In the first part of this series, we explored Environmental Social, and Governance (ESG)—what ESG is and the basics of what lawyers and law firms need to know about ESG. After reading part 1, you may be thinking: How will ESG impact my practice and my firm? We will answer that question here by exploring one of the ways that ESG may impact your law firm operations: client requests for ESG metrics and, specifically, greenhouse gas (GHG) emissions.
The regulatory landscape in the United States is currently in flux, but the market demand for ESG data and reporting—particularly emissions data—is strong. 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.”
Companies that make robust climate commitments (such as Science-Based Targets), need to work collaboratively with their supply chain, including law firms, to actually meet those commitments.
What are Climate Commitments and How Do they Impact the Supply-Chain?
When a company makes a climate commitment, such as “net zero by 2030”—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. Indirect 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 hypothetical technology client, Scope 1 would be all the emissions from real estate and vehicles the company owns. Scope 2 would be all electricity purchased for heating, cooling, etc.—the company’s owned assets. 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. (A helpful visual on Scopes 1, 2, and 3 emissions is available on Climate Everything.)
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 carbon 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. If you think about Walmart’s business model, this makes sense as the company is essentially a supply-chain business.
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. Security and Exchange Commission’s proposed ESG rules.
Why are Scope 3 Emissions Important for Law Firms?
If we continue with the hypothetical technology client example, your firm, as a service provider to that technology client, would be part of their supply chain, and its Scope 3 emissions. This means that your firm’s carbon emissions—from sources such as heating and cooling office space, 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:
- Issuing requests for information regarding your firm’s emissions;
- Utilizing new contractual mechanisms in vendor contracts to enforce emissions reductions; and/or
- Shopping around to find vendors whose climate goals are aligned with their own.
How Should Your Law Firm Advise Clients on ESG Emission Commitments and How Can Law Firms 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 commitments. There are a few key steps that law firm leaders should start thinking about:
- Develop at least a baseline understanding of your firm’s climate impacts: For most law firms, leased office space and travel are the two biggest sources of climate emissions. There are both free and paid tools available in the marketplace, and technology providers are making it even easier for firms to track the emissions associated with things like cloud services.
- Prepare for requests for information and future reporting requirements: For purposes of this article, we are focusing on carbon, but law firms should expect client requests to be 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, hiring and promotion practices, and the like.
- 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 talent, and ensure compliance with evolving ethical obligations. ESG is still very much an evolving space; the key is to lead with transparency and authenticity.