Across society, interest in sustainability has grown exponentially over recent years. In the commercial world, this interest has largely manifested as an increasing focus on ESG (Environmental, Social and Governance) factors, which are intended to act as proxy measures of sustainability performance. While some question the correctness and efficacy of ESG as the mechanism by which to deliver sustainability (as to which, see the first article in this series), the trend towards more sustainable ways of doing business is unlikely to reverse.
Businesses must respond to a complex web of standards and laws, which vary widely between jurisdictions and are evolving rapidly. In the EU alone (in which ESG-related rules are, at most, partly harmonised), since 2019 the “European Green Deal” has spawned dozens of policy and legislative proposals, covering everything from sustainable finance standards and disclosures to corporate sustainability due diligence.
This complexity is a challenge, but also an opportunity, both for businesses and their in-house legal advisers. The businesses that respond most effectively to ESG developments, appropriately balancing short-term performance with long-term sustainability, are more likely not only to survive, but to be in a position of strength 10 or 20 years from now. In our view, an effective ESG strategy requires more than reactive regulatory compliance. Proactive scanning, monitoring, prioritisation, engagement and feedback are needed.
At Deloitte, our lawyers are working closely with our experts in other fields (ESG Advisory and Consulting, Audit & Assurance, Tax, M&A and others) to help clients – and Deloitte itself – respond. This note explores 10 key things that we have learned from work in multidisciplinary teams on ESG projects, which we think lawyers will find helpful as they work with others with their businesses to shape and implement ESG strategies:
- Approach ESG as a transformation
- Think multi-disciplinary
- Consider what lawyers do best
- Compliance or beyond?
- Get clear on priorities
- Design structures that work
- Acquire skills
- Acquire tools
- Acquire data
- Build on best practice
Every business is, of course, unique and we would welcome a discussion about how ESG topics affect your business and how the principles discussed in this article can be used to design a detailed response strategy. We have found structured workshops, or “labs”, to be particularly effective in helping to develop our clients’ ESG strategies and programmes.
1. Approach ESG as a transformation
The shift towards more sustainable business echoes the last great (still ongoing) macro trend: digital transformation. ESG is similarly pervasive and complex. ESG transformation requires revolutionary, but incremental, change and substantial investment. To navigate this change and direct investment as effectively as possible, companies can derive several lessons from their and others’ digital transformations. Such lessons include the importance of a clear vision, careful analysis and planning, effective co-ordination across multiple business areas, the collection, organisation and utilisation of meaningful data, and regular opportunities to take stock, refine and improve.
Equally, it is important not to over-manage the transformation, particularly in the case of environmental challenges that are literally existential. An effective ESG strategy must combine a clear vision and co-ordination with harnessing the incredible energy and creativity that can result from people applying themselves freely to challenging problems, particularly when working in high-performing teams, outside of narrow silos and comfort zones.
Perhaps most importantly, the companies that “won” the digital transformation were those that invested resources early and boldly, not those that adopted a reactive approach, in response to regulatory requirements and the desire not to lose further ground to earlier-moving competitors. The same is likely to be true for the ESG transformation, whether that means winning the war for talent, reducing overheads and the cost of capital, or ensuring the future viability of a business model.
2. Think multi-disciplinary
Traditionally, companies treated ESG as the preserve of Heads of Sustainability, CSR officers and/or HR. Today, the substantial threats and opportunities within ESG require a response that harnesses capabilities from across the business. For example, a company’s response to just a single ESG-related change – plastic packaging taxes – will involve not only the Tax and Finance functions, but also Legal (to monitor and interpret legal requirements and standards), Operations (to measure usage and consider alternatives), Technology (to deal with relevant data), R&D and potentially others.
The complexity, demands and noise of ESG-related change will be difficult for individuals and teams to navigate. In-house lawyers and legal teams should reflect on their strengths (see below) and the ways in which they had added the most value, working as part of multi-disciplinary teams, in the past. A focus on these strengths and lessons learned should help to build high-performing ESG response teams, in which individual strengths are maximised and duplication is minimised. This will maximise the ESG upside for both the company and legal teams.
One lesson that organisations sometimes ignore is the value of early involvement of legal teams. In relation to ESG, this value will only increase as mandatory compliance continues to supersede the voluntary standards of old.
3. Consider what lawyers do best
In-house lawyers and legal teams are under constant pressure to demonstrate their value (the unfortunate reality of being deemed a “support” function and overhead cost). ESG transformation is a huge opportunity to do just that. Lawyers are known for many things, some more flattering than others. Our detail orientation, strategic thinking and sound judgement, and drafting, negotiation and project management skills (particularly in the context of risk assessment and mitigation) are highly prized and clearly can be invaluable in the context of ESG transformation.
As Deloitte Legal has grown rapidly from zero, it has been interesting to observe our lawyers and our non-lawyer colleagues integrating into project teams and finding the areas in which the lawyers can add the most value. Not only can lawyers interpret, assimilate and advise on vast amounts of law, but they are also particularly adept at understanding what is not there: the legislative intention and direction of travel; what the judge did not say in their judgment, and how that judgment might be applied in different contexts.
Lawyers therefore tend to be good at spotting opportunities to go beyond risk mitigation, get ahead of change and maximise business outcomes. Recent examples where in-house lawyers have delivered these outcomes include GDPR implementation and Brexit planning. Looking at what went well, and less well, in the context of these projects is a good starting point when thinking about how Legal teams should approach working within their companies on ESG transformation.
4. Compliance or beyond?
ESG transformation is more complicated than GDPR implementation and Brexit. It touches every business area, and the transformation is not always a direct response to legislative change. Instead, there is a complex patchwork of soft and hard law and – like digital transformation – many elements of the transformation are discretionary. In many areas, there is scope for individual companies to determine their own strategy, priorities, timetable and implementation methodology; the same is true of legislators in different countries (even within the EU).
It is possible to approach ESG as a traditional compliance issue – a box to be ticked. Many businesses are, however, choosing to look at ESG transformation more holistically and to ask difficult questions about the fundamental sustainability of their business models. The latter approach may be more resource-intensive and risk short-term profitability for the promise of long-term gain. Neither approach is necessarily wrong. The right strategy requires a balancing of factors as diverse as the cost of capital, shareholder pressure, litigation risk and employee engagement, over various time horizons.
In addition to the cold business logic there is, of course, an ethical dimension. In-house lawyers often take a leading role in relation to business ethics. They combine a sophisticated understanding of corporate risk with training and experience that also teaches principles of fairness, transparency and responsibility. They are among the best-equipped people within a business to facilitate a conversation about what an ESG strategy should look like, to minimise risk, maximise opportunities, and to do the “right thing”. In-house lawyers do not have a particularly vested interest in ESG matters and are well-placed to look at their company’s ESG strategy holistically and dispassionately and to avoid becoming distracted by “pet” projects. Even better, they can help to ensure that ESG is integrated into corporate decision-marking as part of good governance and long-term value creation.
Lawyers can also add value in relation to business opportunities – for example, how IP in sustainability-linked innovations can best be protected and exploited; balancing the commercial value of sustainability claims in advertising with the risk of greenwashing; or cleaning up the upstream supply chain to give the business’ stakeholders and customers confidence that they will not be caught up in a scandal.
5. Get clear on priorities
Most in-house lawyers work in complex and ambiguous environments. This will only be compounded by ESG transformation. It is crucial to prioritise in order to develop credible plans for change. Ultimately, to achieve maximum buy-in, ESG transformation must be focused on the changes that are most likely to reduce costs and/or increase revenue.
As a first step, a business must benchmark its current ESG maturity level against current and future requirements (legal or otherwise) and aspirations. This exercise will help each business to prioritise and to focus on the resources, tools and structures needed to support the necessary transformation. The assessment will be affected by various factors, such as organisation type and size, geographical footprint, industry sector, competitor landscape, customer sentiment, investor composition and sentiment, available resources, and internal attitudes. To take one example, in choosing between regulatory compliance and “compliance plus”, a company Board may take account of the increasing risk of corporate and even personal liability for ESG-related failures, but will need to quantify this risk and weigh this in the context of the risk of a shareholder rebellion if ESG-related changes require a short-/medium-term drop in profitability.
At Deloitte, we have developed various tools and frameworks to help businesses assess, prioritise and address ESG topics in a structured way, while recognising that no two businesses are the same.
6. Design structures that work
Deloitte embraces a multi-disciplinary model. This enables us to assist our clients with complex, strategic projects that do not fit neatly within a single person’s or team’s remit. The model adapts well to a wide range of business challenges. The key to success is establishing at the outset the structure that enables project teams to deliver their best work. The optimal structure will vary depending on the desired outcome (e.g. basic legal compliance versus compliance-plus transformation).
It is perhaps helpful to look at ESG transformation through the lens of a slightly worn metaphor: the company as a complex machine. First, the person with ultimate oversight and responsibility is the chief engineer. In relation to ESG generally, this may be the Head of Sustainability (although arguably it could and should be the CEO). Second, individual ESG-related projects require an operator, or project manager, to ensure the effective co-ordination of multiple business areas. (Interestingly, we noticed in previous transformational projects – such as GDPR and Brexit – that lawyers are often burdened with project management responsibilities, which distract their attention, potentially resulting in a suboptimal outcome – appointing a professional project manager would likely be better). Third, individuals with different skills – technical specialists, lawyers, accountants – understand how to operate different parts of the machine better than others. These individuals need to be identified and empowered to add their insights and ensure that their respective parts of the machine run smoothly, while the project manager co-ordinates their efforts as required.
The lubrication that keeps the machine running is the flow of information. This requires careful attention. If information is properly shared, command-and-control (which has clear limitations) is replaced with individual empowerment, an essential ingredient of high-performing teams. What do project teams, and those with overall responsibility, need to know to ensure that ESG projects remain on-track and co-ordinated? Whose job is it to share information and how should it be shared? In the context of ESG, it is important to note that more information leads to more electronic data (or paper), which has a greater environmental impact.
The optimal approach is likely to be asynchronous information-sharing (assuming that there is sufficient structure in relation to the information to be shared, and proactivity among those who are required to do the sharing). To maximise engagement across a business, it may also be helpful to think about sharing information at different levels of detail, to cater for varying levels of interest in ESG matters (think concentric circles).
7. Acquire skills
A General Counsel is already likely to have the skills and experience to help guide their company through ESG transformation. The problem is one of time – ESG is so vast that no one person can cover the full range of topics and projects that may notionally be within their remit.
It may be helpful to reflect on the 10x approach. How can General Counsels multiply their impact to maximise results? There are a few answers: acquiring skills, acquiring tools and acquiring data.
In relation to acquiring skills, the ESG transformation is a golden opportunity to enhance the knowledge, abilities and exposure of in-house team members. This should also increase personal impact and engagement levels within the team. ESG matters are so diverse that there is scope for everyone to “own” one or more issue, whether monitoring the progress and impact of a proposed law or acting as legal Sherpa for an ESG-related programme. Team members will require technical training, coaching and a common framework to perform these roles effectively.
Even then, there will be gaps. GCs will need to assess, in the context of their company’s ESG priorities and expected journey, whether it is necessary to bring in external skills (whether from external firms or permanent hires). This is challenging because demand is high and increasing, yet there is no such thing as an “ESG lawyer” – the discipline requires breadth, agility and non-traditional skills (such as project/change management, comfort with data and technology and forecasting).
The procurement of external legal services raises some interesting questions. The use of panels and fee incentives to promote diversity in external law firms is becoming more mainstream (Novartis and Microsoft are among the trailblazers). It is only a matter of time before clients begin to screen their external advisers for other ESG factors (not least given that they will be among the client’s Scope 3 emissions). And ways of working will likely evolve – email, which is relatively eco-unfriendly given the server space demanded, may in time be replaced with centralised matter management systems (which, as a single “source of truth”, have advantages beyond their relative environmental friendliness).
8. Acquire tools
Given the complexity and sheer noise of ESG transformation, it is near-impossible for in-house lawyers to navigate this landscape without recourse to technology.
There are a range of tools available to assist companies with various aspects of the ESG journey, including ESG screening (in respect of suppliers and on the company’s own account, which can assist registration as a B Corp or similar); ESG sentiment scanning; ESG regulatory tracking; and ESG dashboards for data management and tracking.
Nearly every aspect of a company’s operations can be disrupted in an ESG-compliant manner. For example, via CLM software, commercial contracting may become entirely paperless. Such software can also support more rigorous monitoring of ESG compliance within a company’s supply chain.
9. Acquire data
As noted, the flow of meaningful information is a crucial component of ESG transformation. The setting of ESG-related goals will cause a proliferation of data to be collected and analysed, in order to measure progress. These data are crucial – some will be gathered internally; some externally. Aside from the legal implications of the collection and use of such data, there are commercial implications. Certain types of ESG data have clear potential for commercial licensing, and already the largest data providers are jostling to establish and promote their own ESG benchmarks.
This latest data revolution also has ESG implications. For example, as already mentioned, more data has a greater environmental impact. Companies must think seriously about how this data should best be collected, stored and shared to minimise the negative consequences.
10. Build on best practice
The great news for in-house teams grappling with ESG transformation is it is not necessary to start from scratch. There are many (arguably too many) existing soft standards and equivalent regulations in comparable jurisdictions (which, over time, may become the global norm). There are also precedents – for example, the Chancery Lane Project has made available various crowdsourced environment-related standard clauses. These clauses are perhaps unrealistically aspirational in places, but they do provide a helpful starting point. Similarly, there are many pre-existing standard legal principles, positions and clauses (such as employment and anti-slavery provisions) that may benefit from a review and refresh via a contemporary ESG lens. Companies at the start of their ESG transformation may also look at their contracts and interactions with customers, to assess how their own practices, and those further up the supply chain, may need to change.
The ESG transformation is, however, also an amazing opportunity to define best legal practice and standards in a relatively greenfield environment. For example, greater thought must be given to how to make an ESG-driven supply chain transformation truly “ESG”. If companies merely seek to impose more stringent requirements on suppliers that in many cases have lesser resources than those that they supply, this is not a very equitable (or “S”) approach and may also lead to sub-optimal outcomes. Companies with significant buying power need to think carefully about how they can support their suppliers through ESG transformation, to everyone’s benefit.
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