How are sustainability and ESG shaping the role of in-house counsel?

The panel

• Julia Hayhoe; Strategy Consultant and Non-Executive Director, Hayhoe Consulting (Chair)
• Simon Tilling; Legal Manager, Environmental Law, Pennon Group
• Ruth Walker; Head of Legal, URBN Urban Outfitters Inc.
• Kerry Stares; Partner and Director of Responsible Business and Pro Bono, Charles Russell Speechlys 

Overview

At the end of September, we hosted a panel discussion and networking event to explore how sustainability and environmental, social and governance (ESG) opportunities and challenges are evolving at the top of the management agenda, and the implications of this for the in-house counsel role.

Our Chair for the evening, Julia Hayhoe, Strategy Consultant and Non-Executive Director at Hayhoe Consulting, began by sharing some sustainability and ESG insights acquired through her experience advising boards, investors, general counsels (GCs) and law firms. 

What are sustainability and ESG – and how do they interrelate? 

One of the first things a board or leader needs to understand and develop is their own point of view on ESG, said Julia, “Because if the board is not clear about what sustainability means for the business, and how ESG factors play out and interrelate, it gets very confusing very quickly for the business and external stakeholders.” 

Terminology around sustainable business is shifting in the boardroom as the term ‘ESG’ has become increasingly politicised,¹ she said, pointing to the example of BlackRock’s Chairman and CEO Larry Fink, who earlier this year said he had stopped using the term “because it’s been entirely weaponised².” 

Julia suggested sustainability could be defined as the overarching umbrella term that determines the long-term future of an organisation, and ESG sits as determinates within that framework, identifying the most material areas – opportunity, risk and impact – for its particular stakeholders.

Why is sustainability on the boardroom agenda? 

In 2021, Julia interviewed boards about what was driving sustainability in their organisations as part of research for the World Economic Forum. “It was all about longer-term value creation, risk mitigation and transition,” she said – “that was where all of their heads were at.” 

Since then, the macroeconomic situation and cost of living crisis had focused minds on the short-term operational efficiency and the discretionary spend of consumers, she said. 

Kerry Stares, Partner and Director of Responsible Business and Pro Bono, Charles Russell Speechlys, pointed to the “regulatory cascade” as another important driver of increasing standards of performance on ESG in the corporate world. She said, “As in-house lawyers, it’s not just a question of asking which new laws and regulations apply to my organisation, it’s: ‘Which new laws and regulations are changing the behaviour and expectations of my stakeholders?’” 

Organisations are already seeing that engagement with businesses in their value chain is important in the context of their net zero targets, both to obtain data about their Scope 3 emissions and to help drive those emissions down, she noted, but this was set to become even more critical with the “landscape shifting” Corporate Sustainability Due Diligence Directive (CSDDD).  

CSDDD – which is still making its way through the EU legislative process - will require businesses that fall within direct scope to carry out extensive due diligence to identify actual or potential human rights or environmental risks in their supply chain. Where risks are identified, they will be obliged to prevent and mitigate them and provide remedy for those adversely affected. 

“This is one of the first major new ESG instruments that goes beyond requiring companies to disclose more about their environmental and social impact”, said Kerry. “This actually mandates a particular type of behaviour – and in-house lawyers will need to play an important role operationalising it.”

What are the material ESG issues on the table? 

All businesses are on a different sustainability pathway, with some further ahead due to the nature of their assets, regulatory pressures, supply and demand challenges, or perhaps commitments within their constitutional documents – in the case of B Corps.

Stakeholder governance

As a landlord owner of real estate, it is evolving the relationship with its occupiers by using green leases across the portfolio. 

Ruth Walker, Head of Legal at URBN Urban Outfitters Inc, noted that its target demographic was Gen Z, which is very focused on sustainability and the environment. “We have to speak to that customer,” she stressed. “They are attuned to greenwashing and we have to be very careful.”

Financing and funding the transition

Attracting the right investment, technology and skills required to support Net Zero ambitions are high on the agenda for boards. 

Kerry highlighted recent analysis³ by Goldman Sachs Group, which suggests that asset managers are finding it “increasingly difficult” to sell funds in Europe unless they are ESG-aligned and meet the definitions of the Sustainable Finance Disclosure Regulation’s Article 8 funds designation, at a minimum. 

She said, “You’ve got enormous demand for ESG-aligned investments at a time when regulators are cracking down on those making claims to ESG credentials that they can’t back up⁴. For investors and companies alike, that means not only having to say more about ESG, but doing what you say you do and being able to demonstrate that with data.”  

Simon Tilling, Legal Manager, Environmental Law, at South West-focused water, wastewater and renewable energy business Pennon Group, said the FTSE 250-listed firm relied on significant capital to be injected into the business to invest in the infrastructure required. “To attract that capital, clearly we need to have the right ESG policies,” he acknowledged. “The focus on ESG and our long-term goals and how we’re achieving it, and the methodical approach ESG reporting is providing, helps satisfy investors that we’re on the right path to a long-term sustainable future.”

Balancing the short-term cost pressures with a sustainable long-term vision is a common challenge for many organisations, including URBN Urban Outfitters Inc. 

Ruth explained, “We want to run our stores in the most green way possible, but it needs to be a responsibility that is shared by the landlord and tenant, and a lot of the time, we’re seeing it pushed into the service charge, or just increasing our costs. Lots of landlords want more control over our fit out and the materials used.” It seems to be a bit of a power struggle, mainly over costs. 

The supply and the value chain

In the tough macroeconomic environment, getting buy-in on sustainability both within the business and externally requires effective collaboration and engagement. 

Julia noted that the rise of Generative AI and platforms such as Chat GPT present both opportunities and challenges for organisations within the social aspects of ESG.

Pennon Group is one of the biggest private employers in the South West, and a lot of its supply chain comprises smaller businesses. “I think some of our smaller suppliers are very intimidated by this agenda, but it’s that collaborative working that is going to drive the changes that we want to see and that will benefit our community,” explained Simon. 

How does this play into the role of the general counsel?

Strengthening and spreading knowledge

Deloitte’s 2021 study ⁵ into the role of the chief legal officer in driving ESG strategy highlighted the multi-faceted nature of the function and the challenges created by such breadth. 

Julia gave the example of a mid-market private equity-backed Insurance business, where as a ‘people business’ the lead for sustainability sits with the HR Director, said Julia, “so they need to collaborate considerably across their business.” This includes more engagement with the CFO – because of the financial implications of sustainability and investor relations – the CIO or CTO, and the Communications lead, she noted.  

Keeping ahead of the evolving policy landscape and feeding back the opportunities and risks to the rest of the business in bite-size chunks is key, said Simon. “There’s a lot for legal to contribute. The investors are very much looking at the results when you have a mature ESG offering, so being able to track it and spread the knowledge is what our team is focused on.” 

Take 5: Next steps 

1. Understand your ESG point of view: What are the most material issues for your particular stakeholders and what are your business drivers?

"The foundation of any strategic approach to ESG is a materiality assessment. Rapidly emerging best practice, because of the direction of travel in the EU, is a double materiality assessment which identifies both ESG issues that impact the business and issues on which the business has the most impact on people and planet." - Kerry Stares

2. Focus on the opportunity: There is a tendency to lead with the risk and governance, but frame the narrative positively in order to get the board’s attention. Focus on the value creation aspects around the growth of the customer base and talent. 

"Be involved in these discussions because there is so much value you can add here. Share the practical, manageable need-to-know elements." - Ruth Walker

3. Prioritise: Don’t try to do everything. Focus on what is most material for your business. 

"That could be a materiality assessment or just a good dose of common sense as to what is material to the business." - Julia Hayhoe

4.  Build your ESG literacy: Then spread that knowledge and engagement within the wider business. Horizon scanning is key, particularly around the regulatory and stewardship aspects of the GC role. Tools such as LinkedIn and AI can help organisations track the latest developments. 

"There are lots of acronyms but don’t be intimidated – it’s an opportunity to learn. It’s not about knowing all the answers, it’s about asking sensible questions, which we all have the skillset to do." - Simon Tilling 

5. Take your seat at the table: Help set the tone from the top as an ESG ambassador and steward of the business.

[1] How Environmentally Conscious Investing Became a Target of Conservatives
[2] BlackRock's Fink says he's stopped using 'weaponised' term ESG
[3] SFDR, two years on - Trends and Anatomy of Article 8 & 9 funds in 2023
[4] Deutsche Bank-controlled investment firm DWS agreed to pay $25 million to settle charges over misstatements regarding its ESG controls, linked to investment and research recommendations for ESG products. 
[5] The role of the chief legal officer in addressing ESG issues