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Principles or profits?

Rachael JohnsonTuesday 24 May 2022

Ukraine, the climate crisis and the pandemic have brought environment, social and governance (ESG) into sharp focus for law firm leaders. Global Insight reports.

ESG is rising swiftly up the business agenda. It is now a non-negotiable aspect of running a law firm and its importance is only increasing. ‘It’s no longer a good-to-have. It’s a must-have for your business now’, says Hanim Hamzah, Co-Chair of the IBA Law Firm Management Committee and Regional Managing Partner of the ZICO Law Network in Singapore.

For Michael Watson, Head of Climate and Sustainability at Pinsent Masons in London, ESG is an inflection point as opposed to an isolated occurrence. For him, the effects of ESG will change everything and therefore cannot be ignored.

In response to ESG’s increasing significance, the IBA Law Firm Management Committee has produced a toolkit to help its members understand the scope and importance of ESG from a law firm management perspective. The toolkit is intended to provide law firm leaders with a better understanding of the three pillars of ESG to assist with internal checks in their organisations.

The impact of ESG on a firm depends on several factors, such as its size and the types of clients it works with. In some jurisdictions, there are political and economic challenges which place ESG in a different context and change its meaning.

Javiera Vela, a partner at Vela & García in Chile, told Global Insight that, as a result of the current rewrite of the constitution in her country, there’s a great deal of political and economic uncertainty, with key institutions such as the central bank and pension funds facing an unclear future. Understanding and attempting to advise on what ESG means in this context is particularly challenging. Nevertheless, Vela says, ‘we are trying to develop the market [by] adopting best practices in corporate governance and ESG’.

As part of this effort, Vela has worked with colleagues in the IBA Securities Law Committee to produce a video analysing current ESG standards across Latin America. Although ESG standards differ across Latin America, there is a common theme of firms and businesses wanting to adopt best practice according to global standards while facing significant political and economic challenges. Vela notes that in Chile there’s even a ‘challenge of credibility with the concept itself’, with ESG often criticised as being nothing more than ‘greenwashing’ – a term given to organisations that are marketed to appear more environmentally-friendly than they really are.

Drivers of change

The impetus for law firms to address ESG comes from two stakeholders in particular: employees and clients. Law firm leaders recognise that ESG issues are important to younger lawyers and that they expect them to be a part of their working life.

‘The younger generations are more driven by values than my generation’, says Jeff Twentyman, Head of Sustainability at Slaughter and May, ‘and all law firms have to be responsive to that’. For Twentyman, the real challenge is in recruiting a diverse workforce with different ways of thinking considering a firm that has a clear position on ESG is likely to attract like-minded candidates, for better or worse.

Lina Pimentel Garcia is Co-Chair of the IBA Environment, Health and Safety Law Committee and a partner at Mattos Filho in Brazil. According to her, ESG is a deal-breaker for young lawyers. ‘They don’t work in [any organisation] that doesn’t have this kind of purpose’, she says.

She explains how her firm has adapted its approach to younger recruits by involving them in pro bono work or training programmes to keep them engaged. As a result, the firm has more interns than it used to, ‘so we can invest more not only in legal service training but also in the different aspects that interest them’.

Our clients expect us to have a clear inclusion strategy and to be regularly tracking and analysing our equal opportunities and social background data

Ayesha Burnett
Diversity & CSR Manager, Penningtons Manches Cooper

Historically, clients have shown more interest in the ‘S’ of ESG, specifically diversity. They want to see diverse representation in the pitches made to them by firms and are now looking for cognitive diversity in the teams that’ll be working for them. ‘Our clients expect us to have a clear inclusion strategy and to be regularly tracking and analysing our equal opportunities and social background data,’ says Ayesha Burnett, Diversity & CSR Manager at Penningtons Manches Cooper in London.

More recently, when it comes to tenders and pitches, clients have begun to ask how firms are addressing environmental issues, seeking relevant data and metrics to demonstrate targets set and progress made towards them.

Twentyman suggests clients are starting to recognise that their own environmental obligations also apply to their supply chain, which includes legal advisers. As such it’s inevitable that they will ask law firms about the action they’re taking to address the climate crisis.

The conversation clients want to have about the ‘E’ of ESG often goes beyond their need to simply audit their supply chain. In many cases clients are keen to gain insight on best practice by understanding what their law firm is doing and what they can learn from it. According to David Raine, Chief Executive Officer of Penningtons Manches Cooper: ‘ESG leaders in other organisations are keen to understand any ideas or any initiatives that people are conducting that might make a difference, or involve people on the ground, or encourage employees to act differently.’

Pimentel Garcia agrees. ‘We have learnt that clients wanted and want and keep wanting to live next to us as individuals’, she says, so that their relationship goes beyond giving advice to a discussion of how to develop ideas and best practice.

Environment

Many firms are now setting science-based targets to reduce their carbon emissions. Michael Watson of Pinsent Masons says, ‘we think the science-based target initiative accreditation is probably the most important thing to do’. Jeff Twentyman of Slaughter and May observes that having these targets in place has opened doors to talk to clients. Once these targets have been set, firms can begin to make transition plans towards achieving them.

David Raine of Penningtons Manches Cooper says one of the steps his firm is taking to reduce carbon emissions is adopting an agile approach to working practices and not expecting people to be in the office. When the firm’s real estate portfolio comes up for renewal, they will seek to reduce the amount of space they have.

For Raine, the biggest challenge is the firm’s supply chain, which accounts for a large proportion of its overall emissions. ‘We’re engaging with all our key suppliers to understand their ambitions and targets so that we can procure our services responsibly,’ he says.

Lina Pimentel Garcia at Mattos Filho says her firm was the first in Brazil to sign the United Nations Global Compact – which encourages organisations to adopt sustainable and socially responsible polices – and is also a member of the Net Zero Lawyers Alliance. She notes that since making these commitments the firm’s leaders have ‘learned how difficult it is going to be to be net zero’. She says the firm has implemented hybrid working and reduced travel, but its leaders recognise that they will need to find ways of doing more to meet the goals they have to committed to, which will be a huge challenge.

However, there is both risk and opportunity associated with the demand from clients to address ESG issues. If a firm doesn’t address ESG, it risks its lawyers being unable to advise their clients on one of the most pressing issues they face. The opportunity is in the many avenues of new business to be won when a firm can demonstrate its own credentials to new clients involved in these emerging areas.

In order to be successful, ESG should be embedded throughout a firm’s strategy, culture and decision-making processes, rather than being tagged on as an initiative separate to the firm’s day-to-day work. ‘ESG is a totally different way of thinking […] a totally different way of leading an organisation’, says Hamzah. She suggests that it demonstrates a change of mindset, from one focused on short-term gains to instead addressing the long-term sustainability of a firm, ‘and then you look at how resilient you are towards all these different changes’. For Hamzah, this requires both a bottom-up and top-down approach.

In the past some firms set up specialist teams to deal with emerging trends, but ESG requires a firm-wide approach to ensure that all lawyers are considering it in the decisions they make and the advice they give. Twentyman argues that eventually taking account of ESG will become intrinsic to being a lawyer, in the same way that tax or inflation are currently factored into legal advice.

Watson highlights an internal training programme that his firm has set up in collaboration with the University of Oxford’s Smith School of Enterprise and the Environment to help embed ESG awareness. The climate and sustainability accelerator programme consists of 12 one-hour webinars that can be accessed by everyone in the firm. ‘The concept behind it’, Watson explains, ‘is, if you uplift everybody a little bit, it’s much more effective than creating five super experts’. He says that clients have now begun to establish similar initiatives in their own organisations, in some cases with the firm’s assistance.

Avoiding greenwash

Some firms have set out their purpose and values. Doing so can help them take a methodological approach to ESG that involves concrete, meaningful action and mitigates the risk of greenwashing or ‘impact washing’ – where misleading claims are made about the real change an investment is making.

Watson’s firm describes itself as a ‘purpose-led, professional services business with law at the core’. He argues that having purpose and values in place makes it easier to explain to all stakeholders why embedding ESG into the business is the right thing to do, as well as why it’s important to invest in long-term projects and major transitions. For him, ESG is ‘a concrete manifestation of what it means to be a purpose-led business’.

Raine’s firm has also set out its purpose and values. ‘The challenge now is to make sure that what we do and how we do it is consistent with what we are or set out to be’, he says. To address this challenge, his firm has established working groups to ensure that what it says is consistent with how it operates on the ground, and a range of working practices have changed as a result.

Hamzah agrees that the approach to purpose and values has to be meaningful rather than aspirational. ‘What makes it competitive is if you really have those values within the firm’, she says, arguing that it’s quickly apparent when a firm has simply published its values for marketing purposes but hasn’t taken meaningful steps to ensure they are lived out in its culture and working practices.

Most law firms have not got to the point where they approach new business or work on the basis that those moral choices are available to them

Jeff Twentyman
Head of Sustainability, Slaughter and May

One of the biggest decisions firms need to make when taking concrete action on ESG is regarding the clients they represent. It can be a difficult balance to strike between addressing ESG issues on the one hand and representing clients who critics may consider problematic from an ESG perspective.

The issue is nuanced with many factors to consider. For example, it’s not always as straightforward as working with some clients and not with others. In some cases, the type of work undertaken, and the consequences of that work, make a difference. Working with an oil company to help it wind down its production and transition to renewable energy generation, for instance, is very different to working with an oil company to simply explore new areas of production.

Social

Both Raine of Penningtons Manches Cooper and Pimentel Garcia of Mattos Filho describe pay-related initiatives at their firms that reflect a culture that values its people as well as profits. Raine’s firm has reduced some of its lawyers’ targets ‘in terms of client-facing work, so that they’ve got time to devote to non-chargeable work and initiatives’.

Pimentel Garcia’s firm changed its compensation model from ‘eat what you kill’ to the lockstep model, which is rare in Brazil. ‘It was good for everyone in terms of financial issues and also cooperative ways of working’, she says. She argues that once the individual employee has a sense that their self-development and wellbeing is important, then the whole institution can develop.

Diversity and inclusion (D&I) strategies play an important role in employee wellbeing. Raine says that ‘D&I is such an important element in terms of understanding where we are and how we’re going to change’.

Ayesha Burnett, Diversity & CSR Manager at Penningtons Manches Cooper, says that ‘our employees expect to be able to bring their whole selves to work and for the firm to champion and support people from all backgrounds’.

Burnett argues that employees should feel their voice is heard. Consequently, her firm has six employee-led inclusion networks where staff can share thoughts and ideas in an open forum. The firm also has an inclusion steering committee and holds lunch-and-learn sessions to raise awareness of areas such as religious observation and mental health. These help to establish a more inclusive culture, which is the crux of a successful D&I strategy.

Twentyman argues that it’s possible for firms to think about clients in moral terms and says they do it for other types of work, for example, choosing not to take on as a company with a poor record on animal rights as a client. However, he argues that law firms do not yet think about ESG in this way. ‘Most law firms have not got to the point where they approach new business or work on the basis that those moral choices are available to them not to take on engagements or mandates for businesses that produce unsustainable outcomes’, he says.

Pimentel Garcia gives an example of a client that her firm decided not to represent. The firm’s leaders regretted the decision because they recognised that if they had taken the case, they would’ve been able to implement their values as part of the legal services they provided. But she says her firm has learnt from this experience and describes how their decisions are based on how they can work for the client in a way that aligns with their values. If they can agree an approach that suits both the client and the firm, then they are happy to take on the work.

In our job as lawyers our power is in representing clients and withdrawing representation is not something that should be done lightly

Michael Watson
Head of Climate and Sustainability, Pinsent Masons

Watson agrees with the idea of influencing clients through working with them. ‘In our job as lawyers our power is in representing clients and withdrawing representation is not something that should be done lightly’, he says.

One approach could be to include ESG factors when conducting ‘know your client’ checks before taking on work. Doing so could help remove some of the emotion and subjectivity from the decision-making process and therefore make it a little easier.

The Russian invasion of Ukraine has proved a testing ground for decisions about which clients to work for or which jurisdictions to operate in. For Raine, thinking about clients against an ESG background ‘throws into sharp focus the Russian invasion of Ukraine and acting for Russian clients. To what extent should one not act in that situation?’ he asks.

Sanctions are relevant to the decisions firms make. Fundamentally a firm cannot take a case when payment isn’t guaranteed or where its ability to provide legal services is compromised. ‘Don’t take work on where you won’t be able to do the deal for the client even if you wanted to’, says Raine.

Socially valuable?

For Pimentel Garcia the question of which clients to represent speaks to a broader question of the contribution law firms and their clients make to society. She says there should be discussion on ‘how much we must adapt our legal advice in order to really improve the role of our clients in society’.

Watson also highlights the role of lawyers in advising clients on what they ‘should’ do as well as what they can do. Thinking in this way will help the profession to remain in tune with society as its expectations evolve. Lawyers can build on their trusted adviser role to work with their clients in this respect.

Watson’s firm has taken the approach of offering its clients the services of other professionals, such as accountants, data specialists and project managers, alongside the advice of legal experts. Doing so allows the firm to offer a more rounded product to clients, which is particularly well suited to the ESG agenda.

Hamzah sees the benefits of this kind of approach. ‘I really believe in open collaboration […] with other experts’, she says, ‘because that’s when you give the best value to your client’. She argues that lawyers are trained to think in a particular way, but that the ESG agenda is much broader and requires consideration of other factors. ‘We are not trained as lawyers to do that’, she says.

Governance

Under the ‘G’ of ESG, some argue that the partnership model favoured by most law firms is not best suited to making the kinds of long-term decisions that a successful ESG strategy requires.

Hanim Hamzah of the ZICO Law Network says that ‘the short-termism of that partnership structure […] does not champion ESG or sustainability in the long term’. For her, the challenge of the partnership model is that lawyers wear so many hats that it’s hard to know what their priorities should be. She adds that the alternative business structures currently available in some jurisdictions could be an option for law firms because ‘one cannot be everything to everyone’.

Twentyman of Slaughter & May agrees that ‘on a financial management level, the nature of the partnership model and its business model is very, very short term’. He says this can make it quite difficult for law firms to make big strategic decisions.

Watson of Pinsent Masons argues that the solution isn’t necessarily to dramatically change the partnership model but rather to ensure that ESG is at the centre of decision making. This should encourage long-term thinking and improve risk assessments through documenting decisions made. He also argues there should be an individual or group with ESG expertise tasked with identifying opportunities, be that a board member or a dedicated committee, or both.

It would be risky for law firm leaders to overlook ESG in their long-term strategic planning. Firms that choose to ignore ESG risk limiting the employees they can hire and the number and types of clients they can take on. Watson says that if ESG ‘is an accelerating trend, then anyone that ignores it will find themselves irrelevant sooner than they expect’.

Pimentel Garcia offers the same advice she would to her clients, which is to implement an understanding of ESG within the firm’s leadership to guide the firm towards the proper path. She says firms should consider ESG as a risk that needs to be managed, for example by carrying out a material ESG risk assessment. For her, taking account of ESG in this way is ‘something essential’ that will determine who’s going to lose space and end up disappearing in the future.

There are also opportunities to be realised for law firms that embrace ESG. Twentyman argues that ‘at this time of disruption of business and industry, there’s a massive commercial opportunity for professional service firms who have the courage to steer themselves in the right direction towards the business and social needs of the future’.

Watson believes that law as an industry is extremely well placed to help clients with ESG issues. He says the profession ‘needs to make sure that law is central to the development of the solutions’, which only comes from being part of the conversation. For him this means lawyers becoming comfortable with having partial-knowledge conversations and not always being the specialist. ‘We’re all learning together, and part of the learning comes from collaborating’, he says. ‘The process of learning is having these conversations and going into situations where you only have partial knowledge.’

Rachael Johnson is a freelance journalist and can be contacted at rachael.editorial@gmail.com