The increasing importance of environmental and social governance (ESG) means that it has become a key consideration for the legal sector. But keeping up to date with this evolving subject is not always easy.
In order to shed some light on the current situation, Jake Reynolds, head of client sustainability and environment at Freshfields Bruckhaus Deringer, talks to The Lawyer about the key ESG issues of 2023 and discusses how lawyers will need to adapt to address them.
What are the key ESG considerations that in-house lawyers must keep in mind?
Boards are recognising that ESG is both a legal and strategic issue. From litigation risk on greenwashing claims and wider, compliance questions around human rights and in supply chains, and governance considerations across the board, in-house legal teams have a lot to get their teeth into. In fact, with ESG issues potentially relevant to every part of a company’s business, counsel are increasingly regarded as a critical voice in the solutions. Managing the risk horizon and working with wider business groups to ensure ESG is embedded throughout the business should be a priority for legal teams.
What three ESG themes will stand out in 2023?
- The quest for net zero – and the legal ramifications – will be a major theme in 2023. We are not on track to limit warming in line with the science, and as a result, the transition is about to pick up pace, with transparency, accountability and disclosure – and above all, action – being key. Freshfields has just announced its science-based targets, and I expect to see a wave of similar commitments across the business community this year. The flip-side of net zero, carbon offsetting, will also rise up the agenda and counsels will wish to stay closely involved to ensure carbon credits are real, durable, correctly reported and absent of greenwashing.
- Following “the biodiversity COP” in Montreal in December, there will also be increased attention on how business impacts – and is dependent on – nature, including the relationship with climate change. Supply chains will need to look carefully at their relationship with biodiversity to avoid reputational and operational risks (eg supply interruption or productivity decline). The new EU law to fight deforestation will add impetus to this important new responsibility.
- On the ‘S’ of ESG, inequalities in all their forms will fall under the spotlight too. The fight for living wages and its contrast with executive pay, plus a continued focus on D&I and working conditions. Scrutiny will not stop at the company itself but extend both directions through value chains, including the social impacts of products (an obvious example being tech). There will be less tolerance for human rights violations in supply chains than we have seen to date, with laws in France and Germany targeting this area specifically.
How is tackling the ESG agenda different this year from previous years?
ESG grew up in 2022. This was partly driven by the discovery of renewable energy as a necessary response to energy insecurity, and partly subdued by an anti-ESG backlash in the US, it emerged in 2023 fatigued, but basically sound. I hope to see more effective partnerships between governments, companies and financial institutions born out of the knowledge that the economy cannot flourish unless it resets its relationship with the planet. The answer is a rapid transition to economic activities that restore the natural world in a fair and beneficial way for people, from carbon pricing to zero emission vehicles, land restoration to nature markets. These and other transitions will continue to land onto boardroom agendas during 2023.
The concept of “just transition” will also feature more prominently in 2023. This is the idea that gains in one direction, such as a reduction in environmental pollution, should be painstakingly managed to avoid losses in another, such as jobs. After all, both pollution and jobs are essential features of sustainable development. Regulators and policymakers will likely bear this in mind in their excitement about the squeaky new clean technologies of the future, in also ensuring they create jobs – preferably in areas that are losing them.
Collaboration has been a hallmark of tackling ESG issues. Similar to other industry collaborations, such activity for ESG purposes requires a careful analysis to assure no anticompetition laws have been violated. Most notably in the past six months, certain industry climate alliances have been alleged to violate competition laws. While this backlash has gained traction in certain jurisdictions, in others, competition authorities are reviewing afresh their approaches to merger approvals to assure against “green killer” deals and to promote new climate-related technologies. We expect a number of new regulations to come forth from authorities this year to help clarify the boundaries around ESG cooperation.
How are law firms evolving to meet ESG needs?
Far from being pushed to the periphery, business is likely to depend even further on law firms to advise on ESG legal, policy and regulatory issues in 2023. In my view, as the issues become more ubiquitous at the boardroom level – science-based targets, supply chain working conditions, greenwashing – we may no longer need to lump them together as ESG. That will be a good thing as labels create factions, and factions create backlashes. Better to develop familiarity with the underlying issues – the things that make a difference – than hide behind nebulous labels.
Transition is a dynamic, urgent and competitive issue for our clients, producing winners and losers. Legal services of all kinds can play a vital role in supporting clients on their journey through transition, whether this is through M&A, corporate strategy, disclosure or litigation. The opportunity to see new possibilities for our clients, course-correct when things go wrong and show how transition can be achieved under current and future regulation, can be a new North Star for legal services. Firms that achieve this can add important value to clients that are confused by mixed signals from governments and pressure from stakeholders, welcoming young people into their firms for whom this is a career objective. My appointment in Freshfields is intended to seize this opportunity.
