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The global effort to enforce ESG criteria has always had a consistent message: uphold companies to certain environmental, social and governance standards that generate greater value for stakeholders, and a better world for us all to live in.
Now, in 2023, the message remains the same, but the criteria have become increasingly more specific and inescapable. Law firms sit on the frontline of these developments; ESG practices are growing globally, but so is the pressure for firms to hold themselves accountable internally. Let’s take a look at where things currently stand and how the climate is changing for law firms.
Why Does/Should ESG Matter to Law Firms?
Law firms are feeling the pressure to develop an expertise on ESG matters not only to service their clients but to also transform their internal operations.
An issue for a company will very quickly become an issue for its lawyers. Climate change litigation kept the courts extremely active in 2022 and there are no signs of this slowing down in 2023. With ESG Disputes looking like a busy practice area this year, law firms will need to follow the demand and hire/promote accordingly. Even on the transactional side, sustainable investment is on the rise – there has been over 1000 mutual funds and exchange-traded funds created to reward and track ESG initiatives.
Internally, a firm that is transparent with its ESG criteria will likely better align itself with its clients. Clients are feeling increased pressure from investors, shareholders, and regulators to ask more detailed questions about emerging ESG-related risks to ensure that their lawyers shall be acting responsibly. As companies begin to require firms to operate by the same rules and regulations as themselves, some firms are playing catch up in order to remain a viable option to represent companies on the best and biggest cases and transactions.
It has become a common assumption that ESG criteria only concern matters of sustainability – this is, of course, inaccurate. A large focus for law firms in recent years has been the ‘S’; social mobility, diversity, and inclusion are issues that the legal industry has come a long way in addressing. From changing internal policies on how you’re allowed to wear your hair to work to City firms launching apprenticeship programmes to attract a more diverse pool of students, the once hyper-traditional legal field is slowly modernising itself. Although there is still a lot of work to be done, there has been an observable change that gives hope for the future of the industry.
ESG as a Practice
There's clear evidence that ESG will only continue to grow as a practice area in Europe and the US in the coming years:
- 50% of law firms reported creating an ESG practice area in the past three years
- 18% of law firms reported plans to create an ESG practice area within the next three years
- 45% of firms report demand for ESG guidance from clients had increased in 2022
The data clearly shows that ESG is continuing to grow as a practice area, but so does the actions of many firms. At the backend of last year, Keele University launched the UK’s first climate crisis LLB; they will be offering a ‘Law with Environmental Sustainability’ Bachelors to help train future lawyers that’ll be ready to tackle climate change issues. Also, just last month, we saw Sidley Austin launch their own sustainability apprenticeship as well as Simpson Thacher bringing on 3 specialist lawyers to strengthen their global ESG practice. The market is showing us that the demand for an ESG offering is there, and growing, and some firms are doing their best to get ahead of the curve.
What Does 2023 Hold?
There are 3 trends that experts are expecting to affect the legal industry this year:
1. ESG Disputes
Yes, the law exists, but the relevant jurisprudence is lacking. Lawyers are expecting to see cases brought to global courts this year that will help to establish, and clarify, the standards that companies need to meet. There is also a growing trend of stakeholders using litigation to hold companies, and in some cases their directors, accountable regarding ESG issues.
2. Data Protection & Governance
In a recent survey conducted by RBC, cybersecurity was ranked as the second most-cited ESG concern among investors. Not only is there a need to manage the data privacy of consumer information, but also that internal ESG data is collected and reported correctly.
3. Sustainable Finance
This includes lending, debt, capital markets, green bonds, social bonds, sustainability bonds, and more. Climate financing hit a record high – over $31.7bn was invested in the fiscal year 2022 with investors already evaluating companies based on their ESG rations prior to making investment decisions. The UK continues to be the centre of global impact investment, but we can definitely expect this to extend into more activity in other territories.
The relationship between ESG and the law differs from many ‘trends’ in the legal industry – there is no expectation for ESG standards to suddenly become irrelevant. Law firms should expect an increase in work this year met with increased scrutiny on their internal operations.
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