We good corporate citizens – ESG report

‘There is such a sense that we need to walk the walk. More so than I’ve ever seen before. This has captured the attention of many senior management partners. People are now taking ESG and diversity and inclusion as seriously as anything else in the firm.’

The view of Doug Bryden, Travers Smith’s head of risk and operational regulatory, certainly chimes with attitudes to the environmental, social and governance (ESG) imperatives held by senior corporate lawyers interviewed for our inaugural ESG report.

It has become apparent that despite best efforts, the failure of the coronavirus pandemic to inflict serious damage on the businesses of the top UK and US firms in London has given law firm leaders the bandwidth to galvanise their stance on the now ubiquitous – and increasingly pressing – matter of ESG.

‘There is such a sense that we need to walk the walk. People are now taking ESG and diversity and inclusion as seriously as anything else in the firm.’ Doug Bryden, Travers Smith

More cynical, seasoned observers may get a pang of déjà vu here. Have we not been here before, more than a decade ago, with that other three-letter acronym: CSR and its various facets of climate change and gender diversity – with law firms clamouring to be seen as good corporate citizens?

The more sceptical among commentators may be justified in pointing to the enduring ability of lawyers to opportunistically rebrand themselves according to where the winds of societal change – and the money – take them.

As Paul Watchman, ESG guru, senior UN legal adviser and former Freshfields Bruckhaus Deringer partner, notes: ‘A lot of people who are emerging into ESG have spent their life as tobacco litigators, defending companies against litigation around the world. Now lawyers are tapping into the fee stream – you’ve suddenly got an explosion of law firms announcing that they’ve launched ESG practices. The only problem is, you have to have people who are familiar with those areas before you can launch a practice.’

As always, the argument is slightly more nuanced. When kicking the tires on the ESG bona fides of the top 25 UK firms and the top ten US firms in London, it has not just been about scrutinising the credentials of the advice they have been giving clients. We have even asked firms for solid evidence of walking the walk on ESG, both in the running of their own businesses and in the types of clients they won’t act for on ethical grounds. Perhaps naïve expectations of firms pouring forth with numerous instances of taking the moral high ground and rejecting mandates that did not sit well with the ESG zeitgeist were quickly thwarted and met for the most part with blanket coyness (see boxout, ‘The mandate minefield’).

‘A lot of people who are emerging into ESG have spent their life as tobacco litigators, defending companies against litigation around the world.’
Paul Watchman, UN Environment Programme Finance Initiative

However, when multinational corporates like Vodafone start putting ESG at the heart of their panel selections, it is clear that firms can no longer hide behind vague platitudes and virtue signalling as they jump aboard the latest bandwagon. They must be prepared to back themselves up with facts.

The high-profile stepping down of Coca-Cola general counsel (GC) Bradley Gayton, shortly after sending an open letter championing financial penalties for firms that failed to meet a 30% diversity target – including women, the LGBTQ community and lawyers with disabilities – has been viewed as a cautionary tale. Where does being a firebrand end and pushing the envelope too far begin?

The reasons Gayton ceased to be GC of Coca-Cola after only eight months in the role have never been clarified. He was announced as a special adviser to the drinks company’s chief executive and chair James Quincey and a spokesperson would offer no further comment at the time about the circumstances behind the change in position, but the situation does suggest the difficulty of effecting institutional change in a corporate world not renowned for its progressiveness.

But there is little doubt that the ESG agenda will be an evolving beast over the coming years and – being charitable – everyone does have to start somewhere. In that vein, we undertake to differentiate between the talkers and the walkers to form a basis for LB’s watching ESG brief.

Environment: Stop slaughtering our planet

The environmental strand of ESG is the more established among firms of the three component parts of the acronym, given it is fundamentally a repackaging of the climate change aspect of CSR that emerged as a concern back in the 1990s but took a backseat immediately after the financial crisis inevitably shifted business priorities.

The campaigning of environmental activist Greta Thunberg and others has done much to reinstate awareness of such matters – and it would be remiss to view such attitudes as divorced from the proper business of law. Often dismissed derogatorily as ‘the woke agenda’, demonstrable care for the environment is already playing, and arguably will increasingly play, a key role for law firms in attracting and retaining a younger generation of talent over the next few years.

One City partner highlights the difficulty of answering these concerns absolutely. ‘There’s a huge amount of inconsistency and hypocrisy in all of this. Students will bang on about the oil companies but when you tell them about fast fashion, they’re not as keen to hear. The petrochemical industry makes materials that go into the clothes. The media plays a big part in whatever the mood of the week is. You’re going to need better PR people.’

Slaughter and May had a PR nightmare when Extinction Rebellion surrounded the firm’s Bunhill Row HQ in protest against its ties with the oil and gas industry. The ‘Stop Slaughtering our Planet’ strapline shows how firms can be singled out.

Slaughter and May had its own PR nightmare in February 2020 before the pandemic, when the legal arm of Extinction Rebellion surrounded the firm’s Bunhill Row headquarters in protest against its ties with the oil and gas industry, namely advice to Premier Oil on its £600m acquisition of North Sea oil fields from BP and Dana.

The ‘Stop Slaughtering our Planet’ strapline employed by the group was awkward, and shows how firms can be singled out and that such reputational damage can sit long in the memory. Across the Atlantic, Gibson Dunn fielded a similar blow to its sustainability credibility in April 2021 when a group of US law students wrote to the firm urging it to commit to a publicly available ethical standard that ‘articulates what fossil fuel work is incompatible with their commitments to frontline communities and to the climate’.

The group – called Law Students for Climate Accountability – alleges in the letter that Gibson Dunn ‘has consistently and actively used its legal skills to advance the interests of high-paying companies that cause immense harm to the climate and frontline communities, particularly indigenous communities’. The group cites, among other matters, acting for Dakota Access despite significant environmental impacts on sacred Sioux land and that the firm has ‘aggressively litigated to ensure Chevron evades liability for dumping billions of gallons of toxic waste in Ecuador’.

‘We are left to wonder if there is any case Gibson Dunn would not take on. There must be a line that Gibson Dunn will not cross,’ the letter pointedly concludes.

Paul Weiss has similarly come under fire from Harvard and Yale law students for its work acting for ExxonMobil. To their credit, both firms have at least recognised the need to change the narrative of their public image, having recently launched ESG practices.

‘In the panel re-tender, 20% of the mark for the firms related to ESG, particularly the planet and diversity and inclusion, which hadn’t been part of the scoring last time around.’ Wayne Spillett, Vodafone

Gibson Dunn declined to comment on the letter. Susy Bullock, the London partner who co-leads the ESG practice formed in February, is nevertheless credited in the market for taking up the gauntlet of advancing its credentials. ‘A tough gig,’ muses one ESG specialist.

Says Bullock: ‘Clients have had to rapidly become conversant and proactive on these matters, seeking to bridge any regional or organisational divisions within their organisations to ensure a global approach – led from the top down. Quite rightly, they look to Gibson, as legal counsel, to provide seamless support across practice areas and global offices. As trusted advisers we have to be ready to offer the holistic and cross-disciplinary advice and support that this practice area requires.’

A spokesperson for Gibson Dunn adds: ‘We are evaluating our supply chain on diversity and sustainability metrics, and engaging new partners to support such measures. We are also in the process of calculating our carbon footprint.’

The sustainability agenda is not just about appeasing the next generation of lawyers. There is also the thorny issue of winning mandates. For Vodafone, the environment as well as diversity and inclusion have formed the crux of its new ESG-driven panel.

Wayne Spillett, Vodafone’s head of legal – commercial operations and IP, notes: ‘When we launched the panel re-tender, 20% of the mark for the firms related to ESG, particularly the planet and diversity and inclusion, which hadn’t been part of the scoring last time around. We asked firms to submit their positions on those points and describe to us what they’ve done and we gave them a RAG status scoring with narrative commentary.

‘Sometimes conversations emerge through a crisis. We have a growing D&I practice so we advise clients on their policies and help clients with their issues, for example if they have a big #MeToo problem.’
Susan Bright, Hogan Lovells

‘We looked at each firm individually to critically assess the programmes and initiatives that they have in place, be it targets to become carbon neutral or implementing improved recruitment practices and outreach programmes to broaden their employee base. We also looked at how they can help us and collaborate with us to improve. Some of them could offer some fantastic things like inviting us to partner on projects, sharing their connections and experiences with other clients, the government and NGOs or even setting up a consortium to thought-lead on environmental issues.’

Linklaters and Latham & Watkins are two of eight firms that made Vodafone’s new panel and have been repeatedly cited as driving substantive change in ESG, attributed largely to a top-down approach which has seen senior figures championing initiatives in earnest.

Led by respected London partner Paul Davies and Ryan Maierson in Houston, who co-lead Latham’s ESG Task Force, the firm has taken decisive steps over the last three years to mitigate the greenhouse gas footprint of over 30 offices globally. It points to increasing the amount of renewable power it acquired globally and implementing several capital improvement projects to boost operational efficiency. A 31% reduction in emissions between 2017 and 2020 has allowed Latham to meet its 25% reduction target ahead of its 2022 goal, even as headcount increased.

Latham has collaborated with the Association for Financial Markets in Europe to produce ‘The ESG Disclosure Landscape for Banks and Capital Markets in Europe’, a new resource designed to help financial institutions navigate Europe’s increasingly complex and interrelated ESG disclosure requirements.

Davies joined Latham in 2014 to help establish the firm’s European environmental practice, providing advice on environmental aspects of corporate and regulatory issues, environmental risk and climate change. He sees even more room for improvement: ‘Technology presents an area of opportunity to increase the environmental sustainability of our operations. We continue to work with our data centre providers to achieve 100% renewable energy for our centres, and we have begun a monitor-replacement programme that will reduce energy consumption by 55% per workstation. We are also actively researching how we can improve our recycling for batteries, light bulbs, and organic material.’

Under the leadership of outgoing senior partner Charlie Jacobs, Linklaters has amassed a number of credible operators in the ESG space, including the influential Vanessa Havard-Williams, partner and global head of environment and climate change (although the firm does not explicitly cite her in its responses). Rachel Barrett is among the other partners making an impact in what is considered a well-staffed practice.

Linklaters’ data boasts a laudable list of improvements, including reduced emissions per person by 52%, even as recruitment increased most years, and reduced tonnes of CO2 equivalent emissions by 46% between May 2009 and April 2020.

There are limitations in crunching firms’ emissions data as disclosures and targets vary dramatically. Herbert Smith Freehills (HSF) is among many firms aiming to reduce emissions to net zero by 2030. While targets set in 2017 to cut carbon emissions by 15%, energy consumption by 10% and paper consumption by 30% by the end of 2020 are not immediately headline-grabbing, hitting them a year early lends kudos.

‘You can’t really criticise anyone on the Deliveroo IPO because they were doing everything right; it’s just maybe they weren’t as mindful to a change in sensitivities and that’s “but for the grace of God”-type territory.’ City regulatory partner

Allen & Overy (A&O), meanwhile, has put its historical infrastructure and energy credentials to good use, pointing to a preponderance of mandates in renewables, so-called ‘green bonds’, sustainability-linked loan and derivative products and infrastructure projects that promote energy transition and a reduction in carbon emissions.

As far as the ethics of advising companies not exactly renowned for their green credentials are concerned, Jeff Twentyman, Slaughters’ partner and co-chair of UK Stakeholders for Sustainable Development, raises the point held by many that the issue is not so cut and dried.

‘There’s a long debate about every business. There was an article in one of the papers this week that was criticising an advertising agency for representing an SUV chain as it contradicted its own green agenda. This discussion is taking place everywhere, but it’s a very simplistic view. We are being asked to adopt a principled position that has no practical consequence. ESG was not set up to make people feel more pure. What we should be doing is using our advice to help companies transition to something better. Help facilitate, rather than running away from it.’

Social mores

Seasoned observers may be forgiven for thinking that the ‘social’ part of the triptych has more than a passing resemblance to the previous campaign of corporate social responsibility (CSR) of 15 years ago, which saw good intentions espoused by the majority of firms without material impact on underlying problems of social, gender and sexuality injustice.

It is clear that gender equality has made substantive progress in the industry in recent years, and even if that has been driven by an element of naming and shaming firms through pressure to report often embarrassing gender pay gaps, positive results have started to make themselves felt at senior level.

Ashurst recently elected M&A veteran Karen Davies as its first female chair and the same month Linklaters’ head of corporate Aedamar Comiskey was elected as senior partner after Freshfields last September elected Asia disputes head Georgia Dawson as its first woman senior partner. Even five years ago, this would have seemed improbable.

Not so long ago, the challenge of diversity only applied to gender inequality at senior level, where now firms have pivoted to the virtually catch-all term of ‘inclusion’, encompassing people of various sexualities, genders, ethnicities, social backgrounds and disabilities. Targets can be arbitrary and ineffectual but they can also be a means to an end – A&O last year included disability data in its annual pay gap report, a move that is sure to be emulated by others.

However, there is general accord that real progress on social change can only really be crystallised by regulation and by advisers and clients holding each other mutually accountable. The legal team of Nokia recently completed its first E, I &D scorecard to assess law firm progress on equity, inclusion and diversity, as well as partnership opportunities on a quarterly and annual basis. Eversheds Sutherland, Roschier, Bird & Bird, Quinn Emanuel, McKool Smith, and Alston & Bird are the first group of law firms to step up to the initiative.

Osborne Clarke says of its efforts in this area: ‘Over the last year, we’ve doubled down on our commitment to create a more diverse and inclusive firm by investing in a new head of inclusion and CSR role at the firm; appointing a race and sustainability champion on the executive board; establishing the Diversity Champions Forum – a body for all diversity and inclusion programmes; launching three new strands of the firm’s diversity and inclusion strategy: age, social mobility and mind and body; signing the Race at Work Charter and Race Fairness Commitment; launching the Mindful Business Charter and supporting the Trans Rights are Human Rights Campaign.’

Spillett says that it is important to enshrine common methodology on diversity to which firms can better adhere. ‘We put into the panel selection some hard requirements in terms of the makeup of the team that supports Vodafone. A proportion of the Vodafone team at senior level need to be women and another proportion need to have another protected characteristic – that could be LGBT+, race or ethnicity profile, social mobility status or some form of disability. We had discussions with the firms in the process and put measures in place that would be both stretching but also facilitate constructive discussions. 50% of the relationship teams need to have diverse characteristics of some kind, which has been included to challenge our firms to think about this right from the top. It’s really important that people get exposure to the client directly, that’s part of the business case for making partner or getting into the equity. It’s hard to get into that club so we wanted to shake things up a bit.’

Of course, there is only so far clients can expect firms to comply while they are still getting their own houses in order. Says Spillett: ‘We did think about putting in penalties – or discounts – if firms didn’t hit the targets. However, we are mindful that we ourselves have room for improvement that we are working on. We also thought that it would create a negative dynamic and it’s really important to have constructive relationships with our firms that are mutually beneficial long term. Ultimately we felt that we would get more buy in from the firms and a richer level of best practice sharing if we approach things this way around.’

The pandemic and enforced working from home for the majority of employees has also caused law firm leaders to expedite mental health care measures for staff, building on the foundations set by initiatives like the Mindful Business Charter. And while pro bono work is nothing new, many firms have adapted their charitable projects to respond to social challenges imposed by the Covid-19 crisis, including providing laptops to disadvantaged children for school.

Susan Bright, Hogan Lovells’ global managing partner for diversity and inclusion and responsible business, and often cited as influential, discusses an area of social awareness common to law firms and clients alike. ‘Sometimes conversations emerge through a crisis, like a big brand issue. Or it’s a people issue. We have a growing D&I practice so we advise clients on their policies and help clients with their issues, for example if they have a big #MeToo problem.’

The governance conundrum

‘You can’t really criticise anyone on the Deliveroo IPO because they were doing everything right; it’s just maybe they weren’t as mindful to a change in sensitivities and that’s “but for the grace of God”-type territory.’ The sentiment of this City regulatory partner speaks of the perennial balancing act that advisers face when they take on mandates. On paper the Deliveroo IPO, which enlisted lead partners from Latham and Freshfields, was not at first glance an ESG nightmare but the scrutiny that followed could be seen as a cautionary tale about how important it is to do your due diligence, however apparently innocuous the mandate.

The float prompted major fund managers including Legal & General Investment Management (LGIM), Aviva Investors, Aberdeen Standard Investments and M&G Investments to publicly announce that they would not be backing the deal, citing governance concerns, including workers’ rights, at the food delivery company.

EdenTree Investment Management said the economic model deployed by companies like Deliveroo was best characterised as a race to the bottom with employees in the main treated as disposable assets – which is the very antithesis of a sustainable business model.

Firms with established asset manager relations have been compelled to follow their clients on governance, and that is not just driven by more stringent regulations coming out of Europe, such as the Sustainable Finance Disclosure Regulation (SFDR), which imposes mandatory ESG disclosure obligations for asset managers and other financial markets participants taking effect from 10 March 2021. Taxonomy regimes and new human rights supply chain regulations have also colluded to change the landscape.

Says Bryden: ‘Asset managers are under pressure from a lot of their limited partners. Canadian pension funds and Nordic investors in particular. Those that have signed up to the UN PRIs or other responsible investing rules are also under increasing pressure. Asset managers and private equity have been criticised for some pretty aggressive behaviour over the years, so they as an industry are keen to embrace the positive aspects of good ESG management. Following the recent deluge of EU and UK ESG legislation, everyone’s now being pulled in that direction, if they like it or not.’

Listed law firm DWF can rely on the cliché ‘it takes one to know one’ when it comes to advising boards on governance. The plc board of DWF has oversight on the firm’s ESG credentials, earlier this year approving the development of a new ESG strategy and appointing partner Kirsty Rogers as group head of ESG. The firm will be publishing its ESG strategy in the autumn.

‘As the only Main Market listed legal services business, we have a wider range of stakeholders interested in how we do business and greater regulatory requirements in terms of ESG disclosures. As we evolve our approach in response to changing expectations, we are reinforcing our due diligence to ensure that we continue only to work with law-abiding businesses that demonstrate responsible business, in practice. Equally, we will not advance opportunities to secure work from clients who are not willing to improve their ESG performance,’ says the firm.

When questioned over their ethical criteria for taking on clients, respondents came worryingly close to simply stating that they don’t act for criminals. Freshfields, for example, has ‘established procedures to evaluate new clients and review new mandate proposals for financial crime, sanctions or human rights concerns and these form part of our risk-based decision-making around acceptance of new business’.

HSF notes: ‘As is normal practice at any law firm, our clients are subject to the firm’s due diligence procedures. We only work with clients that we are competent to serve, who value our service and who meet our standards of legitimacy and integrity.’

Gowling WLG adds: ‘Comprehensive checks are undertaken at the client and matter opening stage and include, but are not restricted to, adverse media, sanctions by UK government, and anti-money laundering checks.’

Unlike with CSR, leading law firms have for the most part successfully managed to prevent push-back from naysayers and lend gravitas to their ESG agendas by having senior management partners in the driving seat.

To this end, Clifford Chance (CC) in November 2020 established a global ESG board, chaired by Jeroen Ouwehand, senior partner and former head of the firm’s European litigation and dispute resolution practice. Together with the influential Nigel Howorth, the London-based head of CC’s real estate practice and member of the global climate change risk team, Ouwehand has earned a name for himself as an instrumental operator for ESG.

Freshfields’ senior partner Dawson is cited by the firm as being heavily focused on sustainability and diversity while managing partner Rafique Bachour is credited with developing the firm’s ESG strategy. New York-based partner Tim Wilkins also wins plaudits from peers as Freshfields’ global partner for client sustainability and taking on that challenge in June 2019 before it became fashionable.

While not seen as an ESG pioneer, Ashurst nevertheless shows willing by having its ESG credential – led by global sustainability partner Anna-Marie Slot – backed by the executive team and managing partner Paul Jenkins.

Likewise, Osborne Clarke’s Ray Berg is cited as the most senior person on the case of ESG, as are CMS senior partner and chair of the board and the sustainability committee Penelope Warne and Lee Ranson, chief executive of Eversheds Sutherland, who recently led a strategic review with responsible business at its core.

ESG is unlikely to be a flash in the pan but for firms to really walk the walk it is clear that they must approach these concerns as an integral part of the risk matrix of their businesses rather than as a standalone practice area (see our risk management report, ‘Going viral’). This direction of travel will be crucial as liability becomes increasingly real for those not giving such matters the airtime they deserve.

Predicts Bryden: ‘On the legal side, the current ESG challenges are mandatory reporting and related data gathering. The problem is acute as although the different regimes are pushing in the same direction, they do not align. Hopefully there will be some alignment over the coming years, as international standards on transparency and reporting come together. Another growing issue is the litigation risk coming out of all this public disclosure, which is fertilising the fields for claimant firms – in years to come clients might well say to their lawyers “you should have advised us on that”.’

Whether under the ESG banner or whatever the next iteration will be, the underlying issues are likely to be increasingly vital in attracting and retaining clients and a diverse and talented workforce.

A significant economic downturn and ensuing survival mode may of course divert the attentions of senior law firm leaders away from luxuriating on such ethical matters. Having evolved over the last decade from switching off the lights, planting trees and recycling coffee cups, it will be interesting to see what, if any, great strides firms will have made by the time of our next ESG report. LB

nathalie.tidman@legalease.co.uk

Additional reporting by Tom Baker

Ethnic diversity – firms’ responses to ESG survey

Gender diversity – firms’ responses to ESG survey