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Governance

Law firms’ ESG practice continues to drive economic growth and better alignment with clients

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

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

Those law firms that create and leverage a ESG practice may have a leg up on the competition in enhancing their client relationships and driving profitability

The idea that the investment cost of companies’ environmental, social & governance (ESG) agendas would dwarf previous regulatory compliance costs — such as those connected to the Sarbanes Oxley Act of 2002 and the Dodd-Frank Act of 2010 — was predicted by one law firm ESG practice leader earlier this summer.

Just a few months later, this prognostication could be closer to reality than originally thought, given the rate at which law firms and professional services firms are fielding inquiries from existing and potential clients and having to add resources and personnel to handle it all.

For example, Eversheds Sutherland’s ESG practice went from a handful of lawyers to more than 200 attorneys in just two years, according to Herbert Short, co-lead of the firm’s global ESG team. “Our management saw ESG as a critical area for our clients and put a leadership team in place when we got serious two years ago,” Short says.

Since then, the firm has created a cross-regional team of 25 senior lawyers, including heads of sector groups and managing partners of geographic practices who are dedicated to assisting clients with ESG strategy. The team re-visits the practice group strategy regularly to remain in tune to clients’ needs across the globe, Short adds, and uses real-time client feedback to shape the practice area’s strategy going forward.

An expansion in the breadth of ESG

Interestingly, those law firms with existing expertise around clean energy, employment contracts, and board governance have elements of an ESG practice, even if those efforts aren’t overtly pitched as such. Within these areas, however, corporation clients — because of pressure from investors, shareholders, and regulators — are asking more detailed questions around emerging ESG-related operational and financial risks, explains Short.

Some areas of clients interest in ESG activities include:

Leadership and governance — Board compensation and composition as well as the scope and structure of the audit committee examining such issues as executive pay, are big areas of focus for many corporations that are seeking to improve their ESG bona fides. Similarly, designating a board member to oversee how ESG requirements and regulations are evolving is a necessity for boards’ governance activities, especially because of litigation risk.

Jessica Lu, a litigator at Brown Rudnick, says the primary driver of this new trend is the divergence between what a company signals its values to be and its implementation of those values. Too large of a gap in this area can carry a lot of risk, ranging from reputational harm to serious regulatory trouble. “We’re seeing corporate ESG disclosures giving rise to costly securities litigation with corporations being sued for securities fraud based on overstating or misstating their ESG commitments and shareholder litigation against officers and directors for failing to ensure diverse candidates for board seats,” Lu says.

Decarbonization — This area — which involves carbon offsetting and clean energy commitments such as in wind, solar, battery, and hydrogen sources of green energy — is quickly becoming a client focus. Many corporations are engaging in green-power purchase agreements, which grant clients’ access to renewable energy and minimize their carbon footprint for a fixed cost.

Another area of growth, according to Short, is carbon credits, in which companies purchase these credits as a mechanism to reduce their greenhouse gas emissions. Marketplaces exist to trade these credits, which are based on a value of carbon sequestration of forestry land and allow small and large landowners to monetize the carbon-capture of their land.

Supply chain management — In addition to demanding transparency into global corporations’ ESG activities, investors and regulators are seeking the same in corporations’ vendors and supply chain. Corporate clients need to be aware of this heightened scrutiny, says Honieh Udenka, at litigator at Brown Rudnick. “We advise clients to start thinking about investments and due diligence in supply chain monitoring and tracing to mitigate risks that can arise down the supply chain,” Udenka explains.

Protecting human rights among workers is a central social issue — the S in ESG — for companies that contract with suppliers based in other countries to produce their products and serve their customers. To that end, multinational companies need to update their vendor and supplier contracts with clauses to meet new data reporting and verification requirements around workers’ protections in order to better reduce reputational risk, says Short, adding that companies also need to utilize appropriate international arbitration clauses to resolve cross-border disputes involving labor.

Data protection Cybersecurity, data privacy, and other data and information concerns are another ESG pillar that’s become top of mind for clients seeking legal guidance. In a recent survey, cybersecurity was ranked as the second most-cited ESG concern among investors. Complexity in managing the data privacy of consumer information and data governance issues for companies all fall within the G of ESG and continue being seen as an increased areas of risk.

Sustainable finance — Sustainable finance, which include lending, debt, capital markets, green bonds, social bonds, sustainability bonds, and sustainability-linked bonds, is a growth vector for many law firms. Disclosure of ESG-related financial and operational risks is another economic engine among firms’ ESG practices, especially because of the expected finalization of the Securities and Exchange Commission’s rules around Scope 1, 2, and 3 greenhouse gas emissions.

Congruence between talk and action

Corporate clients are demanding that their legal service providers act responsibly through the alignment between the ESG guidance they offer to clients and law firms’ own internal commitment to ESG. It takes proactive action to make this alignment work.

Eversheds Sutherland, for example, is accredited by the Good Business Charter in the UK and validates its own emissions-reduction targets through the science-based targets initiative. At Brown Rudnick, Mark Grider, chair of the firm’s Crisis Management Litigation & Government Response group leads many elements of the firm’s ESG practice and uses that role to center the firm’s values into the core of its business and culture. In fact, Grider’s first-step advice to clients often involves a re-evaluation of their current corporate policies, procedures, and practices through the lens of their values.

Within the firm, this values-derived perspective allows Grider to help mentor up-and-coming lawyers like Lu and Udenka to ensure he is leading with authenticity, forging genuine relationships with clients, and living the firm’s ESG commitment at the same time.

Walking the talk as a responsible business starts at the top. Managing partners of law firms and practice leaders are best positioned to ensure their law firms’ purpose, core values, and internal practices are aligned to their public declarations of ESG initiatives and responsible action.