Environmental Social Governance (‘ESG’) refers to three key factors used to measure how sustainable and ethical a company is from a corporate governance and investment perspective and also increasingly from an employee perspective. There are a myriad of frameworks to help measure ESG impact and whilst there is currently no clear industry leader, companies and the investment community are utilising technology and data to assess and evaluate ESG criteria.
Global assets in ESG currently exceed US$40 trillion, driven by both investors and by the millennial generation. The number of investment funds incorporating ESG factors has increased steadily over the past few years, with many private equity companies, such as Blackrock, now insisting that their portfolio companies have an ESG policy. Very recently, global PR agency Edelman announced that they will part ways with clients who do not have an ESG strategy in place. But more important than appealing to investors, ESG is about a company ‘doing good’ because it’s the right thing to do from a sustainability, moral and ethical perspective.
Taylor Root assembled a panel of leading professionals to discuss the growing movement for companies to entrench an ESG policy at the heart of their organisation’s strategy, and what role an in-house lawyer can play in this process. Facilitated by Eva Bishop, NED and International General Counsel, and Sarah Ingwersen, Partner and Global Head of In-house at Taylor Root, the panellists were;
• Rebecca Perlman, Regional Lead ESG & Sustainability Practice, Herbert Smith Freehills
• Steve Butterworth, CEO, Neighbourly
• Kriti Avasthi, General Counsel, Emerging Markets Investment Management (formerly General Counsel of Duet Group at the time of the panel discussion)
• Rohan Paramesh, General Counsel, Pixel United (formerly General Counsel of Habito at the time of the panel discussion)
How is ESG different to CSR?
“Engagement with environmental and social issues used to be considered through more of an ethical or a moral lens and this approach essentially underpinned many of the efforts that come broadly within the definition of CSR. Those efforts were often viewed as being dilutive to financial value but nevertheless fundamentally important as part of a business’s social license to operate and for some businesses those efforts were driven largely by reputational concerns. What’s changed is that business leaders now acknowledge that ESG factors can be financially material and, with growing attention from investors, regulators and other stakeholders on environmental and social performance, businesses across the globe are integrating material ESG factors into their core strategies, operations and activities. Combined with pressures resulting from the palpable effects of climate change and from activists, consumers and voters demanding greater transparency, this attention has served to elevate ESG issues and – with technological advances – we are now able to gather more granular reporting data. This is another core difference between CSR and ESG: the latter is underpinned by data, by metrics and by reporting on environmental, social and governance issues that are financially material to business. As a key issue for investors, it has become essential to embed ESG at the very heart of corporate strategy and this is being reflected in shifting approaches to internal organisational structures. For instance, while CSR is often housed in a centralised department, ESG is fast-becoming a fully integrated strategic objective, with related responsibilities being embedded across business functions.” Rebecca Perlman
Who should “own” a business’s ESG proposition?
“ESG needs to be absolutely integral to your business strategy. If it is not baked into the DNA of the organisation then it is very difficult for it to be authentic. To ensure ESG is not ‘green washing’ and is not a tick box exercise, and if you are building trust with your employees and consumers, ESG has to permeate throughout the entire organisation from top down to bottom up.” Steve Butterworth
How are different organisations structuring their approach to managing ESG?
“The starting point is that successful integration and effective management of ESG considerations requires a robust governance structure. This helps the business implement the strategy, manage disclosure, strengthen relations with external stakeholders and ensure overall accountability. Historically, ESG risk management has been led principally by centralised specialist sustainability teams which advise the business, monitor ESG and assist with disclosure and stakeholder engagement. It is important that any dedicated sustainability teams are integrated to avoid silos. With this in mind, we are seeing a growing number of businesses develop more decentralised approaches through which ESG specialists are integrated across business teams – including legal teams. Those types of approaches generally allow for an understanding of ESG risks and opportunities relating to specific products and services, which really helps when identifying emerging risks. Board level oversight of ESG issues is also critical. Boards need to be involved in overseeing, managing and disclosing material ESG risk exposures. In addition, integrating ESG into the board agenda demonstrates a wider commitment to the agenda at the highest levels of the business.” Rebecca Perlman
How do you measure ESG impact?
“There is a dizzying variety of voluntary and aspirational frameworks that have developed in recent years to measure ESG. They are all trying to establish best practice in relation to measuring ESG impacts and embedding those factors into risk assessment and decision making. Most of the frameworks have traditionally been ‘opt-in’ but some are now being mandated through hard law. The IFRS Foundation’s International Sustainability Standards Board intends to develop global standards around ESG. This has received widespread endorsement from regulators, corporates investors and lenders across the globe. But, for now, we are stuck in the position where there isn’t a common standard and the landscape of frameworks and acronyms can be very tricky to navigate. Part of the problem is that ‘sustainability’ means different things to different people. When we work with clients to develop an approach that best suits their strategy and meets the expectations of their key stakeholders, we usually start with what sustainability means for their business. That entails identifying which ESG considerations are fundamentally material to the business and essentially working from there.” Rebecca Perlman
What is a ‘B Corp certification’ and how can it amply your company’s ESG impact?
“B Corporation’ is a movement of businesses who all have the same notion of impact at their hearts and really want to make a difference in whatever sector they operate in. With respect to ESG it is effectively a promise that the business makes to put people and planet at the same level as profit. An organisation has to amend the Articles of Incorporation to put ESG on the agenda of the board so it is a legal commitment and it needs to flow through absolutely every function and every person within the business. To be ‘B Corp’ accredited you really need to demonstrate that commitment in lots of different ways which is why it is effectively a growing movement in a community of companies who think the same way about those issues.” Rohan Paramesh
If you are a lawyer in a company without an ESG proposition, where do you start?
The initial steps for building an ESG proposition may not come as a huge surprise. They include things like conducting a materiality assessment to identify which ESG issues are core to the business, and then developing a plan and strategy, benchmarking ESG initiatives in your sector, getting buy-in and promoting ESG efforts internally, so that you’re well-placed to establish the team and the operational processes that will govern the proposition. Lawyers are often the natural leaders for such initiatives. This is particularly the case for the risk management and regulatory compliance aspects of the programme but also more broadly, given that in house lawyers tend to operate at the intersection of law, reputation, risk management, investor and government relations and business operations.” Rebecca Perlman
How easy is it for in-house lawyers to influence ESG change?
“It is not that difficult anymore given the current regulatory landscape and investor demands. I have previously convinced a business to agree to look at the United Nations Principles for Responsible Investment. When I broached the subject a few years back there was some resistance from some pockets in the business; namely portfolio managers that weren’t keen on including ESG analysis into their investment strategy. I think it is a changing of attitudes and the good thing for our industry is that change is being driven by investors. You can use both the regulatory landscape and investor demand to fight your case.” Kriti Avasthi
What’s the most powerful role a General Counsel can play in educating the Board on ESG?
“There is a dual track really; there is the legal requirement when you are a B Corp and you amend your articles and as General Counsel you have to be a champion for it in a governance sense and ensure the board always have this at the front of their mind But you also take your General Counsel hat off in some ways and say as a general business person sitting around the table thinking about interesting things that help to further the causes that we believe in, what kind of ideas can I throw out there? Encouraging people to think big and as a business we think about the things that we can influence. So ask what things can you do as a business to make a real difference and don’t think that any goal is too big. You can definitely make some impact at chipping away at it. Taking the General Counsel hat off in some ways is helpful.” Rohan Paramesh
How can General Counsels drive ESG Initiatives?
“We are advising clients on issues relating to ESG governance and leadership, how to improve board-level understanding of ESG issues, how to develop ESG policies, undertaking ESG due diligence and risk mapping exercises and increasingly how to link executive remuneration to ESG criteria. In that context, General Counsels are well placed to lead the ESG charge and closely involved in driving these initiatives.” Rebecca Perlman
From your perspective as CEO, what role do you see the General Counsel playing in bringing ESG to the Board’s attention?
“There’s two key roles for me in what the General Counsel can do. Firstly there is the advocacy piece and championing ESG from within the legal team which is absolutely critical. Secondly, there is the accountability bit; keeping the board accountable in relation to regulations coming in and the policies within the business. General Counsels have an opportunity to ensure that the board absolutely understands what it is that’s expected of them and what they are signing up to.” Steve Butterworth
What do General Counsels and in-house lawyers absolutely need to know about ESG?
“ESG has for some time now been predominantly the domain of the C-suite. That is not to say that this is new for General Counsels – in-house legal teams have been focused on corporate governance for many years – but with this growing body of hard law requirements, ESG issues have become a fundamental set of considerations for General Counsels and their teams. This is the General Counsel’s rightful place because the ESG agenda is fundamentally underpinned by legal requirements. Businesses operating in or with links to developed economies have been regulated in areas like anti-bribery and corruption, anti-money laundering, health and safety and employment matters for many years but what’s new is that these obligations are increasingly accompanied now by disclosure and reporting requirements that are aimed at driving greater transparency regarding ESG factors. That in turn is leading to these increased levels of activism and litigation risk as it becomes easier to scrutinise corporate behaviour. General Counsels have a critical role to play in helping their organisations to engage with this changing landscape and meet stakeholder expectations. In that context, in-house teams are required to not only manage the legal risks relating to the ESG agenda but they also need to navigate the potential reputational risks regarding the company’s ESG commitments and performance.” Rebecca Perlman
“As an in-house counsel, I think you should not only identify potential risks but also allocate responsibility across the board because it is not just for the General Counsel/legal team to take on. Secondly, for people who are just starting their ESG journey, coupled with the regulatory development, it is also very important to keep an eye out on industry development and best practices to get guidance on issues where the regulation is not very clear”. Kriti Avasthi
“I think it is striking the balance of thinking really broadly about all the different ways in which the business can make an impact but then helping to execute narrowly and really specifically. In-house legal teams can really be a guiding light when it comes to defining really what ESG means to your business and what specifically do you want to do about it this year/next year? You can have different phases of the way in which you think about it and bring order, precision and define clear paths as to how you want to go about things. That balance of thinking big with all sorts of crazy ideas are things we could do to change the world but how are we actually going to do something about it this month this quarter this year? It is about bringing those big ideas and jumble of thoughts precisely into an executable path and I think that’s something that General Counsels and in-house legal teams can help with.” Rohan Paramesh