ESG – environmental, social and governance – programmes are now widespread across business and commerce internationally.
They set out to allow the organisation to focus on the ethical, sustainable and climate performance of the organisation, to identify the business risks related to ESG issues, and to evaluate the organisation’s response to them in a structured manner.
Many programmes are based on a formalised ESG reporting framework which allow the organisation to report on ESG issues in a consistent way, giving stakeholders a clear picture of the organisation’s strategy, performance and future goals. Typically, they will include ESG factors such as energy consumption, climate change, emissions, board standards and performance, human rights and engagement with communities which the organisation may impact.
Programmes will often reference the requirements of the European Union Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive, applying progressively to larger companies, and the United Nations Sustainable Development Goals, which set out 17 goals for sustainable development across a range of sustainability issues from poverty, health and education to equality, affordable and clean energy, work and economic growth, industry and infrastructure to responsible consumption and production, climate action and peace, justice and institutions.
In-house lawyers are increasingly providing advice on ESG matters, and it is a natural step to consider starting an ESG framework for the legal team and for the wider business. This article sets out some of the steps which you can consider, key risks and expectations, and some practical steps to raise ESG issues for discussion within your organisation.
Resources for anyone considering setting up an ESG framework can be found in the Some Resources section at the end of this article.
So what is ESG?
Environmental, Social and Governance is a term originally developed by the United Nations some 20 years ago as a starting point to measure and define approaches to responsible investment. The World Economic Forum indicates that ‘it is intended to refer to a collection of corporate performance evaluation criteria that assess the robustness of a company’s corporate governance mechanisms and its ability to manage its environmental and social impacts.’
The World Economic Forum has set out four key pillars for business integrity, which are a good starting point for an organisation’s thinking:
- Commit to ethics and integrity
- Strengthen corporate culture and incentives to drive continuous learning and improvement
- Leverage technologies
- Support collective action to increase scale and impact
Where do I start?
A crucial part of the in-house legal role is to manage legal risk and reputation, and working with ESG is no different. It used to be said that the lawyer was the conscience of the company, and that lens remains as valuable today – the in-house lawyer can and should influence the ethical conduct of the organisation, not simply ask whether something is legal or illegal.
So where do you start?
It may be tempting to think that the starting point is the choice and adoption of an appropriate framework, but that in itself isn’t enough. A framework will only be of value – and will certainly only serve to improve performance – if there is a cultural and strategy commitment from the very top of the organisation. Here, the in-house lawyer can play a very important role – in educating the organisation and the board, and prompting discussion and debate leading to change.
The lawyer can provide legal frameworks and tools, but they will only work if there is an understanding – and a commitment – to ESG factors. A ‘me too’ approach – we should something because our competitors are, and our investors are asking – won’t work alone. There needs to be a commitment to change, and an understanding of why it is relevant.
How do I get people to buy into ESG?
If an ESG framework is to succeed, then in addition to that top-down commitment, there needs to be an understanding and buy-in to the concept. This needs a combination of education – about the issues, the steps in hand, and the importance – but also clear understanding that ESG builds on initiatives which are likely already to be in place in the organisation, and nowhere near as overwhelming a task as it might first appear.
Many organisations will have had a commitment to sustainability in environmental terms for many years – in terms of how they use resources, how they work with suppliers, and how they measure their impact. In some cases, this will have been a regulatory imperative, in others an active choice. Similarly, working with their communities and stakeholders is something most organisations choose to do as good business, not simply as something which has now become fashionable.
And, of course, governance as a key driver of regulatory and reputational risk management is something which has been developed in organisations, with most organisations of any scale having governance professionals within their workforce. There will also almost certainly be a risk identification and governance process in any organisation of scale, which should dovetail with the concepts of ESG.
Looking at it in this way can provide an easy hook into developing ESG awareness. Most of the component parts will already be understood, and there will be people in the organisation whose role – and often personal commitment – is already focused on them. Working with them you can identify the key risks, priorities and concepts, using them as a platform to demonstrate why ESG is important in your context, and what can be done about it.
This work will also allow you to identify the messages appropriate to different audiences within – and outside – your organisation, and can also make sound business sense. If you understand the needs and drivers of your stakeholders and customers, you can ensure that your own framework allows you to build on those relationships and make choosing your organisation an easy decision – indeed a positive choice - for your own customers.
Many organisations now include ESG requirements in their procurement frameworks, and dealing with someone who works with and understands their culture and ESG drivers will drive value.
How do I choose an ESG framework?
One of the key issues is that there is no single ESG framework. As such, you have – possibly too much – choice in deciding where to start. In addition to the EU and UN initiatives already noted, essentially your choice is a framework of voluntary disclosure which provides a scored outcome, or a guidance framework which provides specific areas, methodologies and measures to use in reporting your performance in ESG areas.
Some are very broad – covering the range of ESG issues; others are more specific, highlighting climate, sustainability, carbon, governance or workforce issues.
Some of your options include:
- International Sustainability Standards Board – which issues IFRS standards, so far including core content for sustainability-related financial disclosures in IFRS S1IFRS - IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and requirements to disclose climate-related risks and opportunities in IFRS S2 IFRS - IFRS S2 Climate-related Disclosures. The ISSB has also consolidated some earlier initiatives including those of the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board standards, which are still in use by some organisations.
- Global Reporting Initiative (GRI) standards which form a modular set of standards around human rights and environmental due diligence, sectoral and topic standards GRI - Standards.
- Carbon Disclosure Project, which grades climate action efforts Home - CDP
- Workforce Disclosure Initiative, which improves corporate transparency on workforce issues including how organisations manage workers across their operations and supply chains globally, capturing issues such as modern slavery and the withholding of documents from migrant workers Homepage - Workforce Disclosure Initiative. The initiative is now under the aegis of the Thomson Reuters Foundation.
- The Chancery Lane Project which is a charity that helps organisations reduce emissions using the power of legal documents and processes, and which now works in over 110 countries. This may be a good place for in-house legal teams to start and is covered in more detail below.
In the case of corporates, an organisation may well already be required to report on climate-related financial disclosures under the Companies Act, the Listing Rules and the Financial Conduct Authority’s ESG Sourcebook.
The Chancery Lane Project
The project is the largest global network of lawyers using climate contracting principles to address the climate impact of transactions, and to ensure they deliver de-carbonisation targets using supply chain, financing and other contracts. The Project provides tool-kits and resources including open access ‘climate clauses’ which it uses ‘to offer contract solutions to common climate obligations such as de-carbonisation targets, measuring and reporting on emissions, co-operating to reduce environmental impact and allocating costs for environmental improvements.’
Their clauses have been used by a range of in-house teams including NatWest, Vodafone, and Salesforce. You can find a series of case studies on the Chancery Lane Project’s website which may give you some ideas on where to start.
Staying grounded – The Law Society guidelines
ESG concepts are grounded in the desire to improve how your organisation works, and enhance its place in society. Yet there are also risks – the growth of ESG, and the lack of consistent single frameworks, has meant that there is the possibility that some organisations might not report clearly, and might seek to use the concepts to obscure the real picture – to ‘green-wash’ the position.
The Law Society has produced guidance for solicitors advising on Climate Risk Governance and Green-washing Risks, and on the Impact of Climate Change on Legal Practice – links are at the end of this article. It sets out to suggest the principles of sound climate governance, including board oversight, compliance, and risk management, and notes that lawyers can use their role of legal and strategic advice to play an important part in promoting climate risk governance in companies.
The Climate Risk Guidance helpfully sets out a framework for assessing the obligations of an organisation and its board, and notes that ‘in-house lawyers should seek to raise awareness of the board of the need for an organisation to develop and adopt sound management of climate-related risks.’ The framework sets out several detailed questions around directors' duties, climate risk, the governance framework, specialist advice, the formulation of business strategy, the know-how in the organisation.
It also discusses the relationship to remuneration, culture and diversity and inclusion, future planning and risk management, and processes and systems. Although focused on climate change rather than directly the social and governance aspects of ESG, the checklist provides a useful pointer to those areas too. It also covers the relevant legislation, and standards of conduct expected of solicitors, and provides a list of further useful resources. The Guidance also reminds lawyers of the risks of advising outside their area of expertise, and the need to seek specialist assistance where appropriate.
What to do next
ESG is a complex and growing field. It’s easy to think that it is too difficult, and so needs to be passed over to an outside specialist, or something which is already covered by the organisation. The reality will differ for each organisation, but as the Law Society Guidance makes clear, it isn’t something which in-house lawyers can ignore – and is an area where you can make a real difference.
So, what to do next? CLL’s own work in its 2023 Legal Leaders’ series gave some excellent advice – starting with ‘engendering a moral commitment between team members and working in short focused cycles’ (Christy Baker, GC and DPO, FirstGroup). If your team is looking for an accessible place to start, you might like to think about the Chancery Lane Project work and guidance as a focused and structured set of resources.
Lastly, you might like to read a recent Harvard Business Review article on ‘The 8 Responsibilities of Chief Sustainability Officers’ which you can find in the Resources section below. The eight key tasks which it identifies are those which underpin an effective ESG framework – including regulatory compliance, ESG monitoring and reporting, overseeing sustainability projects, managing stakeholder relationships, building organisational capability and fostering cultural change, and provide a good starting point for your thinking.
SOME RESOURCES
World Economic Forum The Rise and Role of the Chief Integrity Officer
World Economic Forum Agenda for Business Integrity
The Chancery Lane Project
Financial Conduct Authority ESG Sourcebook ESG 1 - FCA Handbook
Top 10 ESG Reporting Frameworks explained and compared 10 Top ESG Reporting Frameworks Explained and Compared
Carbon Disclosure Project www.cdp.net/en
Law Society Guidance: Climate Risk Governance and Greenwashing Risks: guidance for solicitors advising companies | The Law Society
CLL: Webinar report: Legal Leaders: ESG – shifting landscapes and current events
Law Society Guidance: Impact of climate change on solicitors Impact of climate change on solicitors | The Law Society
Inside Legal ESG Podcasts
HBR Farri, Cervini and Rosani The 8 Responsibilities of Chief Sustainability Officers