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Rolandas Valiunas, Co-Chair of the IBA Law Firm Management Committee and Managing Partner of Ellex, in Lithuania, welcomes moves to encourage law firms to take action in this area. He argues that the transition from voluntary to mandatory measures is inevitable and will help prevent ‘greenwashing’ – where an organisation’s products or services are marketed as greener than they really are.
However, he also says there are limited scientific methodologies available to law firms with which to assess their impact on the climate. In addition, Valiunas argues, ‘climate change issues are becoming a means to put pressure on law firms, [which] might impact relations with the client or create [a] reputational crisis’.
Julio Veloso, Co-Chair of the IBA Asset Management and Investment Funds Committee and Head of International at Broseta in Spain, says that for law firms, ‘just trying to be compliant is not going to be easy and that will put a lot of pressure on [lawyers]’. He adds that ‘we’ll have to think about things that we [have] never thought about before’.
ESG has the potential to create certain barriers to the international flow of capital if there are different views on what ESG standards should be
Co-Chair, IBA Asset Management and Investment Funds Committee
Veloso also believes there’s already competition in the wider business world to have the highest standards on environment, social and governance (ESG) and sustainability issues and therefore new reporting requirements should not present a significant challenge. ‘[Companies] know that their investors will be demanding this and therefore those who are not compliant or those who have low standards will suffer’, he says.
Sallie Pilot, Chief Insight and Engagement Officer at Black Sun, a global stakeholder communications agency, argues that corporates and other key players in the sector will need to maintain a continuous dialogue on the latest developments so they’re prepared for inevitable mandatory reporting. ‘You can’t just wait for the reporting cycle,’ she says, ‘you’ve got to be on top of these [requirements] year-round to make sure you get the right things in place to […] meet the reporting requirements.’
There’s a risk that implementing a range of differing regulation at the national level will lead to fragmentation and increase the compliance burden for multinationals, ultimately hindering progress towards addressing the climate crisis.
Christian Schmies, Co-Chair of the IBA Asset Management and Investment Funds Committee and a partner at Hengeler Mueller in Germany, argues that ‘ESG has the potential to create certain barriers to the international flow of capital if there are different views on what ESG standards should be’. For him, the creation of a globally agreed standard for financial disclosures on ESG is crucial.
In early November, the International Financial Reporting Standards Foundation announced the creation of the International Sustainability Standards Board (ISSB) to develop ‘a comprehensive global baseline of high-quality sustainability disclosure standards’.
The ISSB’s disclosure standards will aim to provide comprehensive sustainability information for global financial markets. In November its Technical Readiness Working Group published prototype climate and general disclosure requirements, which will now be considered by the ISSB.
Schmies says the creation of the ISSB is more than necessary. ‘If there are not internationally harmonised standards then it makes cross-jurisdictional services much more difficult,’ he argues, ‘because companies are facing a multitude of different standards which may not be compatible’.
Investors are also under pressure to address the climate crisis, in particular to divest from fossil fuel companies. Schmies says that the pressure on pension funds and other asset managers is reflected in their more active involvement in annual general meetings and in the growing number of ESG products being launched.
Schmies believes that without an international standard for this kind of investment there’s a significant risk of greenwashing. ‘These ESG-orientated investments could turn out to be quite litigious,’ he says, ‘with increasing liability risk for asset managers if they brand products as ESG compatible but ultimately that branding doesn’t have any basis in objective criteria’.
Kiran Aziz is Head of Responsible Investments at KLP Asset Management, a major Norwegian pension fund, which divested from coal in 2019 following a phasing out process starting in 2014. ‘We are a long-term investor,’ says Aziz, ‘and coal is not part of the energy transition we need in order to reach the Paris Agreement’.
Engagement with fossil fuel companies on the climate crisis will be KLP’s preferred tool, rather than divesting, to see ‘if they are heading towards a less carbon-intensive business model’, explains Aziz. She believes it’s important to allow companies time to demonstrate how they will move to net zero. ‘Exclusion is the last option we have’, she says.
Pilot says investors are encouraging companies to establish transition plans as a way for them to understand how companies will achieve their climate-related targets. These can be ‘used as a dialogue tool to understand progress against that plan’, she says.Schmies believes that divesting might risk a situation where the investors who are most concerned about the climate crisis have the least say in how significant companies, such as those in the fossil fuels sector, are run. ‘You may end up in a situation where those who are most concerned about ESG factors divest, whereas others who don’t care move in’, he says.