As environmental, social and governance (ESG) issues take top priority for companies and society more broadly, today’s legal teams are being challenged to understand how the heightened focus on ESG is changing priorities and requiring them to find new ways to add value and derive opportunities from ESG in all its dimensions. 

From geopolitical tension, trade disputes and supply chain disruptions, to climate change adaptation, remote working and diversity and inclusion issues, the focus on ESG is becoming sharper across many organisations.

In the last two years, Black Lives Matter, PRIDE and other human rights movements have caused huge waves in the business world. The ‘social’ aspect of ESG has driven the legal services industry to change its policies and approach, and focus on how employees, customers and other stakeholders are treated. This includes issues such as employee rights and fair labour practices, customer privacy and community engagement. Although the social element of ESG has been a driving force in moving ESG into the spotlight, environmental and governance themes are now equally essential protagonists occupying the centre stage for many in the legal services industry.

Legal departments have an increasingly essential role to play advising senior management 

The current environment sees organisations move on ESG at different paces. Some companies have not yet taken any specific steps toward an ESG approach, while others are approaching ESG only in terms of regulatory compliance. More forward-thinking companies are taking a strategic approach, seeking ways to turn ESG thinking and practices into a source of competitive advantage and, for the legal departments that follow suit, this journey involves a shift away from the traditional business advisory role, opening a plethora of opportunity.

Progressive legal departments who adopt ESG as an integral component of their strategy should now serve as business partners, helping the business to understand and address ESG risks and work across functions, such as finance, treasury, procurement, IT and HR. In this way, legal departments can serve as a joiner of dots, and help to develop the right policies across functions and develop the governance frameworks to implement them.

Numerous factors are making legal considerations arising from ESG even more acute. ESG issues are quickly emerging as cross-disciplinary areas of responsibility for C-level leaders who are now experiencing a significant expansion of their corporate function because of their newfound responsibilities. As they become more accountable for ESG performance, they are increasingly exposed to risk from evolving regulations and their responsibilities to a broadening group of stakeholders. 

Legal departments have an increasingly essential role to play advising senior management as they oversee the implementation of their company’s ESG strategy and complying with the laws and regulations that create their ESG risk and liability. The stakes are getting higher and show no signs of abating. There have been instances where legal action has been taken against company directors who were not seen as moving quickly enough toward an ESG strategy.

The stakes are getting higher and show no signs of abating

ESG thinking is bringing previously siloed functions together as the accountabilities of each function broaden and converge. Legal and finance teams are increasingly integral to sustainability reporting and green financing initiatives, with boards and senior management requiring guidance on how to fulfil reporting obligations without putting the company at reputational risk or giving away competitive advantage.

For legal departments, this journey involves a shift away from their traditional advisory role. It may no longer be enough to provide others in the business with advice to do with as they see fit. In an ESG-led legal function, legal departments should be business partners who really understand the business they are advising on, so they can give the right advice to help sustain the business and grow it responsibly over the long term.

Stuart Fuller is head of global legal services at KPMG International 

Find out how key jurisdictions are responding to the ESG movement. Click here to read the Law Over Borders ESG comparative guide