Environmental, Social, and Governance (ESG) is essentially an investing framework that brings 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 a variety of factors such as climate change, use of consumer data, and racial justice (among many others), which we broadly group 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 and transition risks, along with increased regulatory activity (as further outlined below). These two factors signal a market shift away from sustainability as storytelling and toward recognizing environmental, social, and governance metrics as meaningful business metrics.
To organize and report information and data on ESG metrics, a variety of frameworks have been developed. You may have heard of some of these frameworks and the entities that develop them, including: the Task Force on Climate-Related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), Climate Disclosure Project (CDP), and many others. Generally speaking, the goal with each of these frameworks is to translate broader policies and practices into measurable and accountable metrics, which can then be shared with external stakeholders.
What’s the Current Status of ESG?
In an attempt to alleviate some of the challenges associated with the number of frameworks and the voluntary nature of reporting, the Securities and Exchange Commission (SEC) recently issued proposed rules that would require publicly traded companies to disclose certain climate risks and metrics. On March 21, the SEC published “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” Presumably in response to numerous requests that the length of the proposed rules (nearly 500 pages) merited additional time for comment, the SEC recently extended the comment period to June 17.
What do Lawyers and Law Firms Need to Know About ESG?
Collecting and reporting ESG metrics is quickly becoming a business baseline. This translates into several key issues that lawyers and law firms should be aware of.
The rise of ESG presents real leadership opportunities for the profession. When ESG is done correctly, ESG fosters data-driven accountability, both for law firms and their clients. Generally speaking, lawyers and legal teams are well-positioned to see the bigger picture and help guide their clients toward leveraging ESG as a tool to make more informed business and risk management decisions.
A good first step, and a way to ensure you are providing competent advice, is to make sure you review your clients’ ESG reports. It will give you a good sense of their business, as well as potential risks and opportunities.
Furthermore, clients are starting to ask more of their legal-service providers. To meet their own climate and other commitments, consumers of legal services are asking more questions 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, 87% of responding law firms indicated that they had received requests for proposals that included the firm’s environmental efforts.”
Lawyers and staff are also asking similar questions, as many consider career transitions. Law firm leadership will want to start getting their own firm’s ESG house in order. 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.