ESG issues drive demand for legal expertise

27-10-2021
By: Remco Feuth

It is undeniable reality that a corporation is a legal structure designed to bring stakeholders (employees, investors, customers and suppliers) and the company together to achieve business goals. Corporations are autonomous in their actions and "live" as self-contained legal entities, independent of those who work and finance it. Legal personality is both a legal concept and a lived reality.

In short, the traditional economic view of a corporation is that it consists of a series of contracts, where the corporation is owned by shareholders with the goal of maximizing shareholder value. The famous economist Milton Friedman once said, loosely translated, "The sole purpose of a business is to make as much money as possible." (from: Capitalism and Freedom, 1962). This idea has greatly influenced thinking about what companies actually exist for. That executives until then also considered the interests of other stakeholders (consumers, employees, suppliers, society, the environment) in their decisions was increasingly abandoned. (Financial) globalism, with less and less regulation, ensured that everything had to be more efficient and profitable, at the expense of the then good relations between management and stakeholders. Fortunately, this picture of the role of companies in society is tilting.

For example, at the 50th anniversary of the World Economic Forum (WEF) in January 2020, Klaus Schwab declared, "Finally, stakeholder capitalism has become or is becoming mainstream." The idea that organizations would no longer pursue profit above all else but instead embrace a broader social purpose is gaining traction. Issues around environmental, social and governance (ESG: Environmental, Social and Governance) are higher on the agenda of corporate boards and managements. ESG is also now accepted as a central part of legal, business and financial risk assessment. Companies and financial institutions can no longer ignore the importance of ESG's impact on profitability and therefore need legal advice when assessing ESG risks.

Before the world was rudely disrupted by COVID-19 and its aftermath, the business community, as mentioned, was already at a turning point regarding its role in society. With more focus on social justice and a loud and widespread call for companies to be more considerate of all stakeholders.

Corporations and the profits they generate provide many benefits to society an sich, including jobs and training, revenue for suppliers, R&D investment for innovation, and so on. They all provide potential social and economic returns to individuals and businesses beyond the walls of the company. Through ESG, this can be done even more responsibly with an eye to the future. For the planet and generations to come, but especially for companies themselves. The corona pandemic is a catalyst for accelerated change. The links between ESG, corporate strategy and risk have never been clearer than during the corona pandemic, when companies had to move quickly and respond to critical risks that were not previously thought likely.

ESG factors are becoming an important determinant of financial strength. Recent research shows that the top 20 percent of ESG-rated stocks outperformed generic index funds by more than 5 percentage points during a recent period of volatility. Financial (spring) power is certainly not the only advantage. There are plenty of opportunities for brand differentiation, attracting and retaining top talent, increased innovation, operational efficiency and the ability to attract capital and increase market valuation. Companies that have already built ESG strategies, metrics and high-quality information into their business models are likely to be well positioned to take advantage of those opportunities and create long-term value post-crisis. Consequently, it is increasingly recognized that companies that meet their ESG commitments tend to outperform their competitors.

Law firms and legal departments are embracing ESG, with or without pressure from the financial sector for ESG investments, because they see the potential and can make a significant contribution to meeting ESG goals. For example, lawyers are working with clients to include a wide range of environmental clauses in contracts. In construction projects, for example, an increasingly standard requirement for contractors is to require an energy performance certificate (EPC) of at least an "A" for buildings to demonstrate energy efficiency. Lawyers are also busy with corporate ESG disclosures, especially as regulators hunt for misleading claims that indicate "greenwashing. That carries risks ranging from lawsuits to reputational damage.

We are on the eve, or even well into it, of major (social) changes and interrelationships. Lawyers are in pole position to make their contribution to these.