27 June 2018
“Data protection, business ethics, bribery and corruption, product safety and liability, labor practices, and environmental stewardship are just some of the many ESG factors where lawyers have a central role…”
In this third in a series pieces on the increasing use of ESG tools in the legal and consulting marketplace, we hear from Alan Kao PhD and Sue Kemball-Cook PhD, from the global consultancy Ramboll. Alan is Ramboll’s Global Service Line Leader for Compliance, Strategy, and Transaction Services, and Sue is a Principal with the firm. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Please tell us about Ramboll, and what is driving your growth?
Ramboll is an international engineering, environment and health, and management consultancy. We partner with our clients to create sustainable societies where people and nature flourish. With our unique combination of technical excellence and socio-economic insights, we deliver enduring structures, resource-efficient solutions and socially cohesive communities for today and tomorrow. Through our network of 300 offices in 35 countries, we provide our clients with the very best in world-class solutions and help them contribute to sustainable development.
Regarding growth – Sustainability is not only in Ramboll’s DNA, it is also a strategic building block and a central part of our five-year strategic plan. Sustainability is a key element of each market around which Ramboll’s services are focused (including Environment and Health, Buildings, Transport, Energy, and Management Consulting). From supporting livable cities to designing healthy buildings and carbon-neutral campuses to siting and engineering the foundations and infrastructure for offshore wind, we help our clients improve the physical environment, strengthen societal cohesion and development, and minimize the negative impacts and environmental degradation related to modern life.
How is the definition of “due diligence” changing with commercial transactions?
We’ve seen the scope and focus of due diligence reviews evolve over the past 25 years. For some time, our clients paid attention primarily to environmental contamination issues – for example, whether the current or past site operations had contaminated soil or groundwater. This made sense from the standpoint of managing liability risk alone.
Then clients became increasingly aware that operational liabilities could be as important or even more important than liabilities connected with physical assets. So they began to pay attention to potential liabilities associated with environmental compliance. But this attention, too, was focused on managing liability risks from tangible assets that can be assigned dollar values and accounted for in the investment decision-making process.
In recent years, we’ve observed a fast-moving trend for the industry to focus on Environmental, Social and Governance (ESG) due diligence. ESG issues are rapidly becoming a key element of investment decision making for at least three reasons:
- A major indicator of risk, ESG goes beyond traditional indicators by considering the management of risks related to both tangible and intangible assets.
- Some leading investors see ESG as a potential indicator of a company’s ability to generate new competitive opportunities.
- Investors are realizing that effective management of ESG issues is an indicator of overall strong management capability, which makes a company a more attractive investment.
All of this suggests that we need a deeper commitment to, and integration of, ESG into the investment decision-making process, particularly at the due diligence stage.
How is the legal community adapting?
As more and more private equity (PE) firms consider ESG factors when evaluating risks and opportunities of potential investments and their portfolio companies, law firms must be prepared to offer their counsel as their clients develop their sustainability strategies. Law firms will be called upon to advise their clients on management of climate-related financial disclosures in the context of different reporting frameworks with varying guidelines on materiality and disclosure of non-financial information.
Are there different types of legal use cases or counsel emerging from the climate risk context?
Counsel on climate risk is becoming increasingly important to our clients engaged in infrastructure design, stewardship of legacy contaminated sites, due diligence and asset management. There is a growing recognition that in a changing climate, management and investment decisions based solely on past data and trends can underestimate risk and increase exposure to liability. For example, a storm water management system designed using rainfall data from the past may not be adequate for the intense rainfall that climate change is triggering. Due diligence of long-lived coastal facilities must evaluate vulnerability to rising sea levels.
We are seeing an increasing demand for forward-looking information that identifies potential climate-related impacts on assets and operations as well as the associated costs. Through quantitative risk assessments using information from computer modeling of the earth’s future climate, we can identify location-specific future physical risks and vulnerabilities. Climate risk evaluation results can then be used to identify adaptation measures that build asset resilience to both present-day severe weather and future climate risks. Cost-benefit analysis allows our clients to compare the merits of a range of adaptation measures.
Climate change can create opportunities as well as risks, as crop growing patterns shift and polar regions become more accessible to commerce. A proactive response to climate change can provide a competitive advantage as businesses find ways to take advantage of opportunities from the changing climate and to make their value chains more resilient to shocks from extreme weather.
Is working with the legal community an important part of Ramboll’s growth trajectory?
The legal sector has always been an important part of Ramboll’s client base. Just as much litigation arose – and continues to arise – around legacy environmental contamination and product safety liability, we expect the liabilities associated with the effects of climate change on physical assets to contribute to disputes and litigation. In this emerging space, we shall continue to rely on sound technical and scientific underpinnings – including state-of-the-art modeling – to support attorneys involved in these matters. The more uncertainty there is around an issue, the more fertile the ground is for litigation, and the more scientific and technical analysis will be brought to bear. This is a space in which our experts have traditionally provided valuable support and even broken new ground in many instances.
Beyond the litigation arena, we expect to continue to work with lawyers who specialize in real estate and project finance for lenders and developers. As ESG issues and climate change factor more and more into deals and development scenarios, these lawyers and their clients will rely increasingly on the kind of expert counsel that Ramboll can bring to the table.
Is ESG or sustainability performance more broadly becoming a new tool for lawyers?
Data protection, business ethics, bribery and corruption, product safety and liability, labor practices, and environmental stewardship are just some of the many ESG factors where lawyers have a central role in counseling companies to protect them from reputational risk. Individually, many of these have been practices for lawyers in the past. By looking at these issues collectively under the ESG umbrella, lawyers can help clients focus their overall approach to ESG management to protect the value of their companies.
How does the new wave of sustainability-related regulation, e.g. in the EU and UK, also relevant to risk?
Attorneys and businesses must be aware of a number of new sustainability-related directives and standards that have been published in the UK and EU in the last few years. Gender equality (UK Gender Pay Gap Reporting), labor standards (UK Modern Slavery Act), and ESG reporting (EU Non-Financial Reporting Directive) are among the issues addressed. Companies that do not meet these standards face potential reputational risks.
How about opportunity?
Other recent energy efficiency directives and standards (eg, EU Energy Efficiency Directive, UK Minimum Energy Efficiency Standards) could represent opportunities for companies to reduce operating costs. Recent studies have also shown that managing ESG issues well can result in increased profit and productivity, as well as reduced financial risk for companies. For example, results from IO Sustainability’s research, Project ROI, demonstrate that ESG, when managed well, tangibly enhances financial performance through an increase in sales of as much as 20%, a reduction in employee turnover of 50%, and an increase in share price of up to 6%. These studies are providing business leaders with quantitative answers to the often-asked questions regarding the ROI of sustainability and ESG.
How will lawyers use sustainability or ESG-related data and analytics 10 years from now?
The UN’s Sustainable Development Goals (SDGs) provide a framework for defining sustainability in the coming decade. Large corporations have been quick to embrace them and to identify ways they directly or indirectly contribute to each of the 17 SDGs and the associated targets and indicators. PE firms are increasingly using the SDGs as a way to identify value-creation opportunities in the companies they are investing in, and tools and guidance are becoming more widely available to help them identify these opportunities. We foresee lawyers also becoming increasingly involved in these efforts, providing counsel on risks that are highlighted by the issues the SDGs are intended to address, as well as helping their clients identify metrics for measuring a company’s progress toward meeting these goals.