Custom & Advisory: Implications of ESG for law firms bring up compliance issues & new business opportunities

A power-generating windmill turbine and the church of the village are pictured during sunset at a wind park in Ecoust-Saint-Mein, France, September 6, 2020. REUTERS/Pascal Rossignol/File Photo

How law firms manage the nuances of their clients’ and their own ESG initiatives will determine if firms find challenges or opportunities.

While it took some time for the concept of sustainability in our business practices to truly take shape and command attention, the last five years have seen a rapid acceleration in understanding, appreciation, and execution of environmental, social & governance (ESG) ideals not only for law firms’ clients, but also within the firms themselves.

To understand this movement further, Thomson Reuters Institute’s recent Insights Council meeting brought together 14 managing partners of large law firms from the United States, Canada, Latin America, the United Kingdom, and mainland Europe with several ESG experts from corporations and market exchanges. These discussions allowed participants to see how firms can better serve their clients on critical ESG matters, as well as progressively lead their own firms to meet ESG objectives.

The Clients

Whether individual outside lawyers see ESG as in-fashion for the moment, or critical pillars on which they can build the foundations of their businesses, it is clear the client focus and commitment to these matters is palpable, and in many cases, substantial. Most clients have always needed to attract investors, and while that exercise hasn’t changed, the requirements of many of those outside investors now include ESG initiatives, making this front-of-mind for the law firms that serve them.

The panel presenting to the Insights Council demonstrated how ESG has become a critical part of the investor story, with high-growth companies nearing their IPOs, asset managers, and consumer packaged goods companies leading the way. While these entities are further along the maturity curve, there is a clear focus beyond those companies as well, with ESG key performance indicators, executive compensation ESG measures, and proposed regulatory disclosure requirements from the Securities and Exchange Commission (SEC) all looming over any portion of the market that’s not keeping apprised of the quickly evolving space.

When viewing ESG adoption globally, Europe has led the way with restrictions and regulations being enacted sooner, leaving a breadcrumb trail for US regulators and companies to now follow. Along those lines stateside, there has been an uptick in Public Benefits Corporations (PBCs) being formed, which moves from a shareholder-first approach to stakeholder-first (suppliers, investment groups, employees) and public-first focus. Many of the venture capitalists and major investors now have ESG-related requirements as well, such as net-zero emission targets for their portfolio, which make PBCs particularly attractive investments.

There is a fair amount of movement expected from a regulatory standpoint in the US of which law firm clients will also be keeping abreast, such as the creation of the International Sustainability Standards Board (ISSB). The ISSB’s first major action will be a forthcoming report early next year that will lay out baselines for sustainability disclosure standards, advice that the SEC is expected to adopt. Additionally, a close eye should be kept on the Generally Accepted Accounting Principles (GAAP) and the major accounting firms in the months and years ahead as they begin to more clearly define ESG and associated standard practices, which is sure to bring further regulatory measures.

The law firms

Today’s large law firms have embraced ESG to varying degrees. Most have a full appreciation for the significant impact it will have on nearly all clients and the opportunities that come along with that. However, they also admit to facing challenges on such a broad subject, making ESG particularly tricky to navigate from a leadership standpoint. The regulatory trajectory that is expected, however, makes these paramount issues for firms to accept, address, and, with proper strategy and execution, thrive on.

The first question many will ask is can we make ESG work profitable?It probably comes as little surprise that any billings at law firms around ESG today are few, with only a handful of “ESG Experts” even at the largest firms — but that doesn’t mean that others have not beaten them to market. The Big 4 consulting and auditing firms, for example, are already providing services on environmental and governance issues, particularly around supply chain and auditing. And with social issues, there are public relations firms that are beginning to emerge as players in the space.

Regardless of these advances, there is likely much opportunity ahead with which law firms can get involved and become serious forces. For example, the importance of energy and the legal implications of the green transition provides a clear space upon which firms can focus.

The main impetus to find profitable work around ESG is of course to drive firm growth, but it also ensures lawyer buy-in, something that doesn’t always come easy for ESG. In the drive to achieve billable hour goals, the incentive structures of most firms would draw attention away from ESG, not to it, offering a challenge for leadership and a major reason why things aren’t progressing faster in firms. To cover that attention gap, many firms have set out plans to educate their lawyers, with some even mandating that every member of their firm be fluent in ESG principles and kept abreast of developments in the space.

Perhaps the biggest barrier for firms is to be able to focus on ESG because it is extremely broad and encompassing. Should ESG progress to a regulatory and business level, it is tough to think of any aspect of life or a company’s operations that will not be affected by it, either directly or indirectly. Yet, boiling ESG down to its basic components can also help provide greater clarity for firm strategy, gaining wider acceptance across the firm and provide a rallying point that more lawyers may support.

What should firms do next?

Firms should try to be an early adopter. Those firms now positioning themselves to be a leader in the space will undoubtedly set the pace for the market and be tough to slow down once started.

Indeed, firms need to be led with clarity around ESG that can be easily understood and accepted by lawyers. Those lawyers, in turn, need to develop a clear value proposition around how their respective practice connects to ESG so that they can more closely align with clients and nimbly identify related business development opportunities. These things are not turns of the speedboat, rather they are turns of an oil tanker, and they will take time. However, there is a large incentive for firms to succeed: By instilling ESG principles in their own firm, firm leaders can bolster existing practices, develop new practices, and potential class actions. They also can better navigate the pitfalls, such as responding to geo-political challenges, addressing carbon emissions via air travel, and managing clients with a poor pollution or human rights record, to name a few.

The Insights Council meeting allowed participants the opportunity to learn about new challenges and opportunities that are clearly afoot in the legal industry as the implications of ESG unfold in the months and years ahead. More importantly, they could see how firms may be able to capitalize on this development for themselves and for their clients.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Thomson Reuters Institute is owned by Thomson Reuters and operates independently of Reuters News.

Brent is the Director of Strategic Insights & Market Intelligence, overseeing Thomson Reuters’ Strategic Insights businesses, a platform including the legal industry's digital benchmarking program Financial Insights (formerly Peer Monitor), and the deeply respected buy-side research, Market Insights (formerly Acritas Sharplegal). He examines how law firm leaders can leverage Financial Insights and Market Insights data to increase firm profitability through key metrics of law firm financial and operational performance, as well as develop a deeper understanding of their buyers and the markets they serve. In addition to helping firms effectuate positive change through competitive comparisons, Brent has participated as a speaker and featured panelist at many leading industry events across the United States, Canada, United Kingdom, and Australia. Brent joined Peer Monitor in 2011 and previously held positions with Gartner and Wright Medical.