The term ESG is now ubiquitous. It has become a guiding set of principles for the way businesses in all industries operate. If you frequently work with corporate clients, it is no doubt already a big part of your day-to-day business. But for those who haven’t yet fully got their heads around it, here’s a short introduction to its history, meaning and challenges.
If it all seems a little abstract in respect of how law firms might take action and show leadership, don’t worry. We’ll dive into the specifics of what you can do in future posts.
E = Environmental.
S = Social.
G = Governance.
The first thing everyone thinks about here is climate change. Yes, this is a key element, but we need to consider the interconnecting crises of climate change and biodiversity loss, both of which are exacerbated by the (over)extraction and use of natural resources. This might be the over-extraction of soil nutrients on industrial farms, or the extraction of oil and gas for energy, leading to more carbon in the atmosphere. Action on the environmental aspect of ESG is often a complex balancing act: competing environmental issues might be entangled with social issues (the S of ESG) – how we decide on the relative balance of these competing interests raises serious questions around equity. For example, there is a need to mine lithium for electric car batteries and renewable power storage; this is generally considered an imperative for climate action. However, mining the lithium is likely to cause environmental damage: infrastructure will have to be built, transportation will be required, pollution/contamination risks will be raised. And those lithium reserves might be located on indigenous land – should governments be allowed to expropriate that land to pursue the national energy transition? There are no easy answers.
The best illustration of the environmental aspects that fall under the E of ESG is arguably the Planetary Boundaries framework. It shows the areas requiring action and the degree of risk that we already face of exceeding the planet’s ability to cope. For example, beyond a certain climate change threshold, there is a risk of accelerated and irreversible icecap melting and sea level rise. The E of ESG is all about reducing our impacts in each of these areas so that we do not exceed these critical thresholds.
The S of ESG is about equity and social justice. It is about an organisation’s relationships with stakeholders and its responsibilities towards them. Its scope is wide, and as with environmental issues, there is now an expectation that organisations consider the risks and impacts associated with their supply chains too. Action on the S of ESG requires organisations to look at equity, diversity and inclusion, child labour, modern slavery, the gender pay gap, living wages, employee wellbeing, education, action in the community… As mentioned above, many of these issues need to be addressed either alongside each other or alongside environmental aspects, raising complexities in assessing the right areas to prioritise. Tracking progress on the S of ESG is also relatively difficult, as quantitative data is hard to obtain for certain aspects. This shouldn’t be a reason not to report on progress, but effective ways of monitoring and reporting need to be developed.
This pillar is about how organisations are led and managed. It is about the policies and practices that are in place to ensure the business minimises its environmental and social impacts. It includes how leadership is incentivised to meet the ESG expectations of stakeholders (stakeholders, not shareholders), as well as the mechanisms that ensure transparency and accountability with regard to the various environmental and social issues outlined above. Some of the key issues that fall under ESG governance include: shareholder structure, board diversity, business ethics, risk management, ESG data controls, reporting and disclosure.
Most agree that the term first entered the mainstream when the United Nations released its Who Cares Wins report in 2004. It recommended that analysts, financial institutions, companies, investors, pension funds, regulators, stock exchanges, NGOs and others work hard to ensure that ESG criteria feed into their decisions. For example, it suggested stock exchanges work to ensure greater levels of disclosure relating to these non-financial concerns, and it suggested pension funds consider ESG issues when making their investments. Only in the later 2010s, though, did the term really come into the wider public consciousness.
What began as a term largely focused on responsible investing has now become a driver of responsible business much more broadly. It has become a synonym for sustainability, although some would argue that ESG tends to focus on the risk to business while ‘sustainability’ centres around risk to people and planet. Whatever your view, ESG has undoubtedly become a clarion call for business action. One of the key shifts that ESG brings about is a move away from shareholder primacy, i.e. profit above all else. ESG ultimately requires an understanding that the economy is dependent upon society, and society upon nature, meaning businesses must safeguard people and planet, not profit at their expense.
This might all seem quite abstract and far removed from the activities of law firms and professional services. Many have argued, for example, that law firms have little environmental impact, as they simply provide advice. As mentioned, we’ll go into detail on the action you can and should take, and why, in future posts. For now, though, it’s worth bearing in mind that firms are dependent on the operation of their clients’ businesses, as well as being part of their ‘supply chains’. With supply chains falling into Scope 3 reporting requirements, firms will increasingly be asked by their corporate clients to disclose their carbon emissions and wider ESG performance. The COO of a large law firm recently said: ‘If we don’t hit our decarbonisation targets [for example], our clients will kick us off their panels.’ If it isn’t already, ESG action will soon be business critical.
To learn more about how we can support your firm’s ESG journey, get in touch with us today.
