Fads come and fads go in business law — remember the hysteria around implementation of the EU’s general data protection rules? The latest involves three letters: ESG.
This is not a fashionable party drug sweeping revitalised nightclubs, but an abbreviation for the term “environment, social and governance”. Anodyne it may seem, but some claim that it presents a danger to law firms’ corporate clients and could be the next mis-selling scandal.
Broadly, ESG is all about creating standards for ethical corporate behaviour. What could go wrong — apart from sniping about woke-washing?
Potentially, quite a lot, some lawyers argue. “Against the backdrop of increasing commercial, regulatory and stakeholder focus on businesses’ ESG activities, and increasing ESG disclosure requirements the gap between what corporates say and what corporates do on ESG is likely to be a major area of legal and reputational risk,” says Heather Gagen, a litigation partner at the City firm Travers Smith.
Put bluntly, Gagen says, “there are analogies that can be drawn with some of the financial mis-selling cases”.
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A report published this week demonstrates just how widespread ESG has become in the corporate world. Researchers for the recruitment consultancy Robert Walters found that a record number of vacancies this year in the UK involved ESG. More than 35,000 jobs have been created over the past 12 months, they said. Staff in ESG-related roles increased by 7 per cent to more than 400,000. That is more than twice the number of people employed in UK car manufacturing.
A survey by Ansarada, a corporate data analytics company, found that 58 per cent of executives said that ESG would become a “significantly more important” factor for parties as they contemplate mergers and acquisitions.
City law firms are even having to take lectures from accountants on the concept. In October, Kate Wolstenholme, PwC’s law firms specialist, said that legal practices would soon be measured by how they fare on “delivering on ESG promises including diversity and inclusion targets, climate related goals, and social responsibility”.
But why such dramatic warnings about the perils of three little letters that on their face seem well intentioned and at least harmless?
Lawyers point out that litigation is already emerging around ESG that involves novel and ambitious arguments over the boundaries of liability. And lawyers predict that complex questions around the extent of corporate legal accountability regarding ESG risks will become more frequent. Doug Bryden, another partner at Travers Smith, explains that “the ingredients are certainly there for tangible legal risks”, pointing out that allegations of corporate “greenwashing” or the overstating of ESG credentials are already being made, with consumers and regulators taking notice. He points to proposals in the UK and the EU for greater disclosure regulations and says that “dealing with ESG risks arising in a company’s value chain feels very much like a paradigm shift as opposed to a passing fad”.
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Some lawyers argue that ESG should not be dismissed as vapid virtue-signalling that will ultimately cause years of litigation when investors and consumers allege that companies have failed to live up to stated commitments that were always window-dressing.
Jason McCue from McCue Jury & Partners says there is “serious value in firms and corporations engaging in ESG activities, but only if it is done genuinely”. He acknowledges that “an increasing number of companies pay lip service to ESG while their practices remain resolutely tunnel-visioned towards commercial returns”. But he adds that “as governments, investors and the public become more aware of the risks of violating established ESG standards, companies and law firms who are committed to upholding them may well see this commitment rewarded. Some corporations will be engaging in ESG-washing but it’s for law and practice to ensure that they actually uphold their newly professed principles. Such will eventually drive behavioural change for the better and see real ESG principles become established over time.”
Chris Poole, the managing director of Robert Walters in the UK, says the fundamental reason that ESG has become such a buzz-phrase at corporations is market perception. Businesses that fail to meet the ESG targets, he says, “should expect to see a knock-on impact on their reputation. As a workforce strategy, ESG has become a competitive advantage in attracting and retaining talent; numerous studies have shown that, when weighing up potential employers, millennials are hugely influenced by how a business responds to and tackles social issues.”
Gagen says the legal landscape around ESG is developing quickly and that “its contours remain uncertain — including the extent of individual corporate accountability and liability”.
She foresees a “fascinating few years” ahead as “businesses, regulators and the courts work out what a reasonable balance of risk and reward should be in relation to ESG, and how positive ESG impacts can effectively be achieved, demonstrated and sustained”.
