ahead:
1. Supply chain transparency
Supply chain diversity and transparency of material issues around ESG will mature because of upcoming deadlines on reporting by regulators in the United States, United Kingdom, and the European Union.
“As law firms realize that they are actually just a vendor in somebody else’s supply chain, they must recognize the need to start making efforts to comply with regulations,” says Aragon St-Charles, Global ESG Officer at Dentons, adding that these regulations are increasingly being driven by new reporting rule-making by U.S regulators and implementation of existing E.U. Corporate Sustainability Reporting Directive regulatory mandates in reporting that are coming in effect in 2024.
Omar Sweiss, CEO of JusticeBid, a technology platform that helps corporate law departments expand efficiency in outside counsel selection and gain increased transparency on ESG topics for Tier 1 and Tier 2 suppliers, agrees. “A burgeoning area of focus coming in 2023 is that every vendor in the legal space, not just law firms, is really going to have to start thinking about their own supplier diversity programs,” Sweiss explains. “Up until now, the majority of these players in legal have been immune to supplier diversity efforts. I believe this is going to change dramatically in the next 12 months.”
2. The growth of ESG benchmarks, scorecards & frameworks
With an expanded collective understanding of ESG material issues for the legal industry, custom frameworks for the industry too will evolve. The beginning of this trend started in the last 24 months, as numerous outside parties began offering up metrics in the ESG space.
For example, impactvise provides a comprehensive measurement of law firms internal ESG strategy; and the Law Students for Climate Accountability focuses on law firms’ client work around climate in litigation, lobbying, and transactions. While Diversity Lab’s Mansfield Rule provides a measurement for diversity, equity & inclusion as part of the social part of ESG.
3. Increased legal risk for law firms
Clients are starting to make ESG demands about corporate values and positions that present a potential risk for multinational law firms, observes St-Charles. There are important implications for this growing trend regarding the rule of law and the right to representation for multinational law firms. To illustrate how the risk shows up, imagine a client working with a partner at the U.K.-based office of a law firm who asks the firm to agree to terms that contractually prohibit it from working with fracking companies, even in other countries. If that law firm is working with such clients in other jurisdictions, then agreeing to this could contractually open up the firm to legal risk.
4. Biodiversity as an emerging dimension of the “E”
The critical need to retain abundant biodiversity is an issue requiring closer attention of the legal sector, notes Adam Woodhall, chief executive for Lawyers for Net Zero, a non-profit initiative launched in mid-2021 that supports general counsel and their teams to drive action on climate and ESG within their organizations. Indeed, governments from around the world — as part of the United Nations — gathered in December 2022 to agree on a new set of goals to guide global action through 2030 in order to halt and reverse nature loss; and the Taskforce on Nature-Related Financial Disclosures, a financial services industry advisory group whose members represent more than $20 trillion in assets, is expected to release its final risk disclosure framework in Fall 2023.
5. Increased pressure to speak out on controversial events
Law firm leaders are increasingly caught in the middle between activism coming from employees, clients, and politicians on one side of a hot-topic issue and another group of clients who may be on the opposing side. For example, we’ve recently seen corporate clients that are leaning into ESG actions, such as enacting net zero commitments, while expecting their supply chain partners to do the same; yet, on the other side, a small group of members of the U.S. Congress warned law firms in a recent series of letters about the “collusive effort” to restrict fossil fuels.
To successfully navigate these events, law firms should “think through the process of if, when, and how to respond and address it from the law firm’s values,” says Gayatri Joshi, former Executive Director of the Law Firm Sustainability Network and a Partner at Vorgate Legal ESG Impact. Indeed, many law firms already have been doing this during the Ukraine/Russia conflict, either by making public statements or internal statements to their employees or clients describing the impact of the this event on the firm and its stakeholders.
Although the ESG issues that stakeholders care about differ across the legal industry, the fact remains that ESG will only increase in prominence for legal organizations in 2023 because of the many external factors — regulations, clients’ ESG strategies, politics, and activism among stakeholders — that influence the industry.
That means, law firms should proceed with introspection and caution.
“Law firms need to get their own house in order if they do not want to run the risk of losing and not attracting new clients,” says Adrian Peyer, Co-Founder & CEO of impactvise. “Until now, the ESG performance of a law firm has been ‘a nice to have’, but 2023 and beyond will move it to ‘a need to have’.”
Woodhall, of Lawyers for Net Zero, agrees, highlighting the unique role of general counsel. “The foundation of our society is a livable planet, so savvy GCs and their teams are supporting their business to be part of the climate and biodiversity solutions, as well as providing the social and governance advice which helps nurture flourishing businesses and society.”