Customers, employees and investors are putting increasing pressure on companies to embrace environmental, social and governance (ESG) initiatives. As businesses take stock of their sustainability efforts to meet new market demands, they may not realize just how much ESG can impact their bottom line and their long-term success. Companies that successfully navigate the world of ESG certifications face incredible opportunity to serve as catalysts for environmental and social responsibility and will be well-positioned to help their clients adopt ESG measures of their own.
ESG certification, however, demands increased scrutiny and accountability to ensure businesses are truly walking the walk. As such, lawyers should be involved in ESG efforts from the outset to guide their companies, clients or their own law firms down the right path.
Understanding Legal Requirements
What separates the ESG efforts of today from corporate social responsibility (CSR) efforts of the past are legal requirements that hold companies to their promises to use their businesses to do good. With ESG certifications such as the B Corporation® certification, businesses must include certain language in their operating and formation documents, providing a legal commitment to operate in sustainable ways and further social and environmental causes.
There are broad-reaching impacts related to how these documents are set up and structured. Having a lawyer involved from the start of ESG certification allows businesses to take a wider look at the core certification process, examining activities, documents and more from a companywide perspective. What’s more, legal counsel must ensure all of a company’s documents meet required ESG framework standards without subjecting the company or its directors and officers to liability and risk. The work doesn’t end there; when exploring ESG solutions, lawyers must remain involved in vendor management and vetting programs to ensure all of a company’s efforts are in line with ESG certification requirements and best practices.
ESG certifications can also include industry-specific requirements. In the accounting industry, for example, firms must include a tax statement relating to tax practitioners. These requirements can be complicated and demand detail from the applicant company or firm, with important legal ramifications.
Clients’ Demand for ESG Efforts Creates Opportunities
Our clients’ own ESG initiatives have begun to put pressure on businesses throughout the supply chain. Law firms and accounting firms have noticed an uptick in requests for ESG-related information in RFPs, and this trend will undoubtedly continue as ESG reporting becomes more mainstream (and potentially required).
Offering transparency to stakeholders and clients requires companies to dig deep into their data, figure out where they stand and report that information. ESG is set to raise the bar in this area, as it will require companies to list more detail about their efforts than ever before. For example, “Does your company recycle?” now becomes a question of what types of materials an organization recycles, and it gives suppliers with offices in LEED-certified buildings that have solid numbers to report on their carbon footprints a competitive advantage.
One of the most exciting things about ESG is its often-unanticipated positive impact on a business’s bottom line and how its customers interact with it. Being environmentally or socially thoughtful helps to improve products and services in a way that can result in cost savings, and clients can even benefit from unintended improvements in risk management. As an example, printing management tools can help with environmental concerns, but by ending the days of documents with confidential information sitting on a printer in a well-traveled area, there’s also a significant benefit to a firm’s compliance with its confidentiality obligations to clients.
Lawyers Can Make an Impact on Governance
Governance is perhaps the least understood piece of the ESG equation, with many frameworks such as B Corporation certification requiring specific language and actions on behalf of companies seeking certification. In addition to including language in organizational documents, good governance efforts must involve lawyers from the start to ensure an organization is meeting this standard from all angles.
Decision-making and policy-making are two parts of good governance that often come into play with ESG efforts. These reflect how a company’s leadership sets an example or even responds to things like disparities in compensation or labor strikes. An insensitive or callous response to these types of issues can put companies in a negative spotlight and potentially a public relations crisis, and it can also put them at risk in terms of ESG certification efforts.
Governance also extends to broad categories, such as how organizations address audits, internal controls and shareholder rights, going beyond corporate structuring or governance on paper to the way an entire organization operates and buys into ESG initiatives.
Whether an organization’s ESG efforts are grassroots, from the bottom up, or influenced from the top down, there must be a meeting in the middle where different perspectives are brought to the table to affect how decisions are made and how a company operates with respect to ESG concerns. As an added benefit, this type of thinking often yields innovation and harmony throughout an organization, another unintended positive consequence of ESG.
How Organizations Can Get Started with ESG
Many business leaders are initially apprehensive about knowing where to start with ESG. Certification processes can seem overwhelming, as they are robust processes that require sound project management and diligence. In reality, these projects are a great fit to be led by legal teams.
A common misconception about ESG certifications is that a company must be selling goods and services that are “green” or explicitly further a social goal to successfully achieve certification. In fact, ESG is a good fit for every organization, and the coming wave of regulations and societal pressure point to ESG as an imperative. Lawyers with broad, in-depth knowledge of an organization can help identify parts of a business’s operations that are a good fit for ESG programs.
Businesses should also know that a successful ESG journey won’t require them to change everything about their products or services, or how they run their company, all at once. Taking incremental steps can help organizations start on the right path, and they often continue to discover opportunities to streamline operations, keep clients happy and add efficiencies that drive revenue and cost savings.
Many companies are interested in how their suppliers are meeting ESG certifications, and often this can spur opportunities for a company to help clients go through the certification process themselves. In the B Corporation community, part of furthering the promise of being a B Corporation is helping other organizations do the same, ensuring they benefit from the shared expertise of others who have gone down this road before. Many certifications also require a periodic evaluation or even recertification, ensuring organizations aren’t resting on their laurels and that they continue to advance ESG efforts and seek continuous improvement.
While the ESG process can be daunting and challenging, it’s important to note that it is incredibly meaningful. Lawyers can help companies take ESG to heart, create opportunities to connect with the issues their clients, people and communities care about most, and hold themselves accountable to do better.