ESG and changing paths for law firms

Environmental, social, and governance (ESG) is becoming more embedded in business culture across all sectors. The latest annual report from Marsh and Legal Business, Walking the Talk, reflects this trend in the legal profession and provides data showing the growth of ESG activity. As activity in this space increases, it is useful to periodically reflect on the definition and purpose of ESG. This ensures that organisations do not lose sight of the overall objectives of ESG, while developing layers of data gathering and governance across their operations.

“Environmental, social, and governance (ESG) is increasingly seen as the measure of the sustainability and resilience of an organisation. It is not only focussed on climate change and environmental performance, but also the ethical aspects of an organisations governance and how that impacts upon staff and wider society.”

Marsh Advisory (2021)

In its growing influence within business, ESG activity typically focusses on the ‘environmental’ pillar, which remains topical and attached to national and international priorities in relation to climate change. The 2023 Walking the Talk report reveals several interesting concerns, particularly around raising awareness of ESG and setting appropriate targets for improvement. The former has remained at the forefront of those firms contributing to the 2023 report, while setting targets has escalated in priority in the past twelve months. Interestingly, the top priority in the 2023 survey did not change from 2022 results: ‘Re-assessing risk due to changes in the external business environment’.

Beyond the legal profession, reputational risk in relation to ESG is receiving more attention. Businesses are increasingly concerned with how their behaviour is perceived externally, particularly by stakeholders and parties that may provide access to finance and/or insurance. Also of concern are risks posed by clients or supply chain partners that could, by association, have a negative impact upon an organisation’s ESG position. ESG risks of this nature can elevate and accelerate concerns to the top of an organisation’s hierarchy.

Reputational risk in an ESG context has an internal and an external face. All businesses will have the opportunity to establish internal processes to manage risks that could lead to reputational damage. Cyber risk and data protection remain high on the list of concerns for many clients, which is likely to continue as the sophistication of digital crime evolves. The ability of an organisation to protect its digital content is a key component for demonstrating its resilience and sustainability.

Increasing ESG activity across all sectors will push the legal profession to actively align with client expectations and corporate ESG strategy. Clients are unlikely to select business and/or advisory partners that could negatively impact their own ESG position or provide opportunity for criticism and possible reputational damage. How organisations exert influence across their value chain is often an important metric when assessing each firm’s ESG maturity. The intention here is to cause a ripple effect across industries and their value chains, which supports the uptake of ESG sentiments as widely as possible.

Similarly, legal firms have stated that they increasingly look at existing and new clients through an ESG lens. Among respondents to the 2023 survey, 66% said that they already assess existing or potential clients on their ESG policies and how their activity could affect the legal partner. A further 22% of respondents stated that, although they currently do not assess clients in this way, it is something they would consider in the future.

These statistics demonstrate an increasing awareness of reputational risk, as well as possible negative impacts via association. Conversely, 12% of respondents stated that they currently do not, and are not planning to, assess clients and prospects in this way. The survey also highlighted that although 66% of respondents already assess clients on ESG policies, only 22% said that these considerations led to the firm refusing instructions or altering its approach to new client acceptance.

These findings may appear contradictory. However, they highlight the dynamic perspective within legal engagements in relation to the emphasis placed on ESG. The client engagement is clearly being influenced by ESG; however, firms are not currently refusing instruction based on ESG performance.

Consequently, legal firms not only should develop their own ESG activity, demonstrating progress and reporting regularly, but they should also assess the possible negative impact by association that could come from clients. Commercial considerations are also likely to be a factor to consider and balancing these issues will cause concern for legal firms. A well-defined ESG strategy, with clear integration across governance procedures, will help address the balance associated with possible reputational risk. However, given changing regulatory and societal demands, how this trend develops bears watching.