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How legal departments are responding to ESG challenges

Lynsey Poulton

18 May 2021

Image Credit: REUTERS/Gleb Granich

Earlier this month I chaired a meeting of the Practical Law In-house Consultation Board focusing on environmental, social and governance reporting (ESG). Across the spectrum of industry sector and organisation size, our members agreed that the various and fast-paced developments in this area presented multiple challenges for in-house teams. 

The first challenge was the sheer complexity of understanding specific new regulatory initiatives that cross over multiple areas of expertise from environmental law to company reporting and finance. In addition, work in this area often requires complex fact-gathering (along with a certain amount of soul-searching) on the part of individual organisations to understand their current situation and the right response.

Senior people from multiple disciplines across the organisation have to pull together these multiple strands, layering wider commercial pressures onto legal compliance. The organisation as a whole has to find a coherent corporate position, enabling management to set the right tone from the top despite a constantly-shifting backdrop.

Make ‘the indigestible digestible’

There was consensus that the best way to approach ESG in today’s climate is to avoid the overwhelm and look for support that makes ‘the indigestible, digestible’.

Our members agreed that you have to break ESG down into components and sub-components. Engage the right people to carry out a true risk assessment of where your organisation is at today and come up with an achievable action plan that can be implemented over time. A key element of this plan is obtaining early executive and board support and buy-in and demonstrable commitments such as an executive/board sponsor and the general introduction of ESG objectives across this group.

Standard contractual clauses come in handy

A number of members raised the development and inclusion of ESG-focused standard contractual clauses in standard contracts and internal contract playbooks as a useful practical tool. Such clauses aim to protect the contracting organisation in relation to specific risks as well as to demonstrate focus on the relevance of ESG and the desire to drive this through the supply chain.

In relation to climate change, we discussed the use of The Chancery Lane Project’s (TCLP) 21 new clauses for its Climate Contract Playbook; these being free to use, accessible on TCLP’s website and searchable using key terms or by practice areas and sectors.

While being realistic about the challenges of repapering existing relationships, our members thought standard clauses were a useful way to put new relationships onto a secure footing and provide a degree of future-proofing.

Data-driven approaches have multiple benefits

Many members were focused on the value of the collection, review and reporting of ESG metrics. While metrics are critical to help build understanding around what the organisation is currently doing, they also have a key role in setting direction and in some situations can help support public accountability and visibility.

A number of members were struck by the commercial value that a data-driven approach in this area had brought to their organisations, and had identified potential upsides in using this data to support commercial rationalisation efforts and wider cost-saving.

Future-proofing through culture and tone from the top

Another observation that resonated with members related to how some organisations are trying to keep ahead of the regulatory curve: by aligning with voluntary ESG measures that go beyond strict regulatory compliance. Some organisations have developed their own standards; others are looking to identify relevant externally developed voluntary measures.

For global organisations, there has long been a school of thought that it makes sense to benchmark compliance with the ‘high water mark’ requirements in the most highly-regulated jurisdiction in which the organisation operates. There seems now to be the possibility of a wider mainstream shift beyond compliance (in both strategy and culture) from not just ‘doing business’ but ‘doing business in the right way’.

Our members highlighted a number of specific examples of actions they have observed organisations taking to demonstrate a strong top-level commitment to ESG including:

  • Objectives – the introduction of ESG objectives for senior leaders’ bonus.
  • Appointments – the appointments of a head of ESG and a chief sustainability officer.
  • Committees – the introduction of an ESG committee.
  • Policy and strategic review through an ESG lens – the introduction of a stricter internal travel policy to reduce unnecessary business travel and make that taken as eco-friendly as possible.

This commitment of board and executive time and focus talks volumes to where ESG sits on the corporate agenda.

Written by our Practical Law experts. To see the original article, on the Practical Law In-house blog, please click here (free access).
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