LexisNexis

Law firms as drivers of sustainable boards

Wednesday 30 June 2021

Natalia Nicolaidis

Dynamic Counsel, London

nnicolaidis@dynamiccounsel.com

Companies continue to face disrupted markets and evolving performance drivers. Customers, lenders, regulators and investors drive an increased focus on environmental, social and governance (ESG) concerns. Contemporary board oversight must evolve to ensure a constant re-evaluation of strategy, as well as ESG risk management, on behalf of all corporate stakeholders.

This is another means of driving value, but governance views vary on whether boards should maintain standalone sustainability committees to ‘own’ the review and analysis of these issues. I believe that business models in certain industries are under so much investor, customer and legal pressure that it is imperative that directors master the underlying technical facts and their impact on their companies.

Societal expectations matter more than ever, and investors are backing funds with a positive environmental and social impact. Effective engagement with stakeholders is critical to responding to these pressures and building and preserving value. To that end, effective, transparent and consistent ESG disclosure is a key aid for investors’ understanding and pricing of ESG risk. Unfortunately, consistently obtaining comparable information remains challenging. No two companies are exactly alike – even within the same sector – and treatment of legacy concerns is also often a relevant differentiating factor.

Committees formerly tasked with corporate and social responsibility (CSR) matters have a key role to play today. Their mission can and should expand to ensure that sustainable development policies and procedures are discussed, understood and owned by the entire board. They can promote accountability for environmental and social performance as well as human rights, health, safety, IT security and corporate resilience. Importantly, they can promote trust with investors by making clear a company’s long-term commitment to creating value (in the fields of economy, environment and society) while, at the same time, regularly evaluating the company’s responsible and ethical business conduct. Relationships with third parties (contractors, suppliers, community members and external stakeholders) are equally important to those with internal stakeholders (employees), and are well under the operational lens of sustainability committees.

Directors are in a unique position to connect sustainability with corporate purpose and strategy. They can promote effective engagement with stakeholders. But how do boards remain on top of sustainability issues when frequently faced with a multitude of legal requirements if the company on the board of which they sit conducts activities in multiple jurisdictions? What is the board’s duty of care and which laws define their members’ legal obligations?

The European legal system has been moving faster than the American system in holding corporates accountable for ESG violations, and the question of who will advise boards on how best to effectuate their obligations is important. Does the job of synthesising national law fall onto the corporate general counsel, and how much comfort can board members take from their advice in a patchwork space?

Law firms are perhaps the best positioned professional service providers to connect the pieces of the puzzle for boards and general counsels by advising holistically on all aspects of ESG risk and opportunities in the multi-jurisdictional world in which international firms now operate.

By understanding that, for boards, ESG is more than regulatory, disclosure and other legal requirements, law firms can put together a one-stop shop for boards and general counsels. Corporates see ESG issues in, for example, supply chain assurance for customers, realistic environmental risk management targets for lenders and clear communication with investors on KPIs. Law firms observe these multi-dimensional ESG dynamics on a daily basis in their reviews of supply contracts and their innovative transactions in the capital markets from both the buy-side as well as the sell-side.

By synthesising these issues and guiding on their impact, law firms can help shape the ESG agenda for their corporate, financial and investor clients.

Sources

Lynn S Paine, ‘Sustainability in the Boardroom’ (Harvard Business Review, July-August 2014).

‘It’s time for company directors to step up on sustainability’ (World Economic Forum, January 2020).

N Craig Smith and Ron Soonieus, ‘What’s Stopping Boards from Turning Sustainability Aspirations into Action?’ (INSEAD), accessed 23 June 2021

Helle Bank Jorgensen, ‘Wake-Up Call: Directors Must Focus on Sustainability Risks, BlackRock Letter Presses’ (NACD BoardTalk, 28 January 2020).