New research from global law firm Morrison Foerster, in partnership with Corporate Counsel, offers an encouraging sign that companies of all sizes are focusing on ESG. Eighty-six percent of respondents report that their companies provide ESG disclosures, half of them voluntarily.
Further, the survey reveals that in-house counsel overwhelmingly take a leadership role in driving their companies’ ESG strategy. Nine in 10 legal departments surveyed lead a material portion of ESG initiatives in their organizations. However, approximately one in five respondents relies on compliance officers—who do not always report to the legal department—to implement their companies’ ESG goals, pointing to a possible disconnect between strategy and execution.
“This is a time of enormous opportunity for the role of in-house counsel to lead the ESG transformation and reshape their role beyond compliance and disclosure,” said Suz Mac Cormac, chair of Morrison Foerster’s Energy and Social Enterprise + Impact investing practices, in a news release. “This survey is showing us that companies across all industries are focusing on getting ESG disclosures and compliance right. However, as the benefits of ESG continue to grow for partners, investors, employees, and consumers, in-house counsel should lead the change in thinking about ESG, less as a box-checking exercise and more as an analytical and strategic tool for managing risk throughout their organization and driving value creation.”
Increasing ESG interest from all sides by regulators, competitors, and shareholders has spurred 64 percent of respondents to make changes in their strategic business decisions. For instance, nearly half of respondents acknowledged that their companies changed their approach to environmental action in the last year by increasing public transparency (49 percent), making emissions changes (44 percent), or increasing their environmental regulatory compliance budget (41 percent).
Asked to identify their legal departments’ top three ESG-related priorities, three-fourths (72 percent) pointed to Diversity, Equity and Inclusion (DEI) as the top priority. Climate change (61 percent) and board oversight of environmental issues (52 percent) also topped the list of priorities. Just as in-house counsel report that data and consistency are their greatest ESG challenges in this timely survey, the Securities and Exchange Commission (SEC) has extended the comment period for climate disclosures.
- In-house legal teams are the keepers of their organizations’ ESG initiatives, with 90 percent of respondents reporting that the legal department leads a material portion of ESG initiatives.
- Sixty-four percent of respondents report making changes in their strategic business decisions due to increasing demand for more meaningful action and transparency around ESG.
- According to respondents, companies are more likely to put a higher emphasis on ESG’s “G” pillar (governance), followed closely by the social/human capital aspects (“S” pillar).
- Changes in the workplace and shifting social and cultural expectations about businesses have broadened the legal teams’ ESG priorities to include social/human capital management in more forms. After governance (84 percent), 78 percent ranked social (examples include human rights and racial justice) and 77 percent ranked human capital (examples include executive compensation, DEI initiatives, and talent management) as their companies’ biggest areas of focus. Further, DEI was identified by legal departments as their top departmental ESG priority (72 percent).
- Looking at the environmental pillar specifically, according to respondents, improving a company’s brand image and reputation is the top motivator for organizations to adopt environmental goals beyond required compliance with environmental laws (85 percent), while staying competitive in the market (73 percent) and increasing pressure from investors and shareholder (54%) rounded out the top three responses.
Corporate governance as an effective ESG tool for change
When asked to rate their companies’ focus on individual ESG elements—environmental, social, and governance—as well as human capital (including DEI), U.S.-based legal departments said they were most firmly focused on ESG’s “G” pillar (governance), followed closely by the social/human capital aspects. For now, ESG’s “E” appears to be less of a priority for companies/boards, owing at least partly to confusion around measuring and reporting achievements.
Companies are considering various levers to meet ESG objectives, and corporate governance is an important tool. However, with the increasing focus on ESG, it is inevitable that some companies will tout their association with ESG policies and operations without effecting real change. This phenomenon is known in the industry as “greenwashing.” The survey respondents are aware that, for ESG to be successful, its effects must be measurable and meaningful, and greenwashing or the appearance of greenwashing is to be avoided.
An important mechanism for aligning ESG priorities with a company’s operations is through executive pay, and 54 percent of respondents note that their companies’ executive compensation includes incentives or mandates for ESG metrics. This is an evolution of say-on-pay executive compensation proxy proposals as more boards and shareholders see executive compensation as a way to meet ESG targets. Further, both internal ESG review and external ESG review are popular according to the survey, as 61 percent of respondents listed board oversight of environmental and sustainability as a top ESG priority for their legal departments, and 67 percent of respondents report using a third-party assurance service or verification for ESG reporting.
Social/human capital aspects top of mind for legal teams
The pandemic created seismic changes in the modern workplace, as employees now have more options over where and how they work. On top of a tight labor market, employees are looking for companies that respect their personal priorities and align with their values. The survey reflects this new perspective, as the top ESG priority identified by legal departments, out of seven, is DEI initiatives (72 percent). Other social/human priorities were rated as follows: human rights issues (42 percent), supply chain management (28 percent), and community involvement or charitable giving (16 percent). By contrast, more than half (54 percent) of the in-house leaders reported that they are not authorized to speak on social issues, such as racial justice and human rights. The percentages remained consistent, regardless of senior titles or size of legal department.
Climate concerns and disclosures at the forefront
The lower rating for the environment pillar (63 percent compared to governance at 84 percent) may point to its more generally accepted reporting requirements, easier metrics to measure, and wider acceptance, rather than a lack of focus by businesses. In fact, when asked to identify their legal departments’ top priorities, in-house counsel ranked two environment-related priorities in their top three, climate change (61 percent) and board oversight of environmental issues (52 percent), while 18 percent also ranked other environmental matters among their top three ESG related departmental priorities. Environment concerns also include upstream and downstream partners, which are known as “Scope 3 emissions” and soon to be required disclosure once the SEC’s climate disclosure proposal is finalized. Fifty-six percent of respondents are already considering the environmental policies and records of vendors and including those in their departmental decision-making processes.
In Q1 2022, Corporate Counsel, in partnership with Morrison Foerster, surveyed legal department leaders with titles including general counsel, chief legal officer, or vice president of legal to study the extent to which ESG policy and compliance development, implementation, and reporting falls to corporate legal departments. The 20-question survey of U.S.-based in-house counsel covered organizational, departmental, and individual approaches to ESG. Responses were collected by invitation via vetted telephone interviews and online from January 26 to March 11, 2022. The survey was completed by 79 respondents. The size of the respondents’ legal departments ranged from a single lawyer to those exceeding 60 lawyers.