The rise of ESG Law: in search of lost time
We are increasingly hearing how the law is being used to force giant corporations to consider their position before it’s too late but what many may not have realised is that this conversation has been going on for quite some time, as highlighted in this article from Alessandra Lehmen[1] Environmental/ESG/climate lawyer.
In the novel whose title we borrow, Proust writes that “works written for posterity should be read by posterity alone”. This idea lends itself to rethinking the corporate sustainability narrative: for decades, supposedly sustainable actions have been conceived and executed with eyes on a distant and elusive horizon, which, luck permitting, our generation would never get to witness. Meanwhile, companies have continued to favor, to a large extent, the Friedmanian maxim that the social responsibility of businesses is to maximize profits and shareholder value. With the rise of ESG[2] agenda, however, and the sense of urgency that accompanies environmental, social and climate issues, works written for posterity need to make sense today.
ESG is not exactly a recent concept: its close origins date back to 2004, when then-UN Secretary-General Kofi Annan wrote to 55 of the world's leading financial institutions, inviting them to integrate ESG principles into the financial market. This initiative led to the publication of the Who Cares Wins[3] and Freshfields[4] reports, which expressly incorporate the term. ESG is not, therefore, the total novelty its recent popularity may suggest. On the other hand, criticisms that ESG is a mere rehashing of old concepts are unwarranted: conceptually, there is an important progress, which cannot be ignored. The key idea, here, is integration: as opposed to philanthropy or an opportunity for virtue signaling through actions that bear little consequence on the core business, ESG came to be understood as a central element to the viability of a corporation, to be broadly and transversally incorporated to the operation[5] and specifically considered in investment decisions[6].
ESG has gained traction in the post-pandemic era and shows signs of being an irreversible trend, especially in the current geopolitical scenario. The Great Reset initiative[7] proposes a shift toward stakeholder capitalism, and pursuing economic recovery in a more resilient, equitable and sustainable way, based on ESG metrics and green infrastructure projects. These ideas have been concretely translated into public policies - such as the European Green New Deal and Biden's stimulus plan - and has been gaining wide acceptance from market players.
This realization has direct and significant implications for lawyers which, however, has not yet been fully understood. Chasing the dragon: the rise of the ESG law firm[8], an aptly titled report led by Paul Watchman, identifies nine main themes of ESG practice: environmental liability, climate change, human rights, corporate responsibility, governance, carbon trading, ESG capital markets/securities regulation, ownership of natural assets, and sustainable finance. The authors surveyed 55 global law firms and concluded that a scramble to structure the area is underway, but, as of March 2021, none of them offered a truly integrated and comprehensive ESG practice.
The growing importance of ESG requires law firms to make up for lost time. That said, what is the role of the ESG lawyer? What opportunities does the ESG agenda bring to lawyers, and, in particular, to law firms? There are two main fronts in which the expertise of ESG lawyers is vital: performing transactional work in order to assess materialities that impact the ESG performance of their clients, thus helping them navigate an increasingly complex regulatory environment, and litigating judicial and extrajudicial cases challenging ESG
To properly consider these two scopes, it is necessary to demystify the idea that ESG is essentially voluntary. It is true that ESG still involves a good deal of self-regulation, but there is a clear tendency towards heightened regulatory scrutiny. As with financial disclosures, the world is moving towards harmonization and comparability of non-financial disclosures (see, for example, the IFRS[9] and IOSCO[10] initiatives), and, at the same time, towards increasingly mandatory standards. Robust examples of this movement are the obligation to adopt disclosures based on the TCFD (Task Force on Climate-related Disclosures) - in the United Kingdom[11] and in Brazil[12], for example -, the Brazilian Central Bank public consultation on ESG and climate disclosures regulation[13], and, in the United States, the recent Federal Reserve[14] and SEC[15] initiatives to take ESG and climate-related risks expressly into account.
Furthermore, ESG integration goes hand in hand with compliance. As the ESG agenda integrates aspects as varied as, for example, emissions of greenhouse gases, diversity, data protection, or management remuneration, among many others, it is self-evident that the ESG performance of companies hinges on their capacity to meet a myriad of regulations related to these issues. Lawyers play a central role in identifying materialities and advising clients in each of the areas involved. To do so successfully, however, a fully-structured ESG practice requires the ability to understand these issues in a coordinated and transversal way. In addition, ESG Law is not limited to minimizing liabilities. Take Environmental Law practice, for example: beyond risk management, it can help clients take full advantage of the opportunities created by the incorporation of ESG variables into their businesses[16], particularly in a context of green recovery and transition to a low-carbon economy.
The second front of action is that of ESG litigation: as companies are increasingly subject to binding ESG obligations, it is possible to anticipate new types of strategic litigation that challenge compliance with said obligations, or, when a corporation appears as the plaintiff, the obligations themselves. In this context, the importance of the recent Milieudefensie v. Shell decision,[17] whether it holds or not, cannot be understated: the first of its kind - but most certainly not the last - a Hague district court extended obligations arising out of the Paris Agreement, a treaty negotiated among States, to Shell, a private company. Also significantly, the decision encompasses a duty to curb Scope 3 emissions. Against this backdrop, we also anticipate that strategic litigation will undergo a shift from catch-all rights-based concepts to more granular ESG arguments[18], such as exposure to stranded assets, climate resilience stress tests in different global warming scenarios, impact investment, and the financing of projects with ESG and climate-related implications[19]. Another relevant trend concerns transnational ESG litigation. Examples include claims challenging pollution and emissions outsourcing, that is, targeting entities that are relatively cleaner in their countries of origin, but are major polluters in other jurisdictions (see, e.g., the Total, EDF and Casino cases, based on the French Duty of Vigilance Act of 2017, challenging activities in Uganda, Mexico, and Brazil and Colombia, respectively), supply chain disputes spanning multiple jurisdictions, or disputes under trade agreements, which increasingly involve sensitive and potentially contentious environmental issues, such as carbon trade barriers and deforestation associated with production of export goods.
This variety of possibilities illustrate why ESG Law is on the rise[20], and require that law firms structure their ESG practice areas carefully. Moreover, another relevant ramification of the ESG Zeitgeist, for which law firms are perhaps less prepared, impacts organizational culture. Structuring an ESG practice depends on the attraction and retention of lawyers who master increasingly sophisticated and transdisciplinary concepts, and the ability to hire the best talents is affected by a generational component that should not be ignored by managers: the negative perception of the younger generations regarding economic activities deemed as unsustainable or insufficiently diverse. An example of this trend is the Law Students for Climate Accountability initiative[21], which maintains a scorecard, based on the analysis of litigation, transactional, and lobbying work, detailing the scale of top US law firms’ role in the climate crisis.
More than just a buzzword, ESG is a call to all relevant actors, state and non-state alike, to take action to adapt to the imperatives of this new paradigm. For all the reasons above, lawyers are especially well-positioned to contribute to the implementation of the ESG agenda, helping to build more sustainable and resilient businesses and a more prosperous and equitable society, for posterity and for our contemporaries.
[1] Lawyer admitted in New York and Brazil. Post-doctoral Laureate, Make Our Planet Great Again Program, Presidency of France. Ph.D, International Law, UFRGS (Brazil). LL.M., Environmental Law & Policy, Stanford Law School. MBA, Economics and Corporate Law, FGV (Brazil). Vice President, Brazilian Bar Environmental Law Commission. Stanford Woods Institute Rising Environmental Leaders Fellow. Recipient of the Stanford Olaus and Adolph Murie Award for best work in Environmental Law and the Lincoln Institute/Harvard Forest Conservation Catalysts Award. Researcher, CNPq-INCT (National Institute for Science and Technology, Brazil). Member, Union of Concerned Scientists Science Network.
[2] Environmental, Social and Governance.
[3] The Global Compact, Who Cares Wins - Connecting Financial Markets to a Changing World. https://d306pr3pise04h.cloudfront.net/docs/issues_doc%2FFinancial_markets%2Fwho_cares_who_wins.pdf
[4] UNEP FI, A legal framework for the integration of environmental, social and governance issues into institutional investment. https://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf
[5] KPMG, Integrating ESG into your business. https://home.kpmg/cn/en/home/insights/2020/01/integrating-esg-into-your-business.html
[6] UN Principles for Responsible Investment, A practical guide to ESG integration for equity investing. https://www.unpri.org/listed-equity/a-practical-guide-to-esg-integration-for-equity-investing/10.article
[7] World Economic Forum, Now is the time for a 'great reset'. https://www.weforum.org/agenda/2020/06/now-is-the-time-for-a-great-reset/
[8] The Blended Capital Group, Chasing the dragon: the rise of the ESG law firm. https://businessbeyondcovid19.org/wp-content/uploads/2021/03/ChasingTheDragon_120321_0050.pdf
[9] IFRS Foundation, Consultation Paper on Sustainability Reporting. https://cdn.ifrs.org/-/media/project/sustainability-reporting/consultation-paper-on-sustainability-reporting.pdf?la=en
[10] International Organization of Securities Commissions, Climate change and finance: What’s next for global regulators? Climate Risk and Green Finance Regulatory Forum 2021. https://www.sfc.hk/-/media/EN/files/ER/PDF/CEO_Speech_Climate-Risk-and-Green-Finance-Regulatory-Forum-2021.pdf
[11] UK joint regulator and government TCFD Taskforce: Interim Report and Roadmap. https://www.gov.uk/government/publications/uk-joint-regulator-and-government-tcfd-taskforce-interim-report-and-roadmap
[12] Joint Statement by the Economy Minister of Brazil and the Chancellor of the Exchequer of the UK at the Fourth UK-Brazil Economic and Financial Dialogue, 10 December 2020. https://www.gov.br/economia/pt-br/assuntos/noticias/2020/dezembro-1/arquivos/clean-8th-draft-efd-joint-statement.pdf
[13] https://www.bcb.gov.br/detalhenoticia/530/noticia
[14] Federal Reserve, FEDS Notes - Climate change and financial stability. https://www.federalreserve.gov/econres/notes/feds-notes/climate-change-and-financial-stability-20210319.htm
[15] Securities Exchange Commission, SEC response to climate and ESG risks. https://www.sec.gov/sec-response-climate-and-esg-risks-and-opportunities
[16] McKinsey, Five ways that ESG creates value. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value
[17] Unofficial English version: https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBDHA:2021:5339&showbutton=true
[18] LEHMEN, Alessandra. From niche to mainstream: the road ahead for climate litigation. https://ilabrasilblog.wixsite.com/blog/post/from-niche-to-mainstream-the-road-ahead-for-climate-litigation
[19] KISHAN, Saijel. Fighting Climate Change by shutting down the money pipeline. https://www.bloomberg.com/news/articles/2021-02-04/climate-change-environmentalists-target-banks-to-cut-off-fossil-fuel-funding
[20] Responsible Investor, The rise of ESG law firms part I: ESG law gets ‘hot’ and CEOs get bothered, leading to integrated ESG legal practices. https://www.responsible-investor.com/articles/the-rise-of-esg-law-firms-part-i-esg-law-gets-hot-and-ceos-get-bothered-leading-to-integrated-esg-legal-practices
[21] Law Students for Climate Accountability, The Law Firm Climate Change Scorecard. https://www.ls4ca.org
