‘Two years ago, if you asked top firms about their ESG credentials they would tell you about the beach clean-up they organised or how they don’t use plastic bags. Now everyone’s got an ESG website and I’m sure many have made statements they wish they hadn’t.’
The words of Ben McQuhae, founder of specialist sustainability law firm Ben McQuhae & Co, speak of the conundrum facing pundits attempting to scrutinise the environmental, social and governance (ESG) bona fides of the top 25 Legal Business 100 and top 25 Global London firms.
It is a paradox that Legal Business has grappled with before. This time last year, our inaugural ESG report concluded on an optimistic note. While it was painfully apparent that many responses to our questionnaire held more than a faint whiff of empty platitudes and virtue signalling, we were confident that the pressure already being placed on firms by clients and, to a lesser extent, regulators, around ESG would translate into genuine action.
‘ESG always has, and perhaps always will have, flagbearers and naysayers, but the overwhelming trend is that banks, corporates and law firms are getting their houses in order.’
Rebecca Perlman, Herbert Smith Freehills
This year it is clear that – while firms are far more cognisant of ESG principles than they would have been even two years ago – the veneer of the ESG website has for many substantively yet to materialise into actual walking the walk. A subdued 52% response rate to our survey, despite reaching out to more firms this year, is disheartening and, even considering Russia’s catastrophic invasion of Ukraine, it is striking how many firms still shy away from questions over clients and mandates they have rejected on ESG grounds. The war has also prompted questions over energy resources, with a desperation to simply secure energy supply threatening to overshadow the luxury of sustainability.
Nevertheless, LB again endeavours to identify which firms are making better strides than others, and which still have a way to go in fulfilling ESG commitments in both external client-facing work and internal policies.
On a dime
‘ESG always has, and perhaps always will have, flagbearers and naysayers, but the overwhelming trend is that banks, corporates and law firms are getting their houses in order. Not least because of regulatory pressure, but also because of investor sentiment, which is driving things and consumer preferences, with shifts in what customers want to buy.’
The view of Rebecca Perlman, partner and head of Herbert Smith Freehills’ ESG, sustainability and responsible business practice, was echoed by many of those interviewed among the top UK and US firms in London.
However, the legal industry has in general been slower than professional services peers in turning on a dime to prioritise ESG as not just a ‘nice to have’, but a necessity in meeting fiduciary duties. In that vein, the legal community might turn to its banking and investment counterparts (which on paper should have a post-financial crisis, regulation-imposed edge on such matters) for a cautionary tale or two.
In May, HSBC was hit with a PR disaster when Stuart Kirk, the bank’s global head of responsible investment, delivered a speech titled: ‘Why investors need not worry about climate risk’. Among his controversial comments, Kirk, who was appointed to the role in July 2021, said: ‘There’s always some nut job telling me about the end of the world… Who cares if Miami is six metres underwater in 100 years? Amsterdam has been six metres underwater for ages and that’s a really nice place.’
Embarrassing, yes, but more importantly, it is indicative of the increased power of the ESG agenda and the reputational threat attached to underplaying it, that Kirk has been suspended from the role.
Then came the reckoning in the same month when German police raided the offices of asset manager DWS and Deutsche Bank, its majority shareholder, as part of an investigation into allegations of greenwashing. Cue intense nervousness among all those professionals falsely claiming to be ESG experts.
Moving from the sublime to the ridiculous, Aviva’s gender-diverse board should be the cause for plaudits, but as the events of its recent AGM illustrated, not everyone got the memo. Misogynistic comments from dinosaur shareholders abounded, including a remark directed at chief executive, Amanda Blanc, that she was ‘not the man for the job’. Another tone-deaf shareholder praised the women for being ‘so good at basic housekeeping’.
Focusing back on the legal industry, many insist that, propelled by regulatory, activist, investor and consumer sentiment, ESG has proved more resilient than its predecessor, corporate social responsibility (CSR), which clearly lost momentum post-financial crisis.
‘ESG is clearly now embedded as a key client priority. Even in light of the big geopolitical events that are happening now, it still hasn’t been pushed off the agenda in the way that it had previously.’
Anna-Marie Slot, Ashurst
Anna-Marie Slot, who became Ashurst’s first global ESG and sustainability partner in 2019, observes: ‘ESG is clearly now embedded as a key client priority. Even in light of the big geopolitical events that are happening now, it still hasn’t been pushed off the agenda in the way that it had previously. That comes in part from learnings out of Covid when everybody thought that was going to submerge ESG considerations, whereas it added quite an impetus to understanding that these are things that we must deal with now to avoid a worse situation in the future.’
People and planet
Given how much more entrenched the ‘E’ of ESG tends to be in market consciousness, it may come as no surprise that firms are more forthcoming about their environmental objectives. While there will always be incompleteness wrought by comparing differing data sets, many firms at least try to be proactive in ensuring their climate pledges are substantiated.
Increasingly prevalent is the desire to measure up to targets from the Science Based Targets initiative (SBTi), a partnership between CDP, the United Nations Global Compact, World Resources Institute and the World Wide Fund for Nature.
This year Slaughter and May became the first law firm to have its science-based Net Zero target validated under SBTi’s new corporate standard, which was launched at COP26. As well as committing to reduce carbon emissions 50% by 2030 from a 2018 base, the firm will also target a 90% absolute reduction of emissions by 2040. Pinsent Masons has since received verification of its reduction commitments of 90% of its 2019 emissions by 2040 from SBTi.
Uzma Hamid-Dizier, Slaughters’ newly promoted director of responsible business, notes: ‘What’s significant is that it focuses on absolute reductions. It means making real changes in behaviour to affect greenhouse gas emission reduction in our direct and indirect activity. There’s a lot of work to do to make that happen.’ She asserts that her director-level role is recognition by the firm that responsible business is a strategic priority.
Then there is the thorny issue of acting for clients with a less than spotless image.
Asserts Slot: ‘Some people might say you should close down high-emitting industries today. OK great, but what about all the people that are employed by that industry? What does that mean to them from a socio-economic perspective? If you’re looking at sustainability in its true sense, you’re looking at all those components at the same time. The key is that all industries need to transition, and transition at scale and speed.’
Firms have also had to grapple on behalf of their clients with enhanced reporting requirements following stringent EU regulations, including the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation that entered into force in 2021 and 2020 respectively.
Doug Bryden, Travers Smith’s head of risk and operational regulatory, says: ‘The ESG regulations at an EU level currently have no real teeth, which is common with a lot of ESG regimes. Nonetheless, these obligations to publicly disclose information are powerful and there are proposals looking to add more regulatory bite. ESG regulation isn’t going anywhere – we are just at the beginning of this journey with clients.’
Meanwhile, the US, which has noticeably lagged on environmental policies since the Trump era, is finally showing signs of mobilising. The Securities Exchange Commission ESG taskforce, which was set up in 2021, has this year begun issuing enforcement actions – including against mining company Vale for misleading investors on its ESG disclosures as well as against BNY Mellon Investment Adviser for misstating ESG information.
Shareholder rebellions have increasingly seen climate issues driving corporate strategy. Last year, oil giant ExxonMobil was subject to a landmark coup by hedge fund Engine No. 1, which successfully ousted two Exxon board members for its own candidates.
‘Shareholder activism has become a growing force to be reckoned with. It is widely acknowledged that shareholders, as the ultimate owners of a company, must positively monitor and police the activities of management.’
Angeli Arora, Mishcon de Reya
Angeli Arora, corporate partner at Mishcon de Reya, notes: ‘Shareholder activism has become a growing force to be reckoned with. In the past, companies often talked about shareholder activists as the enemies and devised defence strategies to deal with short-term investors. However, that narrative doesn’t work anymore, as it is widely acknowledged that shareholders, as the ultimate owners of a company, cannot be passive bystanders but must positively monitor and police the activities of management. Now companies must actively engage with their shareholders to understand and address their concerns.’
For the first time in the UK, this has manifested in high-profile climate-related litigation in a case brought by environmental law charity ClientEarth against Shell. As a shareholder, ClientEarth is seeking to hold directors personally liable for failing to properly prepare for the energy transition.
Kimmie Fearnside, head of pro bono at disputes boutique Pallas Partners, which is representing ClientEarth, says: ‘It demonstrates scrutiny by investors of energy transition plans, which have only started to be voluntarily or mandatorily put in place in recent years. It also highlights the changing investor sentiment. Where you have a public company, for instance, and investors that are subject to their own scrutiny, they are taking more of an active role in driving that change.’
This follows the landmark decision by the Hague District Court in a case brought by Dutch environmental organisation Milieudefensie against Shell, which found that the company owed Dutch residents a duty of care to reduce its CO2 emissions. Heather Gagen, Travers’ commercial litigation partner, notes: ‘What you tend to see in the case law and in the reputational narrative that sits around ESG litigation is the focus on human rights. Human rights is terminology that is accessible to consumers, wider civil society and the media. In cases such as the Milieudefensie v Royal Dutch Shell, you have the court looking to soft law human rights frameworks and essentially hardwiring them into national law.’
Elsewhere, investment priorities have inevitably shifted, with renewables projects being stalled as the need to mitigate the immediate energy crisis bites.
Bay Area partner Paul Barker, who joined Kirkland & Ellis’ ESG and impact practice in November 2021, observes: ‘The world is looking quite radically different than it was just four months ago, certainly than it was 12 months ago, as a result of Russia’s invasion of Ukraine and the energy crisis. Clearly, there are geopolitical reasons why the Net Zero energy transition is going to take a different path in the short term than most stakeholders had envisaged.
‘These recent events only reinforce the necessity of the energy transition, to address both climate change and energy security, but there is also growing recognition of the complexities, nuances, and challenges. In this difficult new reality, ESG will remain an important lens through which to view businesses and the risks and opportunities they face.’
Governance gripes
To tackle ubiquitous ESG issues, clients are increasingly demanding holistic governance advice. Says Jeff Twentyman, head of sustainability at Slaughters: ‘Clients are now asking about how they make their governance systems work well, for which that former environmental compliance lawyer is not ideally suited. Our aim is to build the capacity in this organisation so that everyone is conversant with the themes and challenges of ESG.’
It is becoming increasingly urgent for firms that have come late to the party in enhancing their own governance structures to act now. As the competition for talent in the City has never been more aggressive, many firms have been slow to the realisation that ESG kudos has become a most powerful recruitment tool.
However, ESG lawyers are not born, they are created over many years with experience and sustained investment.
As Linklaters’ environment and climate change partner, Rachel Barrett, notes: ‘It is not always easy for lawyers in private practice to spend the investment time needed to stay ahead of the curve in this rapidly changing area, particularly given the dominance of the billable hour. That said, it is critically important to recognise the need to invest in upskilling teams and educating around ESG matters so lawyers can continue to provide the best advice to clients as the world transitions.’
This is particularly true as City firms move away from lockstep towards remuneration structures closer resembling US ‘eat-what-you-kill’ models, making it harder for many to neglect billable hours in favour of building their ESG credentials.
Uptake has been far from wholesale, however, and offering non-billable credit is one potential solution. In May, Reed Smith said lawyers could count up to 25 hours of sustainability-related leadership, advocacy, training and development as billable credit, marking an extension of the work qualifying with other activities including pro bono legal service, innovation projects (up to 50 hours) and diversity-related projects (up to 50 hours).
Paul Davies, head of Latham & Watkins’ global ESG practice, alongside new arrivals Sarah Fortt and Betty Moy Huber in the US, argues that firms can also tackle these challenges with the use of tech. Latham collaborated with sustainability consultancy Anthesis to develop Risk Horizon, a due diligence tool, now used by other firms, that screens potential deals for ESG risks. Says Davies: ‘The ESG space is really interesting from an innovation angle because the way that ESG has evolved is so dynamic and it lends itself so well to lawyers that are willing to think outside the box and challenge the norm.’
One Magic Circle partner is more cynical: ‘It is the same with any new or growing practice area, including our tech practice. People just do the thought leadership and meet their billables.’ Though he admits the argument is more nuanced: ‘A challenge that we see more in our US peers than firms coming from a lockstep background, is the conversation around how individuals will be rewarded for work in this area.’
‘Clients are now asking about how they make their governance systems work well. Our aim is to build the capacity in this organisation so that everyone is conversant with the themes and challenges of ESG.’
Jeff Twentyman, Slaughter and May
McQuhae is familiar with such cultural challenges, having previously worked at global law firms including Jones Day and Dentons. He launched Ben McQuhae & Co in February 2021.
‘I appreciate some of the challenges of big law firms but I also appreciate the laziness and the short-sightedness of some. It is important, according to our view of what it means to be an ESG-focused law firm, that we deliver additionality. This means placing ESG at the heart of our business plan and having the courage to be faithful to our values. We have to be willing to say no to work that is not consistent with our values, even though we can do the work – and we do.
‘Taking fees from clients who are making a difference, isn’t making a difference. People call it greenwashing or bullshitting and maybe it’s just inevitable as an early stage of the transition of an entire industry, but we need to be clear that if there is no additionality, let’s not pretend there is.’
Clifford Chance (CC)’s senior partner Jeroen Ouwehand is widely hailed as the real deal when it comes to walking the walk on ESG, although he is the first to admit that it can be a minefield. He holds his hands up on occasionally missing the mark – including the time CC issued a press release proclaiming hundreds of ‘ESG lawyers’. The cohort had completed just one six-week training programme.
Since 2020, CC has made substantive moves in integrating ESG principles with its governance strategy, its code of conduct and into key non-financial performance indicators.
Ouwehand insists that ESG standards are viewed as complementary, not contradictory to the firm’s economic success: ‘To anyone who says we’re becoming too political or that this is “woke”, I say that it’s what clients need and expect. It’s also good for the bottom line and, at the end of the day, will be beneficial to our business.’
This sentiment is echoed by Davies: ‘It is critical that we walk the walk as well as talk the talk. It’s a recognition that we are part of our clients’ supply chains so it’s important that we spend time on what we are doing internally. Increasingly, it’s a topic that comes up in recruitment too.’
While examples of missing the mark will, and should, continue to garner critique, the silence of those not willing to join the conversations is louder than ever. After gaining traction against the backdrop of a pandemic and geopolitical and humanitarian crises, it is clear that choosing not to engage is a luxury firms can no longer afford.
For all their well-chosen, zeitgeisty rhetoric, few firms have successfully integrated ESG principles into their business models. Whether lagging firms can properly mobilise the cultural overhaul required before Legal Business’ next ESG report is looking doubtful. As Twentyman concludes: ‘ESG is a whole-business proposition – you can’t just do part of it. You need to change everything; the advice you give clients, and the way you operate yourself.’ LB
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The mandate debate
Slaughter and May’s Jeff Twentyman captures the inherent hypocrisy underpinning the question of which clients or mandates law firms will handle or refuse on ESG grounds: ‘There’s a long tradition of professional service firms distancing themselves from what their clients do by saying: “We just advise. Whatever it is they do doesn’t implicate or affect us.” Typically, law firms adopt that position less frequently where the client reflects well on them.’
Ben McQuhae of Ben McQuhae & Co notes: ‘As lawyers, we make choices every day about the work and the clients we take on – whether it’s commercial conflicts, legal conflicts, whether it’s worth getting out of bed for the fee or whether we think the client is able to pay – so choosing work and clients on the back of aligned values should be no big deal.’
Unlike the majority of top UK and US firms in London, he is happy to provide several examples of mandates his firm has refused due to a lack of alignment on sustainability, and some that it turned around.
In the main, survey responses to the mandate question were disappointingly similar to last year. The commonly pleaded ‘confidentiality’ or ‘not disclosable’ defence continues to wear thin. Typical responses this year include this from Clyde & Co: ‘If clients or matters do not meet the standards which the firm sets for client onboarding, they will not be accepted. There are examples of this each year but as a law firm we would not be able to provide any details.’
Or as Herbert Smith Freehills said: ‘Client-related matters are confidential and we won’t be commenting on them, however ESG issues are considered in our business selection processes.’
Among the exceptions, Clifford Chance has implemented a policy specifically looking at sustainability concerns in incoming matters. Senior partner Jeroen Ouwehand says: ‘If we have a matter that comes in that could have a huge adverse climate impact, it is automatically escalated through our conflict system. It comes to our general counsel and to me and the two of us then have to make a decision on whether or not we take it on. We’ve also included some red lines around certain matters, particularly around new thermal coal projects, which we just will not do, and that is new. Now I can say, hand on heart, we’ve turned down matters which a year ago we would have taken on.’
After admitting last year that this is ‘not something we track’, DWF launched its ESG strategy in December 2021 alongside a strategy for client onboarding. ‘We have also implemented an ESG client policy for all new and existing clients, which focuses on identifying clients that operate in what are considered high-risk industries and the process we need to follow. We also have a new sanctions and risk committee which regularly reviews the clients we act for and takes appropriate action where necessary,’ the firm says.
Simmons & Simmons, which last year said: ‘We have not had any incidences of turning down work due to incompatibility with our own ESG agenda’, has marginally increased its resolve. ‘Our stance in response to Russia’s war in Ukraine demonstrates our approach to work that we feel does not align with our values. Even prior to this, Simmons was investing time in thinking about how our purpose as a firm may shape the type of clients and mandates that we take on. This is something that we will continue to consider as we look to shape a robust international process for reviewing work of all types to ensure it reflects who we want to be as a firm.’
Meanwhile, CMS wheeled out the same response as last year: ‘Our policy is not to draw up formal fixed criteria to govern the circumstances where we do not take on work. We look at all factors of which we become aware in deciding whether to accept a mandate or not.’
Reviewing work for Russia-based clients through an ESG lens is something that firms have provided some commentary on, although not acting for clients subject to sanctions is a legal requirement and certainly not something that law firms should be praised for doing (for more on this, see our commentary on acting for Russian clients).
As Hogan Lovells notes in its survey response: ‘The firm does not accept work where it is incompatible with our values including our ESG agenda. Most recently in relation to the invasion of Ukraine we terminated some ongoing matters and declined new mandates where we believed they were not consistent with our values or were not aligned to our support for the innocent people caught up in the invasion.’
The issue of which clients firms can comfortably act for in accordance with ESG considerations is still taboo, in spite of the war in Ukraine which should have furnished law firms with a model answer. The industry is not quite at a tipping point yet but, with full regulatory disclosures looming, firms will have to get used to having awkward conversations with clients.