As the challenges and opportunities posed by ESG become more high-stakes than ever, Craig Donaldson and Jeannine Lemker of premier legal search firm Major, Lindsey & Africa discuss how this shift is already changing the unique value that Chief Legal Officers and General Counsels deliver to Board and executive teams looking to manage risk and build sustainable value for years to come.
Chief Legal Officers (CLOs) and General Counsels (GCs) are routinely asked to scan the global policy and regulatory horizon and serve as a the “center of gravity” for corporate-wide initiatives with impact to both. Environmental, Social, and Governance (ESG) is no exception.
Successful ESG programs require contributions from across an organization, since nearly every function has an important ESG role to play, from safety, energy and natural resources utilization, packaging, and supply chain to marketing and communications, human resources, finance, product design, and more. Consequently, these teams draw on the GC to be a programmatic and consistent anchor with the company that brings ESG into harmony with larger business and strategic needs while thoughtfully assessing risk and regulations.
Today, ESG regulations are, of course, growing, with new requirements coming from U.S. federal and state governments, the EU, and other countries and global organizations. What was once a series of principles and frameworks is rapidly moving towards much sterner regulatory and legal requirements—the quintessential “one-way ratchet,” so to speak. Additionally, there is a rising tide of litigation from all sides of the debate on ESG practices and policy. Likewise, courts are increasingly being used for impact litigation—lawsuits intended to accomplish broad societal objectives.
In such a tumultuous environment, it falls to GCs and CLOs to reassure Boards, management, and auditors as to whether a company’s investments are meeting increasingly complicated stakeholder expectations…as well as if it is adequately managing its ESG-related risks while both staying true to the company’s ESG strategy itself and protecting the company at large.
STAYING TRUE TO YOURSELF WHILE ASKING: ARE WE DOING ENOUGH?
As with nearly all corporate strategy decisions, investments in ESG reflect a corporate mission—part of the company’s raison d’etre. As such, every company will make its own unique choices as to which initiatives to advance and how to advance them.
Take, for example, the inherently different ESG choices a B2C consumer products company will make versus a B2B manufacturing company. A consumer products company might adopt a progressive-leaning stance that will also win market share and customer loyalty with products that are environmentally friendly from their production to their packaging, and tout such attributes in their marketing. Alternatively, a B2B manufacturing company whose purpose is to enable other businesses to achieve end products or solutions might focus on supply chain resiliency, renewable energy, safety, greenhouse gases, and water use—all ways it best enables its largest customers to achieve a shared ESG strategy.
In either case, ESG must be embedded in a company’s core policies, procedures, and operations—making it even more crucial to select initiatives that are meaningful to a company’s mission. Companies that set highly ambitious ESG targets—whatever those targets may be—may invite unwelcome pressure and challenges when it comes to meeting those objectives. What is not in your ESG plan can be as important as what is.
Despite many necessarily bespoke investments, all enterprises face the same essential questions: Amid the ebb and flow of ESG viewpoints and practices, where should our business be on the spectrum? Is the company doing enough? These questions are increasingly complicated by regulatory changes and shifting cultural attitudes which present more risk than ever before.
The CLO or GC often serves as a wayfinder between the company and Board by holding management to a set of principles that help make the tough decisions on whether to invest in a social cause, particularly aggressive net-zero emissions goal, or progressive governance strategy. In tandem, CLOs and GCs can benchmark ESG policies versus competitors, ensure that ESG goals are measurable (and ideally, tied to executive compensation) and provide regular progress reports to the Board.
CACOPHONY OF VOICES
Of course, ESG strategies are meant to reflect the mission, vision, and values of your Board, management, and employees while also meeting the expectations of regulators, investors, and other stakeholders. As a result, ESG policies often go beyond products and services and carry over into the contentious realm of public opinion.
In recent years, it has become more common for employees to ask employers to take action publicly about world issues in the news or social media. This can raise some difficult questions. Should the company have a stated position on abortion rights? Immigration? Political leadership? With hundreds of thousands of different consumers, customers, and supplier relationships, is it the place of the company to take public positions on such matters?
Weighing the pros and cons of these decisions takes us back to the company mission as the first touchstone—with the added proposition that taking (or not taking) action may drive talent retention and help to solidify the customer base. In such moments, there are two useful questions to keep in mind: Do we really want to say that? Does it sound like us?
EXPANDING ROLE FOR THE GC OR CLO
Ten to fifteen years ago, as compliance was developing into the field it is today, the adage was born that GCs and CLOs “ignore compliance at their own peril.” Today, GCs and CLOs again are rising to the forefront, now in ESG leadership. Additionally, as ESG reporting becomes more technical (look no further than Scope 1, 2, 3 emission standards) and regulated, expect an audit function to arise within the CFO’s domain, which will work alongside the GC or CLO’s team.
To prepare for today—and the future— GCs and CLOs are taking a hard look at the talent in their organizations with an eye towards expanding programmatic and risk management capabilities that can bring cohesion through a process or system and see around regulatory and political corners for emerging risk. Likewise, GCs and CLOs are looking at scaling up corporate legal teams to meet the newest governance expectations and partner more deeply with Investor Relations, Marketing, and Communications on public statements. Finally, regulatory and litigation attorneys are adding a new suite of expertise to their portfolios, as they are at the cutting edge of ESG’s move from frameworks to laws and the back end of defensibility of a company’s ESG choices and communications.
General Counsel and Chief Legal Officers have long been viewed as trusted advisors that can bring together many parts of a company into one single voice and strategy. Today, ESG is the GC and CLO’s next chapter of this story—with much impact ahead and the ability to shape not just a company but our world.