What lawyers and law firms need to know about ESG
Business is changing — for good — and the legal industry needs to adapt to stay relevant and compliant.
Environmental, Social and Governance (ESG) is everywhere. It has completely changed the landscape of modern business. This evolving landscape presents opportunities and challenges for the legal community.
What do we mean by Environmental, Social and Governance (ESG)?
That’s a great question.
ESG is a broad and (at least of this writing) largely undefined term that relates to data collection and reporting on a variety of factors, which broadly fall into the “buckets” of environmental, social and governance. One touchstone of ESG is that it expands corporate accountability beyond shareholders (the traditional limit of accountability) to include external stakeholder expectations on a variety of topic areas that fall into these buckets.
While the collection and public reporting of this type of data is not necessarily new — it has existed in various forms, including Corporate Social Responsibility (CSR), for many years — the push from the private sector, arguably led by Blackrock’s Larry Fink, and the introduction of numerous reporting frameworks (SASB, GRI, TCFD, CDP, and many others), is new. Also new, and largely driven by the fact that financial institutions and insurance companies are very interested in this data, is that robust ESG reporting more closely resembles verified financial and accounting standards.
And while the number of reporting frameworks currently presents challenges and confusion, the move towards consolidation is helping to create clarity and streamline what can be an onerous process.
ESG is also a risk management strategy because it forces organizations to review their performance on key issues and introduces some amount of transparency and accountability with respect to a broad range of risks — ranging from poor governance to data security, and human rights violations to unsustainable or carbon-intense business practices.
Smart legal practitioners will see ESG as an opportunity to manage risk and drive positive change, both for their clients and their own firms.
So what does this really look like?
The rise of ESG presents various risks — and opportunities — for your clients.
The great majority of clients are collecting and reporting ESG data, whether or not their lawyers know it.
I recently spoke at a continuing legal education seminar where I noted that, “if you haven’t read your client’s ESG report, and made yourself aware of any climate, EDI, or other commitments, you are putting them at risk,” and I stand behind that statement.
Nearly every company — and many other entities like public and private institutions — are issuing some type of sustainability report. In 2019, 90% of the S&P 500 published some type of corporate sustainability report — up from about 20% in 2011.¹
“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.”
The question for legal practitioners and law firm leaders is whether they are evolving their practice — and their guidance — accordingly. And for reasons I’ll explain below, every practitioner should be asking these questions.
Your clients need your “climate cooperation” to meet their climate targets.
Because climate is a shared resource, we need to work collaboratively to address climate change.² Companies are looking to their vendors and suppliers to help them meet their climate goals — this includes their lawyers and law firms. Why? Because of what we call “Scope 3” emissions.
When a company makes a climate commitment (i.e. “net zero by X date”) — a commitment that nearly one-fifth of the world’s largest public companies have made — they quickly realize that they need to get a handle on their Scope 3 emissions, or they will never meet that commitment.
Scope 3 Emissions
This section requires some background. When we talk about Greenhouse Gas Emissions (GHG), we are really referring to at least three big “buckets,” or sources of those emissions. We generally refer to these as “Scopes” 1, 2 and 3 (there are others, let’s focus on the Big Three). The below chart provides some additional detail and examples.
If we take a hypothetical technology client and look at the above chart from their perspective, Scope 1 would be all the assets (buildings, vehicles) they own, Scope 2 would be all the energy and fuels they purchase to power those assets, and Scope 3 would be everything else up and down their supply chain.
Scope 3 is a big deal, because for many companies it is estimated to be the largest source of emissions, and for most companies, it is a complete unknown.
- Walmart, for example, estimates that about 95% of its emissions fall into Scope 3.
- For most law firms, about 90% of their emissions are estimated to fall into Scope 3.
Again looking at the above chart from the perspective of a hypothetical technology client, service providers like law firms fall into the technology client’s Scope 3 “bucket.” So do all the customers who use the technology company’s products, all the carbon produced by manufacturing and shipping their products, all employee travel, and much, much more.
Scope 3 is a really big deal, and lawyers and law firms have a part to play, both with respect to their clients’ goals and their own risk management.
New contractual mechanisms
So how do companies plan to get a handle on their Scope 3 emissions? Among other strategies, they are increasingly leveraging new types of contractual provisions.
Salesforce has been a leader in this regard, so let’s dive into that example.
In late 2021, Salesforce introduced a “Sustainability Exhibit.” Below is the introduction and recital section of that Exhibit:
The Sustainability Exhibit has four main aspects to it:
- Requires customers to set Science-Based Targets. A Science-Based Target is “in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement — limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C”;
- Actively work towards those targets (“develop and implement a plan for continuous improvement,” Sec. 2.1.2);
- Publicly disclose Scope 1, 2 and 3 Emissions (Sec. 2.3.5); and
- Penalties of cost of carbon offsets for any emissions above zero, or 0.5% invoiced to Salesforce over past 12 months (“Climate Neutrality Fee”).
While not explicitly stated, the reason Salesforce is pushing its suppliers is that in order to meet its own carbon goals, Salesforce has to get a handle on its own Scope 3 emissions.
So what does this have to do with law firms?
Law firms should expect to see these types of clauses incorporated into their engagements in the very near term. In fact, Salesforce is hoping for exactly that type of circularity: Patrick Flynn, Salesforce’s VP of Sustainability, has publicly stated that he hopes the Sustainability Exhibit (or similar terms) comes back to Salesforce from one of its customers, not knowing that it originated from Salesforce.
The question for the legal community is: are you prepared to counsel your clients with respect to these types of clauses, and are you prepared to sign these types of agreements on behalf of your firm?
What are the opportunities?
As explained above, companies that have made climate commitments (the great majority) have quickly realized that they need to engage their supply chain in order to meet their climate targets — this includes their legal service providers.
Professional service providers, including law firms, are receiving RFPs and other inquiries that relate to not just Scope 3 — although carbon emissions is one of the most commonly requested metrics— but also with respect to other ESG factors and issues.
These requests are increasingly common, as demonstrated by the latest surveys:
“As part of clients’ supply chains, law firms factor into a company’s total carbon footprint and environmental impact, even if indirectly. Many clients are now asking for sustainability credentials or requesting information on law firms’ ESG policies in order to remain compliant with their own reporting requirements, whether self-imposed or mandated by a third party. In a 2021 Landscape Survey conducted by the Law Firm Sustainability Network, 87% of responding law firms indicated that they had received requests for proposals that included the firm’s environmental efforts.”
Multinational law firm Baker Makenzie’s CSO, Alyssa Auberger, recently noted that her firm is, “seeing an increase in client requests for information about its carbon management program…in part because clients are reassessing their own impact on the environment, including their supply chain”.
These types of requests are so prevalent that many companies are making it easier for their customers to track emissions data. For example, the Wall Street Journal recently highlighted the efforts of the “Big-Three” cloud computing providers to make data center emissions (which would be Scope 3 for customers of cloud-computing providers) more available:
“[T]he company introduced a carbon-tracking tool for AWS users that estimates a customer’s emissions based on where they are and the share of green electricity powering the data centers they are using. It also estimates emissions of their data-center use from before the tool was introduced, and the carbon savings they have made since switching to the cloud.”
Similarly, and perhaps unsurprisingly, Salesforce recently introduced it’s Net Zero Cloud (formerly Sustainability Cloud 2.0), a tool that claims to, “Get investor-grade data all in one place with detailed dashboards for Scope 1, 2, and 3 emissions in addition to waste management.” Salesforce invented a new type of contractual requirement, then created the tool to make compliance easier— it’s a brilliant business strategy.
Law firms that are early adopters of tracking and accurately reporting their emissions (and other key ESG metrics), will have a real market advantage.
With all these tools and resources available, the question for law firm leadership then becomes, “what are you waiting for?” Failing to take action in this space also raises ethical considerations, which we will cover in the next section.
ESG is an important issue for employees and it presents emerging ethical issues
Your current and future employees care about ESG
Lawyers and legal staff are increasingly inquiring with respect to both the firm’s own commitments (or lack thereof) on key ESG issues and the types of clients law firms are serving.
As highlighted in a recent Reuters article:
“ESG can also be part of the formula for attracting and retaining talent, especially younger generations of attorneys and staff. In the same way that many potential new hires are now routinely asking questions around diversity, equity, and inclusion, many are also beginning to inquire about firms’ environmental policies. Having a clearly stated and well thought out ESG strategy can help to differentiate firms vying for up-and-coming, socially conscious talent.”
And it’s not only pressure from clients and staff, attorney ethical obligations can also be impacted.
Ethical obligations are evolving to reflect this new business reality
As the ESG landscape continues to evolve, so will legal ethical obligations.
Every lawyer and law firm should be asking themselves the question posed by Larry Fink in his latest letter to CEOs:
“Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led?”
How are you preparing for and participating in the net zero transition?
While there is not (yet) a specific ethical obligation with respect to climate change, there are two potential “hooks” that lawyers need to be aware of.³
First, ABA’s Resolution 111. While not an enforceable standard, is certainly a clear signal to legal practitioners:
Second, Model Rule 1.1, adopted in many states, informs the context in which lawyers practice — and ESG is rapidly changing that context.
Rule 1.1 Competence
A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.
Here is the key question: if you do not know your clients’ climate and other commitments, and if you have not read your clients’ ESG reports and related disclosures, how can you provide competent representation?
And even if not explicitly stated in ethical rules, given the overall context of the ESG landscape, lawyers should begin to question whether they are putting their clients and risk, or perhaps even practicing to the standard of care?³
This area will continue to evolve as ESG becomes even more mainstream and ESG disclosures become increasingly mandated.
So what should you do?
At a minimum, get up to speed on ESG generally, and start asking your clients if they have made climate or other public commitments. Read their ESG and related reports, to make sure you can provide competent representation.
Examine your own firm’s operations and get a handle on your firm’s basic ESG metrics. Gather robust and defensible data on key metrics and seek support from outside experts and consultants.
[1] The key phrase here is obviously, “some type,” and an unstandardized (currently) and unregulated area is ripe for greenwashing. A recent review of data submitted to the Climate Disclosure Project found that nearly all climate-related corporate disclosures are inadequate.
[2] While ESG covers a broad range of categories, my work generally focuses on climate, so this article will lean heavily towards the “E” in ESG.
[3] There are other potential ties into attorney ethical rules. At least one author has argued that precedent surrounding disclosure rules (ABA 1.6) could be applicable to harm caused by greenhouse gas emissions, potentially requiring attorneys to counsel their clients to cease these activities and in some instances, withdraw. This may be particularly true for lawyers assisting clients with regulatory or other filings and disclosures.
