In the recent past, the role of in-house counsel has evolved from the traditional and, you would be forgiven to say, reactive one where the legal person or team sprung into action only when needed. That is to say, when there was a dispute or other legal ‘problem’ for the organisation to solve.
Today, in-house lawyers operate in fast-paced, highly dynamic environments, with their employer organisations required to operate in similarly challenging circumstances. The stakes are so high that many times, organisations that have failed to recognise the need to evolve have collapsed entirely.
The evolution of organisations requires that they engage in sustainable business practices. This recognises that even legal or juristic persons exist in a larger space than just the commercial, where they deal in production activities or the sale and purchase of goods and services. They need to relate with the greater society in a way that requires greater levels of accountability and responsibility. They should also be able to clearly outline how each of the activities they undertake impact society, to ensure that resources are annexed and utilised in a manner that will ensure future generations can benefit from present operations.
This is where ESG comes in. Focus is placed on the environmental, social and governance aspects of the operations of an organisation to determine whether they engage in conscientious business practice. Investors are increasingly keen to ensure that businesses are intentional in not only what they do to turn profits, but also in how they operationalise this and further, that businesses understand why this is important in today’s world.
It follows that a conscientious business must have the support of conscientious personnel. This includes the legal department. Primarily a support function, a shift from reactive to proactive support is necessary to enable businesses stay steps ahead of any challenges posed by non-compliance with sustainability initiatives.
As your organisation gears towards implementation of ESG principles in day-to-day operations, a clear distinction must be made between standards of operation as would be found in legislation and regulations, and guidelines in place as determined by local and internal organisations that support ESG.
As a rule of thumb, the law of the land must be adhered to. This is the primary role of in-house counsel – ensuring that the company operates within the confines of the law, guiding decision-makers on course correction when this does not happen, foreseeing risks where the decision is made to pursue business outcomes with possible negative legal and regulatory consequences to the business and finding ways to mitigate against such risks. In other words, protect business interests but ensure that there is a method to the madness.
Often, the end does not justify the means. Business will likely be more concerned with what needs to be done to get results. In-house counsel must then concern themselves with the how. This requires having an innate understanding of the actual business environment and what your company does, and how this interacts with the laws and regulations in place, to properly advise the business on the propriety or otherwise of decisions made.
Legal and regulatory compliance
Depending on your organisation’s operational sector (banking, FMCG, telecommunications, etc) there may be slight variations in how ESG principles are adopted and implemented. Even with these differences, some general rules apply across the board. Key among these is whether, in operationalising sustainable business practices, ESG principles are integrated into your organisation’s strategy, with the backing of the highest governing body – the board.
Your role during the formulation of company-specific, strategic ESG principles begins with ensuring that they remain compliant with legal and regulatory standards. Where the law in most cases sets the minimum requirements, companies, in proving to their consumers that they embrace sustainable business practices, often pledge to not only comply with the law and regulations but go a step further and commit to implementing initiatives that will benefit society in the long term. So where, for example, the law defines limits of industrial emissions or effluent and the way such waste should be treated, a manufacturing business may pledge to engage in additional activities for protection of the environment. These include cleaning of rivers into which treated effluent is directed, reduction of their carbon footprint by planting more trees and adoption of green energy sources among others.
Counsel must also keep track of new legislative and regulatory developments in sustainability practice and ESG, and keep the business informed of such changes and their impact. Where there are international practice standards (for instance, the Sustainable Development Goals (SDGs) adopted by a majority of the member states of the United Nations and the standards established under the Global Reporting Initiative (GRI)), counsel will guide the business on their application and where necessary, adaptation to the organisation’s specific needs.
The role of counsel stretches further to guiding the organisation on policy issues relating to ESG. These include international, national and organisational policies. Counsel further need to undertake regular reviews of policies and offer assurance to the organisation on its adherence to ESG matters.
Stakeholder engagement
Where collaborations or partnerships with different players are necessary to operationalise these pledges, in-house counsel will curate the agreements defining the terms of reference for such partnerships. What form will they take? Are the terms of reference clear? Are each party’s obligations clearly defined? Are there attendant service levels against which either party’s performance is measured? Are any commercial terms involved?
These agreements form the backbone of partnerships for the realisation of ESG principles. Counsel must ensure that the terms remain fair for all parties, while safeguarding the business’s purpose – implementation of the specific ESG principles.
In-house counsel also play a significant role in engagement of industry-specific regulators to get the necessary backing for ESG activities.
Risk identification and management
In carrying out compliance activities and engaging relevant stakeholders, issues may arise requiring legal intervention. These could be opportunities for improvement or disputes between different parties.
As you performed the previously-mentioned roles, you may already have identified possible avenues for such issues to arise. Did you also put measures in place to prevent such negative outcomes? This is another important legal function that helps the business. In keeping with conscientiousness and a 360-degree understanding of your organisation, mitigation of risk will not only focus on legal issues, but also any commercial and reputational (social) ones. Specifically, how may the activities for advancement of ESG principles have unfavourable outcomes? Are there more favourable alternatives? If not, is the business aware of such possible negative outcomes? Is it ready to absorb the risks irrespective of the outcomes?
Always guide the business towards an informed decision with clarity on the legal position, and how it aligns or conflicts with other business interests.
Awareness and knowledge-sharing
Secondary to guidance of business on compliance with legal and regulatory requirements, in-house counsel has a role to play in dissemination of information on ESG to the rest of the functions within the organisation, and the role that these functions have relative to ESG principles.
An understanding of ESG across multiple functions and assimilation into an organisation’s culture inevitably results in a self-aware organisation with a multi-dimensional focus combining profit with purpose.
Identification of appropriate external legal expertise
Just as ESG presupposes that organisations operate within a larger environment, so too do in-house counsel exist within a wider legal professional environment.
You may not have all the answers to your organisation’s legal challenges. ESG may be a new area of operation for you, or one in which you have had minimal experience. Even where you have some level of knowledge or skill in ESG, you may require new perspective on an area of application. Should that be the case, you should onboard or instruct external counsel with the required expertise in ESG to guide the business as it implements ESG principles. Take this as a learning opportunity to add to your knowledge on ESG, in addition to having the business benefit from the external guidance.