Lawyers have not been typically seen as being at the forefront of the sustainability transition. Indeed, they were often characterised as the “no”-brigade acting as a bottleneck to change companies wanted to enact, something I experienced myself in my previous life as a corporate sustainability advisor. This was understandable. After all, in-house lawyers are the guardians of corporate risk and in that role naturally resistant to change which can lead to uncertain outcomes.
But recent evidence shows that things are changing.
At Freshfields we have noticed how our clients are increasingly turning to us for advice on how to manage sustainability, not just to better understand potential risks, but also to ensure that an understanding of the legal implications of sustainability can support the development of commercial opportunities. In a recent FT article, associate editor Pilita Clark references a number of GCs who are at the forefront of the sustainability transition within their organisations.
What has changed?
Simply put, as sustainability issues are becoming increasingly strategic and driving a company’s profitability, the topic has escaped the CSR annex and moved into the corporate boardroom and become integrated in all the main corporate functions. The role of the sustainability specialist has shifted from one where they developed a strategy that very few paid attention, to one where they provide thoughtful and strategic advice to all business functions, including in-house legal, on how sustainability is material to their function. And that helps grow these functions’ understanding of the topic and ability to contribute to the corporate strategy.
Indeed, the role of lawyers in supporting corporate sustainability objectives has become more strategic for four main reasons:
1. Sustainability regulation
Over the last few years, sustainability regulation has evolved from focusing purely on operational environmental issues, such as end-of-pipe legislation, to becoming more critical to a company’s strategy and business model. Examples include:
- the growth of climate laws and policies, numbering over 2,000 according to the latest research by the London School of Economics. Many of these place restrictions on current and future CO2 emissions, forcing companies to consider how they design, source, make, distribute and sell products. For instance, in this week’s State of the European Union address, EU Commission President Ursula von der Leyen introduced a new target to reduce emissions by at least 55% by 2030.
- the changing nature of human rights law, moving from voluntary principles such as the UN Guiding Principles on Business and Human Rights towards hard legal standards such as the human rights due diligence laws that have become ubiquitous in many OECD countries. This recent blog by Freshfields colleague Marlen Vesper-Gräske explores the potential for an EU-wide human rights due diligence law.
Freshfields, in partnership with the UN Global Compact recently released a detailed analysis of the topic from a legal perspective in its report: Business and Human Rights - Navigating the legal landscape.
2. Sustainability litigation
While litigation on sustainability topics has been around for decades, the last few years has seen a surge of new cases, most of these relating to the enforcement of climate change legislation. According to LSE, there are close to 400 climate litigation cases globally, which has led to many companies seeking to understand their exposure to climate litigation risk. For more information on this evolving topic see Freshfields’ in-depth analysis of Legal Risk and Climate Change.
3. Sustainability in transactions
As companies adjust their strategies to adapt to the new reality, they are also reviewing their business portfolios and acquisition strategies to minimise long-term risk. This has two consequences:
- On the one hand companies will review the composition of their corporate portfolios to ensure they capture sustainability opportunities and manage sustainability risks. A good example of this is BP’s recent commitment to low-carbon energy which promises to deliver ‘sustainable value with increasing investment in low carbon and non-oil and gas’. This increase in low-carbon investments will also result in divestment of high-carbon assets.
- On the other hand, companies will also want to ensure that any future investment or divestment is free from sustainability risks. For instance, Freshfields human rights due diligence toolkit helps clients assess human rights risk in an acquisition.
Investor interest in corporate governance
As investors become more aware of the material nature of sustainability to the assets they invest in, for many of the reasons outlined above, they are also paying close attention to the ‘G’ in ESG: corporate governance. Issues of particular interest include:
- Disclosure, such as the investor-led Task Force on Climate-related Financial Disclosures which is gradually becoming the de-facto disclosure standard for climate disclosures.
- Diversity in board composition, ensuring that corporate boards are an accurate reflection of the gender and ethnic balance of their business. For instance, a recent blog by our Sillicon Valley colleagues Doru Gavril, Pam Marcogliese, Sarah Solum, and Maj Vaseghi explores the impact of California legislature’s mandatory board diversity requirements.
- Executive pay to address the growing concerns around inequality between executive pay and average salaries in their organisations and to ensure that executive compensation reflects corporate performance.
Out of the comfort zone, into the zone
As a result GCs are increasingly being included in these strategic conversations even if the remit is not always legal in the traditional sense. As Ursula Wynhoven, CLO and chief of governance and social sustainability at the UN Global Compact put it in a Legal 500 interview, ‘in-house counsel are being increasingly called upon to advise not just on what the law is, but on what is acceptable, which is increasingly informed by principles such as human rights, labour, environment and anti-corruption’.
While sustainability was until recently unfamiliar territory for most in-house lawyers, those that have taken on this challenge are now finding themselves at the heart of their organizations’ strategic priorities.
That is a very good thing for all involved.