‘A fast-evolving phenomenon’: City partners on how GCs can get ahead of the ESG curve

‘ESG is a huge opportunity for lawyers, including in-house counsel, to play a different and more strategic role, and be really plugged into the business. But that is also big change and change can be quite difficult,’ asserts Rachel Barrett, environment and climate change partner at Linklaters.

According to a survey conducted last year by Simmons & Simmons of 700 participants including GCs, 84% of executives and investors believe businesses that invest most effectively in sustainability will perform best financially in the next five to ten years.

Insisting that ESG is not just a passing fad, global head of ESG at Simmons, Sonali Siriwardena comments on the findings: ‘GCs looking to help their companies navigate ESG should be aware that their role now goes beyond just compliance and risk management. Moving from a risk-focused mindset to an opportunity mindset on ESG is a fast-evolving phenomenon, especially among large organisations.’

As the significance of ESG continues to grow, in-house lawyers are inevitably being probed about their role in helping their companies avoid risk and raise business awareness. IHL sought insights from ESG partners at top City firms to understand the ways GCs can up their ESG game.

The backdrop

Amid the frequently-touted market forces of rising inflation, escalating interest rates, geopolitical uncertainties and the energy crisis, businesses run the risk of making hurried decisions that may not fit with their stated ESG values. Adding to the complexity, the ongoing conflict in Ukraine and the Israel-Hamas war has exposed investors to heightened ESG and political risks.

Moving from a risk-focused mindset to an opportunity mindset on ESG is a fast-evolving phenomenon, especially among large organisations.
Sonali Siriwardena, Simmons & Simmons

While cynics have questioned for years the potency of the annual United Nations Climate Change conference as a genuine force for material change (one opinion maker labels it ‘just a Greta [Thunberg]-fest’), some are more optimistic about the outcomes of COP28, the latest such event, which was staged in Dubai in 2023.

Notes Jeroen Ouwehand, partner and head of Clifford Chance’s global ESG board: ‘Some of the key elements that came out of UAE included an agreement to call on countries to triple renewable energy capacity between now and 2030, to double energy efficiency between now and 2030, and then the language which has had the most attention, to transition away from fossil fuels in the energy system in a just, orderly and equitable fashion.’

Siriwardena points out that 2024 being the year of the US presidential elections and the UK general elections, among others globally, will inevitably impact the ESG landscape. ‘Almost half the world will go to the polls this year including the US, EU, UK and India. This will likely result in policy turbulence on ESG issues across these jurisdictions, which organisations will need to weather, particularly over the short term.’

However, she flags that green crowding – where companies hide in a crowd to avoid discovery of greenwashing or unsustainable business practice – will be impacted by looming political changes. ‘There will be a sizable segment of companies which prefer not to put their heads above the parapet on ESG issues to avoid getting caught up in the cross-hairs of political gameplay that is likely in an election year.’

Ouwehand warms to the theme: ‘A lot of companies are trying to do the right thing, but they are worried that sticking their head above the parapet is not always helpful. Companies think, “I’ll just be among the crowd, let’s go along but not be leaders, because then we’ll be more at risk”. We see quite a lot of examples of that and that’s the trend also to be aware of. In a similar vein, we also see more “greenhushing” in reaction to the many greenwashing claims.’

How to get ahead in ESG

Partners canvassed observe that for any GC aiming to enhance their ESG credentials, a crucial step is to determine their specific role and where they fit into the business.

Ouwehand explains: ‘It is an exciting time because ESG oversight often falls to the GC and this makes them very much an intermediary for the executive on the business and strategy side. But a GC does need to consider their role in the company – how is the governance set up? Are they the leaders of the ESG drive? Are they the protectors of the business around ESG? Are they intermediaries, educators or mediators, or a combination of all of these?’

Siriwardena agrees, also noting the imperative for GCs to understand the issues that face their specific industry. ‘ESG can mean all things to all people. So firstly, GCs need to have a solid grasp of the main aspects of ESG that apply to their specific company. Secondly, they need to consider how best to equip their teams to stay, not just abreast, but ahead of relevant developments.’

And this can be no mean feat, as Silke Goldberg, global head of ESG at Herbert Smith Freehills, remarks: ‘When we say ESG we need to be aware that it’s not just climate change. Indeed, we often talk about climate change because of the climate emergency. But, for instance, the EU Corporate Sustainability Due Diligence Directive that is about to be introduced is very much focused on human rights or supply chain due diligence. To me, the biggest challenge is the sheer vastness of the practice area.’

Given that GCs are seen as having a generalist legal role within a company, adept at advising the board on many legal areas, navigating the complexities of ESG could be viewed as a challenge. Yet, when posed with this question, private practice lawyers remain optimistic.

Linklaters’ Barrett explains: ‘While we’re seeing some GCs hiring specific ESG lawyers with lots of experience and building teams around them, that won’t be an option for many others. But a GC’s skillset is in many ways well suited to this area because they tend to have quite a flexible approach and holistic view of risk, because they flex their skillset all the time, across a whole range of different areas. They’re probably better placed than they realise to navigate this.’

A regulation tsunami

What you really hope for is that there’s a mindset in the GC about not just ticking boxes with reporting and getting all the data, but how to navigate the opportunities and risk.
Jeroen Ouwehand, Clifford Chance

It is no secret that ESG is dominated by many regulations that are constantly developing and changing, for example, the reporting of data for large companies will be kicking off in 2025, pursuant to the Corporate Sustainability Reporting Directive first released in 2022.

Ouwehand comments: ‘In terms of the tsunami of reporting obligations, there’s lots coming their way. People are really waking up to what everything is starting to mean and just the sheer volume of ESG developments is something happening almost daily. There are so many regulations and requirements, which are sometimes overlapping, sometimes different. If you’re a multinational, international business, you have to navigate all of that, which is not easy.’

He adds: ‘It really is implementation crunch time now. What you really hope for is that there’s a mindset in the GC about not just ticking boxes with reporting and getting all the data, but how to navigate the opportunities and risks.’

Siriwardena offers her advice on how GCs can stay ahead of the game. ‘Given that the pace and volume of ESG regulatory change will continue over the next 12 to 18 months, it is critical to ensure that your teams can efficiently absorb and decipher these regulations in a way that is not just reactive but proactive. For example, advising your business leads of potential policy positions well in advance can have a transformative effect on a company’s ability to seize any opportunities presented by these policy changes.’

Coming together

City lawyers also suggest GCs play a distinctive role in a company’s structure, providing them with the opportunity to really drive the ESG initiative forward. ‘ESG is so broad – you can imagine everyone involved: HR; environmental practitioners; corporate governance people; and so on. Depending on the size of the organisation that can be a lot of people in a lot of different teams, who may or may not have traditionally engaged with each other for good reasons,’ explains Barrett.

She adds: ‘We’re seeing GCs and in-house teams become a convenor and centre for ESG excellence. They can make sure that the right governance and structures are in place internally, so that everybody is pulling in the same direction. We see lots of in-house working groups and committees where people are getting together to help each other navigate the shifting landscape.’

Goldberg agrees, asserting that private practice lawyers specialising in ESG are also ready to provide assistance. ‘Typically the in-house teams play an absolutely critical role because ESG, climate change, human rights and all compliance related topics will be anchored somewhere in the company. It is very often that GCs take special responsibility for it, or very often they are the go-to person for the board to explain something, if there’s a new standard coming out, for example. Our role here is to assist GCs in developing the strategy for their team and company and then implementing that strategy. We also support in the implementation of that strategy.’

Looking ahead, Siriwardena stresses the significance of taking a long-term view. ‘ESG embodies a core concept that is fundamental to building a sustainable world so, while it may evolve with time, the principle will continue to define business activity. Effective GCs must take a long-term view while also acknowledging the urgency to act if their companies are to be considered responsible stewards of business in a world now shaped by stakeholder capitalism.’