Issues around ESG have increasingly become a vital focus within the financial services industry and dominated conversations at board meetings. Legal teams within businesses and organisations can play a much bigger role driving the ESG strategy instead of being an implementer of the regulations and business strategies.
That’s the key message from a roundtable co-hosted by The Lawyer and Irwin Mitchell’s chief commercial officer Victoria Brackett, where a delegation of senior in-house legal counsel shared their thoughts on the progress made so far, practical advice and experience in dealing with challenging situations.
“ESG is going to sit at the centre of all our strategies and purpose moving forward,” said Brackett. “There’s been an acceleration moving from tick box exercises, and lawyers can become advocates of ESG at board level and make sure key messages are heard.”
It is critical for in-house lawyers to go beyond being the guardians of compliance and take on a wider role around ethically driving ESG through the strategy in the business. But getting the right structure and the right business culture balance is essential.
A senior business integrity officer of a multinational software company agreed that ESG is a hot topic within the business, which has recently launched its sustainability and social strategy. The business integrity team works closely with the in-house legal team on ESG and the general counsel, who is also on the executive committee, is ultimately accountable for the strategy.
“The compliance aspect is a very central piece of it, but definitely not the only piece that’s been focused on. It also includes looking at how we can embed the principles of our ESG strategy into every avenue of the business,” said the business integrity officer.
While not all companies have lawyers on their boards, the general impression is that ESG is an integral part of boards’ conversations and a regular item on their agenda. In-house lawyers and external advisers can influence and advocate for ESG across the business in many ways.
A delegate from an international bank said that in-house lawyers can use their business relationship and their involvement in strategy projects to influence key business decisions and act as the moral compass.
“In-house lawyers usually are the first and second line of defence. At the end of the day, you do have to be the sounding board of the company,” he said.
In the sustainability-linked loan context, for example, legal counsel have to put their hands up for what’s being referred to as “green washing”.
“Where you work with clients that on the face of it are aiming to more than tick the box and trying to do something good for the environment like reduce carbon footprint, things that are seen as ESG objectives, sometimes you have to kick the tyres and ask the question whether they are doing it to try to get kudos for it? There is a fine balance,” explained the in-house counsel.
Another participant shared a rather unconventional approach that has worked effectively on the board level – by defining the sub risks for her business and frame the questions around risk profile.
“Most companies have approached it from an one directional question – what impact we have on the environment and how can we mitigate that?” said the participant.
Having an integrated approach towards ESG is essential and so is the way in which in-house legal teams communicate the messages clearly across all areas of the business.
“It is not that different from advising on other core principles like design standard products and services, in terms of the legal team being the pivotal role that has interactions and oversight across every area of the business,” one head of legal in a financial institution pointed out.
“We have the direct dialog with the board. We can ask questions and fundamentally understand what they try to deliver and filter that down into individual questions and principles and deal with each area of the business to make sure they are aligned with the underlining expectations from top to bottom,” said the legal head.
“The key is to make sure what’s being delivered is attainable and practical, throughout the life cycle from procurement to customer services. The products need to work for your back, mid and front office operations. In-house legal teams always play an important linchpin role in getting the right people in the right business areas talking to each other. We are at the heart of facilitation with driving the ESG strategy, like with everything the business is doing,” she concluded.
Conflicts and challenges
There has been a noticeable progress and acceleration in building ESG principles into companies’ growth strategy in the past few years. But it is far from being a smooth sail for in-house counsel working with other business teams and making sure ESG is accounted for appropriately. Several delegates gave a few examples to highlight the challenges they are facing.
The lack of “compulsoriness”, the standardisation of metrics and a common system means each corporation will have different tolerant levels and risk appetite.
“It’s still quite tricky to understand the legal risks associated with not being compliant with ESG parameters,” says a senior in-house lawyer of an international bank.
“Banks and other sectors are more focused on the conduct risks around it. But the risk is undefined. Lots of things are still voluntary, but some of them have become more a part of our DNA. For example, reducing carbon footprint is a given now compared to 10 years ago, or last year when one of the world leaders suggested climate change didn’t exist. But in many cases, it’s difficult for lawyers and compliance officers to decide when to draw the line,” he continued.
Applying ESG principles in practice can often be met with resistance from the commercial teams. It’s particularly true when the in-house team, which is expected to play a facilitator role needs to say no to certain business activities or proposals. There is always tension between commerciality and doing the right thing. But one way to overcome that is pitching commercial aspects as a longer-term view – five or 10-year strategy, and trying to persuade the business that it is not about revenue for this quarter this year.
“When the legal team is approached for legal advice by the business, we’re clear that although the proposed activity wasn’t illegal, there is a difference between what we have the right to do and what’s the right thing to do. We ask key questions such as does it align with the company values, is it good for our customers and colleagues, do we want to stand behind it if it is in the social media tomorrow? The so called ‘grandma and media test’ is a powerful tool to coach other people in the business through that thought process,” says a delegate.
However, legal teams need to feel completely empowered to have these challenging conversations stopping people doing what they want to do. Having the board right behind ESG strategy and the right business culture helps encourage legal teams to take a proactive role in challenging business on these topics.
Legal teams can also play an instrumental role in applying ESG principles in transactions.
“Around 90 per cent of the time, ESG is driven by the culture we live in and urgency that society dictates. Let’s not have an over-inflated view about the role of lawyers and what they can do. Lots of what we do is reactive. Where we can be proactive is that we can understand the principles and help businesses interpret these things, so that when the world tries to go down those roads then we are able to facilitate that. For example, LMA has produced guidelines on principles. We need to have good understanding on what that really means, so when it comes to drafting and commenting on documentation you can really have an instrumental impact,” says an in-house lawyer of a cooperative bank.
“The practical things around introducing a series of checks and balances can be reactive. We need to keep the CEO and business true to that principle. Being that ambassador into business, guiding them and doing sanity checks with them, holding the mirror up is a critical and challenging role,” agreed Brackett.
Slower progress on the “SG” front
All participants of the roundtable agreed that significant progress has been made on the “environmental” aspect of the ESG, particularly in the past two years. But in contrast, things are moving slowly on the “social and governance” fronts.
“The ‘E’ of the ESG, in terms of the concept and principles are gradually becoming more defined and clear. For banks PRA objectives around climate change financial risks are well set out and described well. It’s easy to understand and how to apply them. The same can be said for TCFD disclosures, in terms of what organisations have to do if they are going to sign up to these principles,” commented a bank’s head of legal.
“Much less progress has been made across the board for the ‘S and G’ part, in terms of legal, regulatory and organisational. They are broadly forgotten at the moment in the discussion because discussions around ‘E’ are so great,” she continued.
The head of legal pointed out her bank has clear requirements in the procurement and tender processes for potential business partners and service providers to discuss with the bank about their ESG culture and ethos.
“But the SG element is less understood internally – what we mean by that and what we are looking for. There seems to be no equivalent move towards standardisation as we are seeing in the E space. Is the momentum on the SG part lost in the face of a massive drive for environmental change, which is absolutely important and should be a key focus. But it would be a shame if the SG is lost and overwhelmed by that.”
The ever-changing global political environment is a reason why some organisations are reluctant to have a defined stance for social and governance.
“The legal voice is loud in the sustainability aspect, which is more progressed. The sense is there’s hesitation and reluctance in defining risks around SG. Some topics inherently connected to political courses, and companies want to maintain political neutrality. Tension is more coming to the fore. But the consensus is that companies want to deal case on case basis. With the pressure increasing, that has to change,” says one participant.
