Exploring ESG through the Lens of Risk Management: Why and How GCs Should Prioritize ESG in 2023
By Axiom Law
Navigating environmental, social, and governance-related issues poses challenges for GCs and other legal leaders, but it also offers them the unique opportunity to help shape and inform how their organizations respond to ESG requirements. Learn why this matters and how to successfully implement an ESG program.
Environmental, social, and governance (ESG)-related issues have received increased attention from both companies and consumers alike over the past few years, and ESG’s significance for companies – and their bottom line – are only likely to continue to grow. Where do organizations’ in-house legal departments fit when it comes to a company’s ESG program and reporting? Why should GCs and other legal leaders be paying particular attention to ESG-related issues as we begin the new year?
Simply put, regardless of whether an organization has a formally defined ESG program, prioritizing ESG can help increase transparency and accountability, and it offers consumers increased visibility and the chance to better compare and choose brands whose values align with their own.
But ESG-related issues aren’t just important to consumers. Investors, government agencies, and significantly, employees, have their eyes on the ways in which companies are handling their ESG practices. “By 2029, the Millennial and Gen Z generations will make up 72% of the world’s workforce...These generations place greater importance on environmental and social concerns than their predecessors do – and will expect more from employers on these issues,” according to an MSCI report.
This should be alarming to GCs because most in-house counsel (94%) don’t feel “bought-in” to legal or organizational strategy, viewing their current positions as not completely aligned with the legal department or with the company as a whole (87%), according to Axiom’s first-annual View from Inside report. And at a time when GCs should consider more than half of their legal team to be a flight risk, ensuring that their values align with their team’s should be prioritized. The report also found the majority (57%) of in-house counsel who are not actively looking are at least open to a new position, and more than half (53%) of those who are not actively looking plan to do so within the next year.
But ESG impacts GCs beyond alignment and attrition, too.
“True transparency is no longer just about financial reporting; it now requires broad disclosure of costs related to ethical and sustainable business practices,” shared Andrew Waitman, CEO of Assent, an ESG solutions and services company. And the data supports the idea that GCs are mindful of transparency, too: despite the recessionary environment and other complicating factors, GCs are still fighting to uphold their most foundational ideals, according to Axiom’s 2023 GC survey report, Economic Volatility Tests Role of General Counsel as Conscience of the Company.
ESG compliance and reporting might seem daunting to GCs and other legal leaders, especially when in-house legal teams are already over-burdened by increasing workloads due to attrition and emerging, novel risk. And ESG compliance and reporting are further complicated by the uncertainty brought about by the recessionary economy. However, GCs who aren’t prioritizing ESG-related initiatives and reporting are missing out on the unique opportunity to help shape and inform how their organization responds to ESG requirements.
Framing ESG as risk management
Framing ESG as risk management can help GCs or other legal leaders who are newer to ESG programs, compliance, and reporting better understand its significance and how it fits into their department’s strategy. Risk management is nothing new to in-house counsel, and ESG-related issues are inherently embedded within the work they’re already doing – regardless of whether or not they’ve been responsible for reporting on them in the past.
In fact, “most companies are managing some of these risks even in the absence of a formally defined ESG program,” shared Adam Gorley, a corporate ESG writer. “Every company faces a variety of ESG-related issues and some of them have the potential to be material and cause financial or reputational damage. Moreover, any company that neglects environmental, social, and governance issues is at increased risk of experiencing an ESG-related incident or controversy. In other words, ESG risk is regular business risk and ESG risk management should be part of a company’s standard risk reduction practices.”
What does this mean for in-house counsel? Lack of attention to ESG not only hinders the risk management work they’re already doing, but it also introduces additional risk.
The focus of legal department mission statements is evolving to include ESG
For GCs and legal leaders who are new to ESG and don’t know where to begin, the answer is much simpler than they might expect: their department’s mission statement.
Axiom’s 2023 GC report also explored how the recessionary economy complicates their ability to steward company values. Many have refused to work with legal providers, firms, and other partners who do not share their values. And, nearly all hold their legal teams accountable as well, tracking their work against a set of value-based success measures and KPIs.
Mission statements are one of the most valuable tools GCs and other in-house legal department leaders have at their disposal to help them stay true to their principles. And their significance is backed by data: The number of GCs with a legal department mission statement grew substantially this year compared to 2021, with 78% of GCs now saying they have one, an 18% increase from the first iteration of the survey report.
How legal department mission statements allow GCs and other legal leaders to stay true to their principles
According to the first iteration of the report, the prioritization of cost reduction over core department values was significantly lower among those legal departments with a mission statement (58%) than those without (75%). Similarly, while 82% of GCs without a mission statement said pandemic-associated risk forced their departments to deprioritize values-oriented initiatives, fewer of those GCs with a mission statement said the same. And while legal department mission statements continue to grow both in popularity and significance, they look different than they did last year.
That’s because mission statements that focus on complying with relevant laws and regulations have dropped from 45% of statements to 29%, while the number of statements focused on social, environmental, and human rights concerns rose to 38%, and those focused on being a good partner with company leadership rose to 33%, according to the most recent report.
The report findings suggest GCs and other legal leaders should prioritize creating or refining their legal departments’ mission statements - but not just any mission statement. Smart GCs will focus on creating or transforming their mission statements to focus more intently on awareness of environmental issues, human rights, and collaborative partnership with company leadership. Why?
Compliance with relevant laws and regulations is table-stakes. It’s the job of the legal department, but it can’t be its exclusive missional focus anymore. Just as the role of the GC has evolved from chief risk mitigator to enterprise guardian, the mission statement must evolve in turn. It must provide guidance for navigating the corporate response to emerging risks and societal factors and influences that impact enterprise reputation and inform policy.
ESG Trends to Watch in 2023
ESG reporting is becoming more integrated
One of the biggest trends surrounding ESG has less to do with the issues themselves than it does with how they’re shared with stakeholders. Despite being non-financial factors, more companies are beginning to include reporting on ESG-related issues within their annual and financial reporting because ESG-related issues have grown in their significance among all stakeholders, not just the company’s consumers or client base.
The introduction and passage of ESG legislation
Although there aren’t currently any federally-mandated ESG disclosure requirements in the U.S., that could soon change. Proposed SEC Climate Disclose Rules would:
· Amend and add new provisions to SEC Regulations S-K and S-X
· Require disclosures of climate-related risks, governances, and processes
· And mandate that disclosures be provided in both registration statements and periodic reports
Globally, the UK already has climate-related disclosure regulations, and in the EU, the Corporate Sustainability Reporting (CSRD) and Draft European Financial Reporting Advisory Group (EFRAG) Standards could apply as early as 2024.
The distinction between CSR and ESG will become clearer for stakeholders
Corporate Social Responsibility (CSR) programs have often been mistaken for ESG, as they do share similarities. While CSR and ESG both help companies ensure social accountability, the impact of ESG should be measurable and is often strategically implemented across the broader organization.
This distinction is likely to become much clearer should federal ESG legislation pass and as more organizations continue to strategically implement their own ESG programs and reporting.
ESG will test SMBs, provide greater opportunity
Both ESG program implementation and reporting can be much more difficult for small and mid-sized businesses (SMB), not only because they often don’t have the same resources as enterprise companies, but also because they might not know where to begin. This year may be the first that many SMB legal departments have had to prioritize ESG initiatives, and many are working without a roadmap. While ESG can provide challenges for SMB companies, it also provides even greater opportunity, as in-house counsel can embed themselves within the program from the beginning and play a bigger role in shaping how it affects the broader organization and its stakeholders.
Here’s the bottom line: Regardless of an organization’s size, it’s imperative GCs and other legal leaders prioritize ESG in 2023. Not only will it allow them the opportunity to help shape and inform how their organizations respond to and report on ESG-related issues, but it will also better empower GCs to remain the conscience of their companies.
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