General counsels & ESG: Range of skills needed to help corporate leaders navigate challenging terrain

NEW YORK(Thomson Reuters Regulatory Intelligence) - General counsels and chief legal officers have a critical advisory role to play for corporations navigating the new and uncertain landscape of environmental, social and governance issues, say legal experts who are knee deep in working with large organizations.

As ESG regulations evolve in the United States and abroad, the legal and reputational risks that companies may face requires a combination of talents -- some well-defined in law and others more nuanced -- from top legal officers. Their abilities to assist CEOs and have a long-term vision for their companies are critical, says Betty Huber, co-chair of Latham & Watkins global ESG practice.

“There’s always this concern that the CEO is only going to be there for three to five years,” Huber told Regulatory Intelligence in a recent interview. “The board has to oversee long-term risk, and the general counsel could be really helpful in that regard, because GCs have longer longevity.”

“They could have that job for 25 years, and as lawyers they understand the fiduciary duties that boards and management owe to long-term shareholders, and long-term stakeholders,” said Huber, who recently joined Latham & Watkins from law firm Davis Polk where she led their ESG efforts.

GOVERNANCE IS CRITICAL FOR COMPANIES

A critical aspect for companies is the “G” part of ESG, or governance. Without an effective governance process and framework, a company’s efforts on climate or social and human capital management issues are likely to fall short.

“You have to have a mechanism, a governance mechanism to review business decisions that have repercussions,” said David Curran, co-chair of the Sustainability and Environmental, Social and Governance (ESG) Advisory Practice at the law firm Paul, Weiss.

In the current environment, with ESG and other issues such as the war in Ukraine and its unforeseen consequences for companies that operate globally, anticipating new risks, some predictable, some not, is becoming imperative for general counsels advising their CEOs and the board.

But for many lawyers, said Curran, whether at law firms or corporates, much of their time is spent on either getting deals done or in litigation. As ESG issues have taken on greater importance and risk for firms, there is a need for legal counsel to transcend what they have become accustomed to.

“In the middle, between transactions and litigation, is where all the action is,” Curran said. “And the middle is the thing that the companies’ in-house counsel are concerned about.”

It’s about helping senior management understand and anticipate “the next surprise that you shouldn’t be surprised about,” he added.

“DELTA RISK” AND THE SEC’s CLIMATE PROPOSAL

One recent development that isn’t a surprise is the Securities and Exchange Commission’s proposed company disclosure rules on climate-related issues. Last month, the SEC unveiled its long-awaited proposal, an attempt to bridge information gaps for investors and bring U.S. regulators up to speed with their foreign counterparts. They are controversial, with some industry groups likely to mount a legal challenge once the proposal is formalized.

But for general counsels, the SEC proposal marks a new milestone in corporate disclosure policies that will require them to prepare their CEOs and senior managers for the risks that may follow. In particular, there is “delta risk,” says Huber of Latham & Watkins, where what a company says publicly about its efforts on climate change doesn’t actually add up in practice. Many also refer to this as “greenwashing,” an area on which the SEC has become more focused.

This type of risk also extends to potential corporate acquisitions. The CEO and senior management will now have to understand how their acquisition target is measuring up on climate risk, says Huber.

“The genie is out of the bottle in terms of heightened government scrutiny, so, when it comes to the public commitments your company is making, you will need to say what you’re doing and do what you say like never before,” added Curran of Paul, Weiss.

All of this puts a sharper lens on the role of the general counsel and chief legal officers. Not only will they have to understand the emerging ESG regulations from a legal standpoint, but as these new rules become embedded, they will be used by investors to measure a company’s performance relative to peers. Which brings in a financial element that general counsels will have to understand as well.

“The chief legal officer will really be in charge of understanding and being conversant in and able to speak all these languages,” said Huber.

(Thomson Reuters will be holding a roundtable event on the role of General Counsels and ESG issues on April 28 in New York. For further information about the event, “The Great Transition: The Intersection of ESG and Law at a Time of Global Disruption,” please contact Jennifer Coleman at Jennifer.h.coleman@tr.com)

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