General counsel are increasingly being asked to take the lead in managing the risks and opportunities arising from their companies’ environmental, social and governance (ESG) policies, according to a report by Herbert Smith Freehills (HSF).

The ESG movement will change the role of GCs as much as it changes their businesses, the report maintains, arguing that oversight of ESG is a role that GCs are well equipped for, given their work at the nexus of regulation, policy, risk management and investor relations.

'Even the most cursory glance at the converging forces powering its [ESG’s] ascent makes it clear the scale of the challenge, for once, lives entirely up to billing,' argues HSF’s CEO, Justin D’Agostino, in the report’s foreword.

As one GC from a property firm put it: “Used correctly, ESG is a pretty holistic filter for how you want to run your business to cover all manner of risks that would sit across the principal risk register of a listed firm.”

The report, based on 20 in-depth interviews with senior in-house lawyers at mainly listed companies, finds that the pressure on companies to improve their ESG policies – which prompted HSF to launch its own practice in February – has enhanced GCs’ role in governance issues, boosting their status within the C-suite.

But that responsibility comes with added complexity. Clients are concerned about a proliferation of standards, although it is expected that accepted global conventions and green investing principles will emerge.

The report, which was written by former Legal Business editor Alex Novarese, argues shifts in investor sentiment, including through shareholder activism, will exert pressure on corporates to get their ESG houses in order.

That, in turn, will affect supply chains, underscoring the importance of contractual as well as soft-law compliance. Human rights laws, anti-bribery and corruption compliance, and climate commitments, including those launched at London Climate Action Week, will come into play.

The study describes blue-chip companies’ net zero commitments as ‘the tip of the ESG spear’. It also points to changing social norms typified by the Black Lives Matter movement that are driving companies to take their societal contributions to a new level, particularly on issues such as mental health, wellbeing and diversity. As one general counsel put it: “You have to care and be brave”.

D’Agostino said: “Social factors like diversity, worker welfare and mental health that for years business could bat away with platitudes, have shot up the agenda, not least because of the humanitarian crisis that is the Covid-19 pandemic.”

He concluded: “ESG is set to change the position of the chief legal officer as much as it will transform the businesses around them. How's that for significance?”