Over recent years, corporate sustainability has become an ever-increasing focus of investors, customers, commercial partners and employees. This has increased the importance of environmental, social and governance (ESG) factors as a measure of corporate performance.
Businesses must respond to a complex and rapidly evolving web of standards and laws, which vary widely between jurisdictions. This is a challenge, but also an opportunity, both for businesses and their in-house legal advisers.
The businesses that most effectively transform in response to the ESG revolution, appropriately balancing short-term performance with long-term sustainability, are more likely not only to survive, but to be in a position of strength years from now. An effective ESG strategy requires more than reactive regulatory compliance. Proactive scanning, monitoring, prioritisation, engagement and feedback are needed.
What does this mean for your business?
The necessary ESG transformation should incorporate the lessons learned from previous major business changes, such as digital transformation. Do not underestimate the importance of a clear vision, careful analysis and planning, effective co-ordination across multiple business areas, the collection, organisation and utilisation of meaningful data and regular opportunities to take stock, refine and improve.
Equally, it is important not to over-manage the transformation, particularly in the case of environmental challenges that are literally existential. An effective ESG strategy must combine a clear vision and co-ordination with harnessing the energy and creativity that can result from people applying themselves freely to challenging problems, particularly when working in high-performing teams, outside of narrow silos and comfort zones.
ESG transformation is arguably more complicated than, for instance, GDPR implementation and Brexit adaptation. It touches every business area and the transformation is not always a direct response to legislative change. Instead, there is a complex patchwork of soft and hard law and – like digital transformation – many elements of the transformation are discretionary. There is scope for each business to determine its own strategy, priorities and implementation methodology, and – to some extent – timetable.
A business should consider benchmarking its current ESG maturity level against current and future requirements (legal or otherwise) and aspirations. This will help each business to prioritise and to focus on the resources, tools and structures needed to support the necessary transformation. The assessment will be affected by various factors, such as organisation type and size, geographical footprint, industry sector, competitor landscape, customer sentiment, investor composition and sentiment, available resources, and internal attitudes.
How the GC can add value
In-house lawyers often take a leading role in relation to business ethics. They combine a sophisticated understanding of corporate risk with training and experience that also teaches principles of fairness, transparency and responsibility. They are among the best-equipped people within a business to facilitate a conversation about what an ESG strategy should look like, to manage risk and opportunities, and to do the “right thing”, even if it will be challenging in the short-term.
Lawyers also tend to be good at synthesizing large volumes of information and reading between the lines to determine the direction of travel and optimal strategy. This skill is essential to take the long view necessary to maximize the opportunity of increased corporate sustainability.
Lawyers can also add value in relation to specific business opportunities – for example, how IP in sustainability-linked innovations can best be protected and exploited; balancing the commercial value of sustainability claims in advertising with the risk of greenwashing; or cleaning up the upstream supply chain to give the business’ stakeholders and customers confidence they will not be caught up in a scandal.
How the GC can move forward with ESG transformation
A GC is likely to already have the experience and many of the skills, needed to help guide their company through ESG transformation. A key problem is time – ESG is so vast that no one person can cover the full range of topics and projects that may notionally be within their remit. GCs may therefore want to consider:
Acquiring an even broader perspective – sustainability is an emerging area of importance within business. Responsibilities and reporting lines are consequently blurry. There is significant opportunity for those who wish to work “in the grey” on a cross-functional basis to have an outsized impact on overall corporate strategy and successful execution.
Acquiring the skills needed to execute a successful ESG transformation across all business units – ESG transformation is a golden opportunity to enhance the knowledge, abilities and exposure of in-house team members. This should also increase personal impact and engagement levels within the team. ESG matters are so diverse there is scope for everyone to “own” one or more issue, whether monitoring the progress and impact of a proposed law or acting as legal Sherpa for an ESG-related programme. Team members will require technical training, coaching and a common framework to perform these roles effectively. Even then, there will be gaps requiring recruitment.
Acquiring relevant tools – Nearly every aspect of a company’s operations can be disrupted in an ESG-compliant manner. For example, via CLM software, commercial contracting may become entirely paperless. Such software can also support more rigorous monitoring of ESG compliance within a company’s supply chain.
Acquiring data – the flow of meaningful information is a crucial component of ESG transformation. The setting of ESG-related goals will cause a proliferation of data to be collected and analysed, to measure progress. These data are crucial – some will be gathered internally; some externally. Aside from the legal implications of the collection and use of such data, there are commercial implications. Certain types of ESG data have clear potential for commercial licensing and already the largest data providers are jostling to establish and promote their own ESG benchmarks. This latest data revolution also has ESG implications. More data has a greater environmental impact. Companies must think seriously about how this data should best be collected, stored and shared to minimise the negative consequences.