September 16, 2021

Volume XI, Number 259

Advertisement

September 15, 2021

Subscribe to Latest Legal News and Analysis

September 14, 2021

Subscribe to Latest Legal News and Analysis

September 13, 2021

Subscribe to Latest Legal News and Analysis
Advertisement

The ESG Movement: Why All Companies Need to Care

As America emerges from the COVID-19 pandemic, many people are grateful that they have jobs to do and homes to live in, knowing that many were and are not so fortunate. The pandemic prompted a rapid, large-scale change in the way people live and work. It shook businesses and individuals out of their inertia – and they discovered new ways of doing things. That momentum can lead to permanent, positive, and sustainable improvements.

“There have been good things we’ve learned from the pandemic and challenging things we’re still understanding,” Cone said. “The jury is still out on what society will be post-pandemic – and we are the jury. Will the lessons of the pandemic drive us to a better tomorrow?”

The pandemic showed that corporations could help address society’s most pressing challenges and help “build back better.” The current focus on ESG is, in part, a reflection of these concepts. 

The Rise of the ESG Movement

Fifty years ago, famed economist Milton Friedman declared that “The social responsibility of business is to increase its profits.” But pursuing shareholder returns with no regard for other concerns may not be in the long-term best interests of a company or its shareholders. Put simply: companies cannot survive in societies that are failing. So nearly all companies now recognize that societal impact must be part of their business strategy.

“But for too many companies, societal impact and shareholder returns are pursued separately; this is no longer sufficient – if it ever was,” Cone said. 

ESG offers a more holistic approach by considering the entirety of a business’s impact on society. The pursuit of societal impact is integral to strategy and value creation, rather than separate functions.

“The values of a company are inextricably linked to the value of a company,” Cone said. And as core business decisions, issues surrounding social impact and responsibility belong with the board, not a side committee of employee volunteers, and should be part of the regular board agenda.

As early as 2010, the ESG topic was discussed by a group of CEOs urging businesses to take a longer-term view. In August 2019, the Business Roundtable, a group of CEOs from nearly 200 major U.S. corporations, issued a statement redefining the purpose of a corporation. This new definition encompasses investing in employees, delivering value to customers, dealing ethically with suppliers, and supporting outside communities as core business goals, in addition to driving profits and maximizing shareholder value.

Even the 2020 theme of the World Economic Forum in Switzerland reflected this broader purpose, as the meeting dealt with “Stakeholders for a Cohesive and Sustainable World.”

Also, Blackrock’s Larry Fink says climate risk is a crucial concern for companies. Fink’s influential 2021 Annual Letter to CEOs says, “I believe that the pandemic has presented such an existential crisis – such a stark reminder of our fragility – that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives.”

From Transactional to Transformational – The Evolution of ESG

“The pandemic raised awareness of the interconnectivity of us all,” Cone said. Decisions made and actions taken by a company or an individual impact the well-being of others – and that must be a part of the equation, she said. 

Even as life begins to return to normal, employees, customers, and other stakeholders increasingly expect companies to take a stand on significant issues. Issuing a statement, while important, is just the first step. Stakeholders expect companies to make systemic changes in how business is conducted and corporate decisions are made. 

Cone identifies three stages of social impact programs. The first, which she calls Transactional, is based on random good deeds with no real driving purpose or goal. The company may invest money in these programs, but rarely time or talent. The second stage is the Transitional, in which a company adds focus to its social investment and incorporates time and talent contributions. The third stage is Transformational, as companies use their highest and best skills and enter into partnerships to achieve outcomes that make a difference. 

Transformational impact is core to the business, consistent with its larger purpose and collaborative in nature, Cone said. For example, Cisco Canada piloted a program to use their video conferencing technology to connect indigenous community schools in northern Canada to educational, artistic, and cultural resources. The program has been wildly successful, and more communities are seeking to participate.

How Lawyers Can Drive ESG

“Lawyers are in a remarkable position to encourage all things ESG and help manage the risks associated with it,” Cone said. Attorneys touch every industry globally and are often considered trusted advisors, either within an organization or as outside counsel, so they are well-positioned to be leaders in driving a company’s ESG efforts.

Claudia Toussaint, General Counsel and Chief Sustainability Officer of Xylem, recently told Corporate Counsel magazine that ESG initiatives are “a natural accompaniment to the evolution of the general counsel.”

Like most business activities, there is legal risk associated with ESG. Whether in-house or outside counsel, lawyers are needed to ensure that actions comply with relevant law and minimizes the company’s exposure to liability. Contemporary ESG-related legal concerns include anti-discrimination efforts, data privacy, human rights, supply chain, regulatory requirements related to climate change, and FTC rules regarding “green” representations.

Standard Chartered Senior Legal Counsel Layla El-Wafi writes in a 2021 ACC Docket article, “In-house lawyers can consider their role of mainstreaming ESG in business through a multifaceted lens, taking a wider view of their role in advising their client to remain compliant with laws and policies. They can and should be part of setting the ESG strategy and subsequent steps to operationalize responsible business conduct.” The same advice can apply to outside counsel acting as a trusted business advisor to a client.

ESG Tools, Metrics, and Goals

As companies become more deliberate about ESG, it is increasingly essential for organizations to be on the same page regarding how they discuss these issues. Enter the U.N. Global Goals for Sustainable Development. This program aims to expand healthcare and education, eliminate extreme poverty, promote equality for women, provide sustainable power and clean water for all, and protect the environment, among other high-level goals.

The U.N. Global Goals have quickly become the common global language when addressing society’s most pressing problems, Cone said. The assumption is that participating businesses will work with other companies that share these goals.

Identifying important goals is one step – measuring a company’s progress is another. Various metrics-based reporting tools (e.g., SASB, GRI, CDP, TCFD) help gauge ESG efforts, but no one knows which tool or tools will emerge as the standard, Cone said. Rather than spend time trying to answer this question, she advises that companies instead focus on identifying metrics and objective targets, then work toward meeting them. 

Where Do We Go from Here on Climate Change? 

Cone sees climate change as a significant issue where business is well-equipped to help – and where the cost of inaction is high. She points to a Plan C Advisors report identifying four trends driving companies to take action on climate change:

  • The financial impacts of climate change are intensifying;

  • World governments are acting;

  • Popular attitudes are shifting; and

  • Investors are holding boards of directors accountable.

“Many of us are already feeling the effects of the climate emergency. It no longer is a problem of the future,” she said.  Governments across the globe are already taking steps to rein in climate change. For example, the U.K. has passed a net-zero emissions by 2050 law. The Biden Administration recently issued an executive order for federal agencies to assess the risk that climate change poses to the U.S. economy and make recommendations on reducing those risks. 

“Attitudes are shifting. Did you ever think you would see an electric Ford F-150?” Cone asked. The growing public/consumer demand for private action on climate change is something businesses need to consider.

And many are. In the last five years, there has been a five-fold increase in companies making commitments to reduce carbon emissions. For example, Apple has committed to be 100 percent carbon neutral by 2030 – and vendors, suppliers, outside law firms, and other partners will have to work toward these targets, too. Major corporations will not allow business partners who are part of their Scope 3 calculations to hold them back from meeting these stated goals.

Climate change and other ESG initiatives shouldn’t be seen as a challenge or an impediment to business but as an opportunity, Cone said. Businesses that embrace social responsibility and climate sustainability will be best positioned to serve a market that will demand such action from private companies.

“This is the opportunity of our generation – our lifetime,” she said.

Copyright © 2021 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume XI, Number 154
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Womble Bond Dickinson, LLP's regional heritage and local knowledge — combined with a transatlantic outlook — generate the insights capable of unlocking more opportunities for our clients.

With locations on both sides of the Atlantic, we provide the breadth of legal experience and services to meet our clients’ needs without losing the intimacy of being connected to our different communities.

These strong local and regional ties enable us to remain close to our clients and the issues they care about.

...
336-721-3734
Advertisement
Advertisement
Advertisement