What Lawyers Need to Know About ESG—Environmental, Social, and Governance
BY NICOLE DeNAMUR
Environmental, Social, and Governance (ESG) originated as an investing framework11 https://centers.fuqua.duke.edu/edge/2020/12/16/esg-investing-what-every-mba-needs-to-know. that brought a broad range of what have traditionally been considered nonfinancial factors into financial decision-making and risk analyses. ESG expands corporate accountability beyond shareholders to include external stakeholder expectations on factors that include (among many others) climate change, use of consumer data, and racial justice— broadly grouped into the three buckets of environmental, social, and governance.
The significant increase in attention to ESG is largely the result of increased investor interest in climate risks, along with increased regulatory activity. These two factors signal a market shift away from sustainability as a marketing tool and toward recognizing environmental, social, and governance metrics as meaningful business metrics.
This article addresses some of the challenges and opportunities that ESG presents for legal service providers and their clients.
A variety of frameworks have been developed to organize and report ESG metrics. You may have heard of some of these frameworks and the entities22 www.linkedin.com/pulse/thick-serving-alphabet-soup-kristina-wyatt/. that develop them, including the Task Force on Climate-Related Financial Disclosures (TCFD), Global Reporting Initiative (GRI), Climate Disclosure Project (CDP), and others. Generally speaking, the goal of these frameworks is to translate broader policies and practices33 www.verdani-institute.org/whitepaper-esg-reporting-frameworks-guide. into metrics and frameworks that can be shared with external stakeholders.
In an attempt to alleviate some of the challenges associated with the number of frameworks and the currently voluntary nature of reporting, the Securities and Exchange Commission (SEC) has become increasingly active in this space, including issuance of proposed rules that would require publicly traded companies to disclose certain climate risks and metrics.44 https://sustainablebizconsulting.com/navigating-esg-reporting-landscape/. For example, on March 21, 2022, the SEC published draft rules, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” which totaled nearly 500 pages. As of the date of this article, the SEC has yet to publish its final rules, but updated information can be found on the SEC’s Proposed Rules webpage.55 www.sec.gov/rules/proposed.shtml.
The regulatory landscape in the United States is currently in flux, but the market demand for ESG data and reporting66 https://hbr.org/2021/12/sustainable-business-went-mainstream-in-2021.—particularly emissions data—is steadily increasing. As noted by Harvard Business Review, “Virtually all of the world’s largest companies now issue a sustainability report and set goals; more than 2,000 companies have set a science-based carbon target; and about one-third of Europe’s largest public companies have pledged to reach net zero by 2050.” ESG is now a global business baseline.
WHAT DO LAWYERS AND LAW FIRMS NEED TO KNOW ABOUT ESG?
ESG presents a real opportunity for lawyers and law firms to better serve existing clients and attract new ones, by understanding the market and leading with purpose. For example, to meet their own climate and related commitments, consumers of legal services are asking more questions77 www.duanemorris.com/events/esg_environmental_social_governance_webinar_series_0221.html. of their legal teams. An increasing number of RFPs relate to legal service providers’ ESG commitments on topics ranging from the firm’s climate emissions (leased office space and employee travel) to various diversity, equity, and inclusion metrics (including partnership composition and the diversity of the firm’s vendors and suppliers). According to Reuters, “In a 2021 Landscape Survey conducted by the Law Firm Sustainability Network,88 https://lfsnetwork.org/. 87 percent of responding law firms indicated that they had received requests for proposals that included the firm’s environmental efforts.”99 www.reuters.com/legal/legalindustry/corporate-clients-emphasize-esg-law-firms-should-be-leading-pack-2021-12-10/. Currently, one of the most commonly requested metrics is greenhouse gas (GHG) emissions.
Lawyers and staff of legal service providers are asking similar questions, as many consider career transitions, work-related stress, and whether their employer aligns with their personal values. For all of these reasons, law firm leadership will want to start getting their own firm’s ESG house in order.
HOW CAN LAW FIRMS SUPPORT THEIR CLIENTS’ ESG GOALS?
The rise of ESG presents real leadership opportunities for the profession. When collecting and reporting ESG metrics is done correctly, it fosters data-driven accountability, both for law firms and their clients. Additionally, ESG is a tool that lawyers and legal teams can use to help their clients make more informed business and risk-management decisions.
A good first step, and a way to ensure you are providing competent advice, is to review your clients’ ESG reports. This will give you a good sense of their business, as well as potential risks and opportunities within the current market. Most major companies post their ESG reports online. It is also important for lawyers to understand that companies that make robust climate commitments (such as Science-Based Targets),1010 https://sciencebasedtargets.org/. need to work collaboratively with their supply chain, including law firms, to actually meet those commitments.
CLIMATE COMMITMENTS AND HOW THEY IMPACT THE SUPPLY CHAIN
When a company makes a climate commitment, such as “net zero by 2030”1111 www.forbes.com/sites/dishashetty/2021/03/24/a-fifth-of-worlds-largest-companies-committed-to-net-zero-target/?sh=7a325c74662f.—a commitment that nearly one-fifth of the world’s largest public companies have made—they need the cooperation of their entire supply chain to meet that commitment. Emissions within an organization’s supply chain can account for a significant share of an organization’s total impacts. As a result, organizations are increasing their requests for emissions data to their supply-chain partners—including service providers like law firms—and negotiating new forms of contractual mechanisms to enforce emissions targets.
Carbon emissions are generally grouped into three broad categories:
• Scope 1: direct emissions from owned real estate and equipment.
• Scope 2: indirect emissions from purchased energy.
• Scope 3: emissions from all upstream and downstream activities.
If we use the example of a law firm’s technology client, Scope 1 would be all the emissions from real estate and vehicles the technology client owns. Scope 2 would be all electricity purchased for heating, cooling, etc., the company’s owned assets. And Scope 3 would be all leased assets, employee travel, waste, production and transportation of any products, and the emissions associated with all service providers—all of the emissions associated with activity up and down the supply chain.1212 A helpful visual on Scopes 1, 2, and 3 emissions is available on Climate Everything. https://climateeverything.com/climategifs/scopeonetwoandthreeemissions.
Depending on the type of business, Scope 3 emissions can be extremely large in scale and challenging to calculate. Yet Scope 3 emissions are an important part of climate conversations because for most companies, these emissions are significant. Walmart, for example, has estimated that up to 95 percent of its emissions fall into Scope 3.1313 www.nytimes.com/2021/11/02/business/corporate-climate-pledge-supply-chain.html. This is presumably why the inclusion or exclusion of Scope 3 emissions in mandatory reporting requirements is one of many points of contention in the comments submitted in response to the U.S. SEC’s proposed ESG rules.1414 Public comments can be found at this link, https://www.sec.gov/comments/s7-10-22/s71022.htm.
WHY ARE SCOPE 3 EMISSIONS IMPORTANT FOR LAW FIRMS?
If we continue with the technology client example, your firm, as a service provider to that technology client, would be part of their supply chain and Scope 3 emissions. This means that your firm’s carbon emissions—from sources such as heating and cooling your office space, and your employee and witness travel—all contribute to your technology client’s Scope 3 impacts.
To account for Scope 3 or supply chain emissions, organizations are leveraging a variety of approaches, including:
1. Issuing requests for information regarding your firm’s emissions;
2. Utilizing new contractual mechanisms1515 www.salesforce.com/news/stories/salesforce-urges-suppliers-to-reduce-carbon-emissions-adds-climate-to-contracts/. in vendor/supplier contracts to enforce emissions reductions; and/or
3. Shopping around to find vendors whose climate (and other) goals are aligned with their own.
NEXT STEPS AND HOW TO ENGAGE IN CLIMATE CONVERSATIONS
Getting ahead of these types of client requests is a key strategy for firms to better serve existing clients and attract new clients who are looking for service providers that align with their values and can support their climate, and related, commitments. There are a few key steps that law firm leaders should start thinking about:
1. Develop at least a baseline understanding of your firm’s climate impacts: For most law firms, leased office space and travel can be the two biggest sources of climate emissions.1616 https://carbon.ci/insights/tackling-scope-3-emissions-for-law-firms/. There are both free and paid tools and resources available in the marketplace to help calculate these emissions, and many technology providers are making it even easier for firms to track the emissions associated with things like cloud services.
2. Prepare for requests for information and future reporting requirements: For purposes of this article, we are focusing on carbon emissions, but law firms should expect client requests to be much broader. These requests could include other ESG aspects that relate to law firms, including partner composition and compensation, the types of clients the firm represents, other environmental aspects, hiring and promotion practices, and the like.
3. Recognize the bigger picture impacts: There are numerous benefits to taking a leadership role with respect to ESG. Leading firms can attract and retain the best talent1717 www.reuters.com/legal/legalindustry/corporate-clients-emphasize-esg-law-firms-should-be-leading-pack-2021-12-10/. and ensure compliance with evolving ethical obligations.
ESG is still very much an evolving space; the key is to lead with transparency and authenticity.
Want to learn more? Check out Nicole DeNamur’s free course, “ESG 101,” at
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- Bloomberg Law: Comparison of ESG reporting frameworks.
- Goby: Explanation of ESG reporting frameworks.
- Forbes: Comparative analysis of three proposals for climate disclosures
- Persefoni: ESG Glossary
- VIBE: Navigating ESG Reporting Frameworks: a comprehensive guide
- Sustainable Business Consulting: Five Ways to Improve Your Environmental Reporting
- Salesforce: Business guide to carbon accounting
- Stok: Sustainable Real Estate Program Handbook
12. A helpful visual on Scopes 1, 2, and 3 emissions is available on Climate Everything. https://climateeverything.com/climategifs/scopeonetwoandthreeemissions.
14. Public comments can be found at this link, https://www.sec.gov/comments/s7-10-22/s71022.htm.