ESG, sustainability, and stakeholder capitalism are at the center of the global dialogue on the future of the corporation. They are being driven by an evolving legal and regulatory landscape, market dynamics, and societal expectations. In particular, ESG is increasingly perceived by investors, lenders, employees, local communities, suppliers, and customers as an integral part of a company’s business model and an organic element of value creation. In this post, we explore the role that legal, compliance, and governance professionals – whom we refer to, collectively, as inside counsel – play in respect of ESG.
Inside counsel are increasingly taking notice of the rise of ESG and are conscious of how expansive and profound could its ramifications be. A recent paper authored by a group of Stanford University scholars illustrates that, while general counsel regard ESG as a catalyst for long-term financial performance and recognize significant internal and external pressure from stakeholders and other constituents to increase their organization’s commitment to ESG, they are concerned that disclosure of ESG-related activities might pose risks from a legal or regulatory perspective.
The chief compliance officers participating in KPMG’s 2021 CCO Survey confirmed that ESG was among the top five compliance and regulatory obligations to refine in 2021 and that ESG initiatives are rapidly moving into focus for chief compliance officers. Approximately half of those officers indicated that they participate in ESG strategy planning and in establishing ESG policies and contribute to the incorporation of ESG risks into overall compliance risk assessments.
ESG appears to be high on the priority list for board secretaries, too. The 2021 Annual Corporate Directors Survey indicates that ESG is among the topics that shareholders most want to discuss with directors, and 62 percent of directors of companies with annual revenues in excess of $5 billion confirmed that ESG themes are regularly on their board’s agenda. A recent survey investigating the implication of climate change (a key theme in the “E” element of ESG) from a governance perspective shows that board secretaries are most often tasked with driving climate change initiatives. The vast majority of respondents (68%) considered the role of the board secretary in guiding the board on climate change issues to be “very important,” “critically important,” or “important”.
ESG as part of the duties of inside counsel
We think that ESG affects all the key domains within the purview of inside counsel:
- Legal, regulatory, and compliance. The ramifications of ESG reacha broad variety of areas, including (i) the applicable legal, regulatory, and compliance frameworks, which are rapidly expanding in scope, complexity and depth across the globe, (ii) contractual obligations, (iii) litigation risk, (iv) regulatory enforcement and securities litigation, (v) compliance with laws on the prevention of crimes such as bribery and money laundering, (vi) the global economic sanction framework, (vii) stakeholder actions, and (viii) directors’ liability and derivative claims;
- Corporate governance. This includes (i) board structure and composition, (ii) board experience and periodic evaluation, (iii) executive compensation, (iv) directors’ duties, (v) stewardship, and (vi) stakeholder engagement and dialogue;
- Ethics and business conduct. This includes (i) anti-bribery and corruption, anti-money laundering, and economic sanction matters, (ii) internal policies, procedures, and codes of conduct, (iii) supply chain and third-party operations, and (iv) diversity and inclusion, gender and racial equality, employee pay and incentives and human rights, and (v) tone at the top;
- Risk management. This includes (i) the identification and assessment o potential ESG risks, (ii) the integration of ESG risk in the comprehensive risk management framework, and (iii) crisis management; and
- Corporate citizenship. This has numerous dimensions, including (i) corporate purpose, (ii) corporate reputation, (iii) corporate communication, (iv) community involvement and relations, and (v) CEO and employee activism.
Based on the foregoing, we conclude that ESG does affect all or most of the responsibilities of inside counsel.
There are three corollaries to the above:
- first, identifying, assessing, addressing, and monitoring relevant sustainability issues ought to be considered part of the duties of inside counsel;
- second, by ignoring ESG, inside counsel would be neglecting a key dimension of their responsibility as guardians of the corporation and more generally not appropriately discharging their duties; and
- third, a corporation’s failing to include inside counsel in ESG efforts would be exposing itself to significant risks and failing to make the best use of valuable resources.
The role of inside counsel in respect of ESG: one size does not fit all
ESG is way more complex than complying with legal standards. While there are signs of progress towards uniformity and consolidation, no universal standards exist, and ESG remains very much an uneven playing field Legal and regulatory frameworks are asymmetric across jurisdictions, guidelines and codes of conduct are fragmented and largely voluntary, as are performance metrics, data may not be fully transparent and are difficult to compare, the map of ESG issues varies greatly depending on business sector and location, and investors’ expectations often shift according to market dynamics. Global firms and regulated businesses are faced with an even more intense challenge, as they ought to keep up with international developments on ESG and reconcile widely varying regulations.
For corporations, this means that ESG efforts are case-specific and may vary considerably, depending on factors such as:
- the relevance to the company of each of the individual elements of ESG (environmental, social, governance);
- the ESG ambitions of the company, in particular, whether ESG is looked at through the narrower lenses of legal obligations/compliance/risk management or considered more broadly as part of the corporate strategy, thus requiring full integration in the decision-making;
- the degree and scope of board and senior management focus, support, and oversight in respect of ESG themes; and
- the level of ESG integration into management roles, systems, and compensation and incentive models and the architecture of the ESG responsibilities and reporting lines: in particular, whether a dedicated, full-time ESG officer with ad hoc responsibilities (variously called a chief sustainability officer, chief ESG officer, chief purpose officer, ) has been appointed, the existence and identity of the members of an ad hoc ESG committee, etc.
Key issues and considerations for inside counsel
While the role of inside counsel in respect of ESG will vary from company to company, we think that all of them should be aware of the following:
- ESG is not a solitary exercise. It encompasses a multitude of disciplines and has such a broad scope that it requires a cross-functional approach and cannot be regarded as a solitary effort of any individual corporate function. Therefore, each of the general counsel, the chief compliance officer, and the board secretary must cooperate and collaborate with the board and a C-suite officers (primarily, the chief sustainability officer, where one exists, and the chief financial officer, chief transformation officer, chief risk officer, the investor relations officer, ).
- Education. Inside counsel ought to teach themselves and members of their teams about ESG and sustainability. They should also ensure that the board and other company functions understand and receive ad hoc training regarding the various dimensions of ESG. First, education ought to go deeper than mere abstraction and focus on what ESG means in practice for the organization in light of its specific characteristics. Second, it needs to be an ongoing process, for ESG elements, priorities, and dynamics evolve rapidly. Third, it requires avoiding insularity and carefully observing what the company’s peers are doing and what market practices are developing.
- Mapping and assessing ESG risk. Inside counsel ought to help screen ESG themes and risks to map and identify ESG priorities for their organizations, if necessary, with the help of external counsel and advisers with ESG expertise. Horizon-scanning will be an important part of the exercise, with a view to anticipating and preparing for developing ESG issues that might affect the legal and regulatory landscape or, more broadly, be relevant for the organization. Themes and risk-mapping must be followed by risk assessment. Inside counsel ought to have input into the design and implementation of a comprehensive risk assessment framework to ensure that key legal, regulatory, compliance, governance, and strategic risks associated with ESG are understood and assessed and the steps to measure and manage such risks are identified.
- Governance and the board. In recognition of the materiality of ESG, the general counsel and the board secretary ought to guide the board of directors towards the adoption of a comprehensive framework whereby it oversees the sustainability agenda and strategic ESG priorities. In particular, the general counsel and the board secretary ought to undertake, in partnership with the chief compliance officer, a key role in aligning corporate governance to the sustainable paradigm, including (a) ensuring that relevant stakeholders engaged in a healthy dialogue, (b) guiding the board of directors to effectively govern strategic ESG considerations, enabling informed decision-making, (c) advising the board to navigate fiduciary duties in respect of the articulation of corporate purpose and the ramifications of ESG, (d) advising the board of directors in weighing and balancing differing interests of various stakeholders, and (e) advising the board about the creation and functioning of a committee with ESG responsibilities (including, crucially, as to whether ESG issues ought to be the remit of the full board, an existing board committee, or an ad hoc committee).
- Tone-at-the-top and corporate reputation. The general counsel and the chief compliance officer ought to help establish an ESG tone at the top and ensure the authenticity of the company’s commitment and full accountability in respect of ESG efforts. This is a corollary to their role as guardians of the corporation and advisers not only on what is legal, but also on what is right.
- ESG integration in policies and procedures. Inside counsel ought to contribute towards developing an ESG program and models for integrating ESG management within existing roles, systems, policies, and procedures. As discussed in a guide recently published by the Business Ethics Leadership Alliance – with the contribution of a group of legal, compliance, governance, and ESG professionals including one of us – an ESG program should be agile and responsive to evolving market, regulatory, business, and stakeholder dynamics but “built on a solid foundation of corporate values and culture.” Developing an ESG program should be an ongoing process, based upon four phases: (a) mapping the salient ESG issues to the business, (b) developing strategies and objectives and establishing oversight, (c) operationalizing activities and managing data and disclosure, and (d) monitoring that the organization measures up to the ESG standards it discloses and that sustainability commitments are implemented and fully aligned with the reality of the company’s action. In this context, existing policies and procedures should be reviewed to ensure that new and existing investments and litigation management align with the company’s ESG strategy and objectives.
- Transparency and reporting framework. Inside counsel ought to collaborate to ensure that the company establishes a comprehensive external and internal ESG disclosure framework based upon a set of relevant ESG factors and metrics, meeting applicable standards. The reporting system ought to satisfy the requirements of investors and other key stakeholders, and be truthful, reliable, transparent, comprehensive, and accurate. Enforcement actions against greenwashing and ESG-disclosure litigation are expected to increase significantly in the coming years.
- Strategy. Inside counsel ought to aim to provide a contribution to the strategic sphere, employing legal astuteness to create competitive advantage. Incorporating ESG within decision-making is a fundamental step towards elevating sustainability to strategic level and a sine-qua non of making ESG part of the organization’s DNA.
 We use the term “governance professional” to mean the company secretary (or board secretary) and other company professionals whose key responsibilities are governance arrangements. We appreciate, of course, that there is no one size fits all and that, while we have distinguished among legal (i.e., the chief legal officer or general counsel (GC)), compliance (i.e., the chief compliance officer (CCO)), and governance professionals, in certain organizations a single individual holds, or has reporting lines to, several of such positions.
 M. Callahan, David F. Larcker and Brian Tayan, The General Counsel View of ESG Risk, Rock Center for Corporate Governance at Stanford University Working Paper, 2021. The paper is available at: https://ssrn.com/abstract=3923913.
 The authors of the paper provide a helpful summary of this insight: “We find considerable tension between a willingness, on one hand, to invest in and support ESG-related activities and worry, on the other hand, about liability and potential regulatory harm. Can companies find a balance between “doing good” and not creating unexpected damage? This is an important issue for boards to understand, and a discussion which the General Counsel would lead”.
 Our list of the key domains within the purview of inside counsel is broadly based upon the taxonomy of the “core priorities of inside counsel” suggested by Ben W. Heineman, Jr. in the book The Inside Counsel Revolution: Resolving the Partner-Guardian Tension, Ankerwycke 2016.
 Including, inter alia, associated with environmental pollution and climate change claims, human rights claims, supply-chain claims and parent-company liability.
 See, Martin Lipton, William Savitt, and Karessa L. Cain, On the purpose of the corporation, available at: https://corpgov.law.harvard.edu/2020/05/27/on-the-purpose-of-the-corporation/ and Lucian Bebchuk and Roberto Tallarita, The illusory promises of stakeholder governance, available at https://corpgov.law.harvard.edu/2020/03/02/the-illusory-promise-of-stakeholder-governance/.
 See, Brian Tayan, The Double-Edged Sword of CEO Activism, available at: https://corpgov.law.harvard.edu/2018/11/27/the-double-edged-sword-of-ceo-activism/.
 In a speech addressed to private practitioners, during the 2021 ABA general assembly, John Kerry put this unequivocally: “you are all climate lawyers now, whether you want to be or not”, https://www.reuters.com/legal/litigation/you-are-all-climate-lawyers-now-john-kerry-tells-aba-2021-08-05/.
 We borrowed the term from Ben W. Heineman, Jr. The Inside Counsel Revolution: Resolving the Partner-Guardian Tension, Ankerwycke 2016.
 The Integrating ESG into your organisation guide, published by the Business Ethics Leadership Alliance (https://ethisphere.com/resources/bela-integrating-esg-into-your-organization/) and developed with the contribution of a group of professionals including one of us, illustrates – in recognition of the absence of a one size fits all – a variety of models for the integration of ESG into management roles and systems, built upon centralised, cross-functional, or hybrid structures, depending upon the specific characteristics of the organisation and the key objectives purported to be achieved.
 See, Association of Corporate Counsel 2022 Chief Legal Officers Survey (available at: https://www.acc.com/sites/default/files/2022-01/ACC-CLOreport22_Final2.pdf). 24% of chief legal officers declared that they oversee these functions as part of the legal department, compared to just 15% in 2020.
 Around the topic of investor engagement (in particular, where the investor base is broad and diverse (e.g., activist vs. index funds, etc.) and managing stakeholder relationship, see, https://hbr.org/2021/07/engaging-with-your-investors.
 This is borrowed, again, from Ben W. Heineman, Jr. The Inside Counsel Revolution: Resolving the Partner-Guardian Tension, Ankerwycke 2016.
 See, Shagun Agarwal The rise of climate litigation, available at: https://corpgov.law.harvard.edu/2022/03/03/the-rise-of-climate-litigation/.
 See, Constance E. Bagley Winning legally: the value of legal astuteness Harvard Business School Working Paper No. 06-037, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=898647.
This post comes to us from Silvio Cavallo, the general counsel and chief compliance officer of Pillarstone; Bruno Cova, a partner at Delfino e Associati Willkie Farr & Gallagher LLP and the former general counsel of Fiat, and Mark Howard, the chief compliance officer for International Markets at KKR.