The increasingly global nature of business and cross-border regulatory compliance means that companies across the world are coalescing around the Environmental Social Governance (ESG) agenda. But in the US, ESG finds itself caught in the firing line between Republican culture wars and has become the focus of intense scepticism and scrutiny.

From South Africa to Finland, ESG is rapidly becoming accepted as a ‘must have’ for corporate credibility – a kitemark for good governance and a business’s overall success. Companies are embracing the new opportunities offered by ESG, such as a more diverse and inclusive workforce, as well as acknowledging the longer-term economic value of mitigating climate change risks.

In contrast, many US firms are facing an anti-ESG movement or ‘war on ESG’. Highly politicised by nature, the backlash is affecting business mostly in Republican states where the introduction of anti-ESG bills is rising significantly. At least seven states have taken anti-ESG stances presented as ‘anti-boycott’ measures that aim to prevent state entities from investing in companies boycotting the fossil fuel industry. These initiatives have also taken the form of bills that restrict state funds from being used for ESG investment. Law firms have a unique perspective in the conflict as advisors on ESG and as businesses themselves.

On 4 November 2022, 51 large US and global law firms were directly approached in a letter from Republican Senators raising anti-trust risks associated with participation in ESG initiatives:

‘Over the coming months and years, congress will increasingly use its oversight powers to scrutinize the institutionalized antitrust violations being committed in the name of ESG and refer those violations to the FTC and the Department of Justice,’ it warned.

Republican-majority efforts to prevent investment managers from incorporating ESG into decision-making came to a head in March 2023 when President Biden issued his first veto. This rejected the 50-46 cleared bill ensuring that citizens who wish to access ESG investments through employer retirement plans can do so.

Some analysis indicates more than 250 anti-ESG bills have been proposed this year, in over 40 US states, but what are the potential implications from a legal perspective? I spoke with partners at Hogan Lovells, Clifford Chance, and Ropes & Gray, among others, to better understand how lawyers and their clients are navigating the increasingly complex legislative landscape in the US and the potential impact on America’s green transition.

Conflicting obligations

To understand the impact of anti-ESG legislation on clients, it is important to underscore the varied legislative landscape in which corporations operate within the US. Under the federal system, both federal enforcement agencies and state attorneys general operate simultaneously and because states are not required to act in conjunction with federal enforcers, state actions are sometimes at odds with those at federal level. From an antitrust perspective, as referred to in the Republican Senators’ letter, coordinated ESG efforts equate to climate cartels, elevating the issue from a cultural debate to a potential antitrust risk.

US-based companies, especially those with a global footprint, are under international pressure to commit publicly to sustainability and emissions reduction measures from the full range of stakeholders whilst having to negotiate this highly complex, domestic legislative environment. Steve Nickelsburg, partner at Clifford Chance and member of the Global Business and Human Rights Risk team, highlights the multiple and opposing pressures clients are facing, and the reality that some are considering whether they must set up separate red and blue businesses as a way of dealing with competing demands.

But which clients are being most affected by these whipsaw public policy shifts? According to Michael Littenberg, global head of Ropes & Gray’s ESG, CSR and Business and Human Rights practice, large financial institutions and asset managers are primarily caught in the ‘ESG crossfire’ between red and blue states, with many having received subpoenas, being asked to testify, or being placed on blacklists by red states.

An obvious example of this is Florida’s $2bn divestment from Blackrock in December 2022. The financial giant embodies the polarity of the issue, being both a leader for ESG and climate change investing whilst refusing to halt investments in coal, oil, and gas, infuriating both Republican politicians and environmentalists alike.

Asset managers have a fiduciary duty requiring them to both abide by their client’s directive, and to provide the best risk-adjusted terms for the said directive. This means clients have steering control on their investment choices, and companies, such as Blackrock, are therefore obliged to offer sustainable investment opportunities for those clients wanting to go down this route, as well as traditional investment products.

We are already seeing the effects of climate change, the extreme weather that comes with it and the potential to weaken global economic growth and financial stability. This propels climate action far beyond ‘the morally correct thing to do’ to something necessitating engagement at board level as a fiduciary responsibility. As a result, complying with anti-ESG laws could be seen as going against asset managers’ core duties.

Globally, companies are becoming increasingly cautious when disclosing their ESG strategies due to regulatory efforts against ‘greenwashing’. Authorities such as the US Federal Trade Commission (FTC) are looking at environmental claims with increased scrutiny. Following the FTC’s review of the ‘Guides for the Use of Environmental Claims,’ it announced plans to update guidance, requiring, for example, more specific information to support claims of the recyclability of products. This specifically targets companies misleading customers and gaining an unfair competitive advantage in the market.

Nickelsburg points out the combined effect of the anti-ESG rhetoric in the US and fear of greenwashing allegations is ‘green bleaching’ or ‘green hushing’, i.e., ‘institutions putting their heads down and saying nothing’. As of June 2023, Blackrock Boss, Larry Fink claims he has stopped using the term ESG altogether. For Nickelsburg, a possible silver lining could be that greenwashing fears foster more rigor as businesses need to be able to ensure there is substance behind ESG claims.

While the politicisation of ESG appears to be strongest in the US, Adrian Walker, global Head of ESG at Hogan Lovells, cautions: ‘The backlash is a significant market development, and it has a global reach with impacts on UK and EU businesses too.’

The role of law firms

To best advise clients on ESG amid state level regulatory variations, firms must be forward-looking and keep track of both the short-term and long-term trends when it comes to ESG and climate-related regulations. Littenberg points to Ropes & Gray’s ESG legislation tracking page as a useful tool for clients to stay up to date on the ongoing developments when it comes to ESG investing at state level.

Upcoming federal requirements reveal a shift from the typically voluntary and market-led climate action we see in the US. The upcoming SEC’s climate disclosure rules are expected to come into force in autumn 2023 and will require public companies to disclose their climate impact as well as their governance, risk management and climate risk strategy. Lawyers will need not only to educate and prepare their clients on these requirements but continue to look ahead at what regulations and disclosures are in the pipeline.

Perhaps law firms with operations on ‘both sides of the pond’ are at an advantage here, being able to directly draw from the knowledge and experience of their European counterparts when preparing clients for the regulations expected to come.

Scot Anderson, US corporate and finance partner at Hogan Lovells, emphasises the importance of ESG for any project’s

success, and the necessity of those on both sides of the issue to understand that getting a project off the ground requires community and stakeholder engagement and advocacy. Businesses that do not cover ESG in their proposals will likely experience more barriers. Anderson states: ‘Even ESG sceptics understand the soft skills required to make a project durable’. Advising in this way shifts ESG from an issue of corporate responsibility to everyday business.

Just as it makes economic sense for firms’ clients to take ESG into consideration as part of their wider business strategy, the economic growth associated with practicing ESG as a law firm cannot be ignored. Law firms creating an ESG practice could have a competitive edge against others. It is plausible that firms who respond to client demand and can provide a one-stop-shop when it comes to advice on ESG-related operational and financial risks will see increased revenue.

A bump in the road?
ESG is undoubtedly a political hot potato in the US and its polarising nature has led to some US-based organisations avoiding commenting on it altogether for fear of provoking either side of the debate. ‘Green hushing’ has also, in part, been prompted by stricter greenwashing legislation.

It’s important to recognise that the ESG backlash in the US does not exist within a vacuum. ESG and the green transition are global phenomena and therefore influence and are influenced by a variety of circumstances.

Coincidently (or perhaps not) the ‘war on ESG’ came shortly after Putin’s invasion of Ukraine which shook the global economy and caused a surge in energy prices. This presented huge financial motivation for oil and gas companies to increase production, and some were willing to undermine or entirely roll back their climate targets to prioritise this. Also unsurprisingly, fossil fuel companies are providing financial backing to anti-ESG activist groups.

According to Nickelsburg, the anti ESG agenda is ‘a counterweight in a huge discussion and is having an impact in discussions at board level.’ Significantly however, Nickelsburg points out that its potential impact will be overwhelmed by the huge subsidies and money flows in the opposite direction.

In August 2022, the US House of Representatives passed the pioneering Inflation Reduction Act (IRA) expected to spur a tsunami of capital into clean energy and climate change investments – approximately $3 trillion – through the expansion and extension of tax credits. This will be a key driver of the green transition in the US, providing a powerful financial incentive for a private sector to move away from carbon intensive infrastructure. As suggested by Nickelsburg, it is highly unlikely that the backlash will derail this industry shift.

In addition to the major economic impetus from the IRA, reporting directives show no signs of slowing in Europe (especially the EU). The enhanced climate disclosures set by the EU due January 2024 require businesses to disclose their indirect or ‘Scope 3’ emissions. These requirements therefore call on US-based companies embedded in EU supply chains to accurately report on their own climate impact, and in turn pressure them to take meaningful actions to reduce this.

Anderson states, ‘ESG is too deeply embedded for the backlash to truly hinder it’, and according to Littenberg: ‘US companies strive to be global leaders, or at least remain globally competitive. This requires them to embrace innovation and be part of the green transition’. Law firms in turn will need to keep a close eye on state and federal-level ESG legislation and be forward-looking in terms of their own commitments to help clients navigate the politics of ESG and stay competitive as a firm.

Investigations by the Guardian and SourceMaterial brought damning and destabilising indictments of the carbon offset market; harnessing academic conclusions, the reports echoed that leading certifier Verra has approved carbon credits which either do not match the carbon claimed to be reduced or removed from the atmosphere, or which have no genuine carbon reduction.

The legal sector must face this challenge as both advisors to offset projects and corporate carbon-credit purchasers, and as credit consumers themselves. In client work and internal strategies, law firms lean heavily on the carbon credits issued from climate mitigation projects to make significant claims of ‘carbon neutrality’, declared where credit purchases help finance a mitigation project which can offset carbon corresponding to the buyers’ operational emissions. Similarly, providing advice for carbon reduction and removal projects on the issuance of credits is an increasingly fertile area of client work for firms.

Accordingly, the legal sector has an inherent interest in rebuilding trust – waning amid popular scrutiny of the veracity of carbon credits – following its advocacy of carbon credits, both to reassure the validity of the corporate carbon-neutral strategies on which it advises and to ensure that nature-based climate solutions actually pursue an environmental good.

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Carbon credits and the VCM

At its fundamental level, a carbon credit is marketed as an option for a purchaser to effectively offset 1 ton of CO2 that it emits, in that the purchase of a credit purportedly finances the management of an environmental or technological solution that correspondingly reduces or removes the equivalent CO2 from the atmosphere.

Private actors purchase carbon offsets from climate mitigation projects on the Voluntary Carbon Market (VCM). As a non-regulated decision for voluntary actors, the credits do not count toward complying with legally binding emissions compliance objectives.

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We are at a juncture where criticisms of carbon credits cannot be ignored; the VCM cannot be left to continue issuing spurious credits which do not correspond to the carbon which projects actually mitigate, since such would only mask and perpetuate our current, unsustainable global emissions levels.

However, neither should commentators simply condemn – and encourage the abandonment of – the offset market, since there are fundamental risks which would emerge amid the VCM’s failure. When considering emissions removal projects, where carbon financing incentivises the protection of natural carbon sinks and supports communities to develop in harmony with their local environment, the withdrawal of said financing may leave the area vulnerable to resurgent deforestation or natural destruction, particularly in emerging markets with insufficient protections for sustainable land use.

At this point, the emissions supposedly ‘offset’ would be returned to the atmosphere and the VCM would have served only as an exercise to perpetuate greenhouse gas emissions among credit purchasers. With the development of climate litigation concerning false sustainability claims, the VCM must guard against the risk of greenwashing inherent in this scenario and strengthen its standards and verification processes.

Despite – yet also because of – my scepticism toward the current transparency and quality of the VCM, the potential pathway that appears most feasible and most productive to me in fact requires greater, albeit more scrutinised, participation. If the UN’s target of a 45% carbon reduction by 2030 is to be met – and acknowledging that carbon credits are an engrained method of driving corporations to financially contribute to decarbonisation – the carbon market must credibly ensure that corporate finance maximises its environmental impact.

Internally, law firms are already making important steps to acknowledge that, where their carbon emissions are to be offset, credits should be verified and be sourced from projects which provide quantifiable evidence that carbon finance is making a material impact. Linklaters, for instance, from 2019-2022 purchased carbon credits from the Gola Rainforest Protection Project, taking value from the project’s REDD+ verification, the scrutiny the project received from the RSPB, and the fact that the co-benefits – here the capacity-building of local farmers – provide a local economic variable that could be monitored.

However, the legal sector has a key role not just as a purchaser of carbon credits, but also as counsel within ESG strategies, as representation of reduction and removal projects, and as advisors on the development and implementation of informal regulatory frameworks. Within these arenas, the legal sector must fulfil important work that helps strengthen and scale-up the VCM, reassure carbon credit demand, and provide more stable funding to ensure that valuable projects remain operational.

Reforming the VCM

Seeking to create the conditions and confidence necessary to build scale within the VCM, the Integrity Council for the Voluntary Carbon Market has developed its Core Carbon Principles (CCPs), which, I would argue, must underpin the legal sector’s activity regarding the VCM. My support for the CCPs comes from the fact that I perceive them to be the most feasible near-term method of reforming the VCM to help it pursue good outcomes within corporate-side decarbonisation and community-side environmental protection.

The CCPs released in late March 2023 provided guidance on how – at the level of carbon-crediting programmes like Verra’s Verified Carbon Standard, which issue the credits corresponding to the carbon offset by a mitigation project – the VCM can align itself to a threshold of quality and integrity, and accordingly build the trust in the market necessary to grow at scale. Here, I focus on four key aspects: how the principles help create uniform standards, reassure the veracity of the link between finance and carbon mitigation, provide focus on the types of projects suitable for carbon finance, and offer a potential avenue for interaction with international climate frameworks.

Seeking to build stakeholder understanding of project strategies, credit origins and quantification, environmental and social impacts, and the veracity of the mitigation activity, prior best practices have been consolidated into principles on effective governance, credit tracking, transparency, and robust third-party validation and verification. These principles help create coherent, uniform standards that help provide lawyers a sense of predictability in legal work – whether as purchasers of carbon credits, advisors on corporate ESG strategies, or as counsel for offset projects themselves – and aid in building certainty on the environmental and emissions impact of carbon-mitigation projects.

Potentially focusing the types of mitigation activities lawyers will advise on in relation to obtaining carbon finance, the Robust Quantification principle requires emission reductions and removals to be verified ex-post, following the mitigation activity. By preventing the ex-ante issuance of carbon credits by projects, quantified before the emission reduction or removal, the CCPs may consequentially adapt the profile of clients seeking carbon finance; with emerging technologies which require an injection of finance before reducing or removing carbon seemingly ineligible for CCP-labelled carbon finance, lawyers may increasingly be providing advice to those existing projects whose issued credits reflect an already-realised mitigation impact. While limiting the scope of carbon finance, such will help assuage accountability concerns that certain projects overestimate their environmental impact in order to issue more carbon credits and secure extra finance.

Importantly, the principle of Sustainable Development Benefits and Safeguards – stressing that carbon-offset programmes must meet best practices on social and environmental safeguards while delivering positive sustainable development impacts – may present a significant opportunity for legal interpretation. That the principle stresses adherence to the UN Sustainable Development Goals suggests that carbon finance is refocusing to become a tool wherein corporates and individuals support predominantly nature-based carbon reduction and removal strategies to boost the resilience of communities disproportionately vulnerable to climate change. Accordingly, the impact will perhaps be that the focus of legal work shifts further toward community-level, nature-based carbon-mitigation solutions, wherein lawyers active on advising projects may be forced to expand their understanding of environmental and social risk, sustainable management, and human and community rights.

Pertinently, the CCPs include an additional attribute of “Host country authorisation pursuant to Article 6 of the Paris Agreement”. The attribute therefore established a relationship whereby a carbon credit authorised by the host country for trading toward the attainment of another country’s Nationally Determined Contributions (NDCs) can instead be traded on the VCM as a high-quality, internationally recognised credit for corporate purchasers. With the interaction between the VCM and Article 6 currently untested, the legal sector will face vital work in reassuring a complementary role for the VCM that does not impinge upon compliance markets and host countries’ NDCs, utilising the standardisation the CCPs provide to interact efficiently amid the international cooperation, rulemaking, and scrutiny established within Article 6.

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Article 6

Article 6 established a mechanism whereby host states can authorise emissions reductions and removals to be transferred by the host country to another party as an ‘internationally transferred mitigation outcome’, contributing toward the recipient’s Nationally Determined Contribution (NDC).

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Reconceptualising the VCM

Earlier, I posed that the VCM requires greater participation to build the integrity and confidence necessary to provide a dramatic increase in the scale of carbon finance. My argument here follows three assumptions: the current price of carbon offsets (currently averaging below $5 per credit) incentivises corporates to purchase cheap credits toward making ‘carbon neutral’ claims, rather than committing more strongly to wholesale decarbonisation; a lack of sufficient checks on mitigation projects creates an uneven glut of low- or no-impact mitigation projects; and these factors combined prevent funding from being filtered toward projects with the greatest climate impact.

Accordingly, I would argue the VCM requires an increase in participation that, at a basic level, drives up the price of credits, consequentially pushing down the relative cost of decarbonisation initiatives while focusing carbon finance toward high-impact projects.

Yet no change in participation is forthcoming while the VCM faces legitimate doubts on the quality and credibility of its credits, both regarding their transparency and their emissions impact. Should such doubts be assuaged, market demand could consequently increase, boosting credit prices and thereby augmenting the finance available for climate action.

With law firms finding it increasingly important – for client outreach, staff engagement, and their sustainability strategies – to make a positive contribution to the green transition, especially boutique firms who may lack the capacity to commit extensive hours and finance to climate action beyond their client work would benefit, should stronger best practices provide confidence that carbon finance can help support authentic emissions reduction and removal projects. Accordingly, such may help manage the concerns of Norwegian boutique firm Glittertind, which commented that, presently, the lack of sufficient information on the mitigation impact and social consequences of offset projects creates uncertainties surrounding the purchase of carbon credits.

The first release of the CCPs is an important development in the VCM which will help consolidate existing disparate standards and provide a necessary sense of uniformity, helping clarify legal work while providing simplifying processes for buyers. Additionally, the CCPs go some way to focus carbon finance on accountable, transparent projects which help local communities protect their native environments while delivering on global carbon mitigation; here, should the upcoming release of the category-level CCPs provide further confidence on the quality and character of high-quality carbon credits, there could emerge an exciting future role for the VCM as a supplementary tool within global decarbonisation.

By familiarising itself with these emerging standards and contributing to the dialogue on their development, imbuing the CCPs into internal strategies when purchasing carbon credits within law firms, and remaining cognisant of the best-available guidance during client work for projects and corporate clients, the legal sector must play a vital role in facilitating the development of a high-integrity VCM.

The EU is internationally recognised as a leader in sustainability, having enacted a number of laws and policies aimed at promoting a green transition and sustainable development. The UK has historically been bound by EU environmental law and has largely adopted the same approaches. However, since Brexit, the UK has been free to develop its own environmental policy – something the country has been doing over the past several years.

This change has brought a number of challenges and has been a topic of hot debate among experts. In order to better understand this discourse, I spoke to Professor Robert Lee and Simon Boyle, renowned experts in this field. Lee is a Professor of Law at the University of Birmingham, who has acted as a specialist adviser to various international agencies including the European Parliament, European Commission, UNEP and UNDP. Boyle, Environmental Law Director at consultancy Argyll Environmental, has 25 years’ experience as an environmental lawyer which has included working in local government and for a major manufacturing company.

Discussing the main challenges that Brexit brings to the UK regarding environmental protection from a legal perspective, three main consequences stood out: devolution, lack of enforcement, and loss of data – each of which come with their own obstacles.

Devolution

To fully understand the effects of Brexit on environmental legislation in the UK, it is important to acknowledge that the region is formed by four very different nations, each with distinct priorities and legal decisions made based on those priorities.

When the UK was legally bound by EU law, this brought a number of advantages, a clear one being uniformity: EU law kept legislation the same across the UK. Now, the glue that held everything together has gone – Wales, Scotland, Northern Ireland, and England are all using different approaches to tackle their environmental policies. As Professor Lee comments: ‘The days when we had a united UK environmental legal regime are pretty much gone.’

EU directives required all regions of the UK to adhere to minimum legal standards, resulting in a consistent framework of environmental laws across the nation. However, in the absence of a unified instrument like a directive, different governments may now take separate paths, leading to potential divergence in environmental legislation.

Take as a case study the UK’s approach to agricultural policy: After Brexit, each nation developed different agriculture provisions and different legislative measures. For instance, in England, there will be money allocated for farming biodiversity from 2024 onwards; meanwhile, we don’t see this for the other three nations. The issue here is clear: Will certain regions fall behind because of a lack of uniformity?

Losing the uniformity we got from following EU legislation will mean replacing it with an untested approach from the Westminster government. This raises important questions for regions such as Wales, which has a considerably lower GDP than England: Would this mean that Wales gets less funding? How would negotiations on the topic between Westminster and the devolved parliaments go? Administrations and governments can only operate within their financial constraints, so a lack of funding could pose a significant issue.

Enforcement

Under the EU, environmental enforcement matters were supervised by the European Commission. Now, in England, this has been replaced by the Environment Agency. Going back to the point above, each of the UK’s four nations have their own approach to enforcement, and the remaining three countries are still working towards solutions, having no formal legislative mechanism.

Will the new enforcement system in England have the same level of scrutiny and oversight as the European Commission? This is something that should become clearer over time. Presently, according to Boyle, polluters are allowed to get away with too many illegal breaches. An example is the lack of action by the Environment Agency when it comes to water pollution, which has resulted in not a single river in the UK being in good environmental health. In England alone, there are over 800 illegal discharges of waste to water a day, and the vast majority of those are going unenforced.

In Boyle’s opinion: ‘The UK needs a strong regulation system that achieves something, and where people are held accountable. However, that has been lacking.’ It’s evident the UK needs to focus more attention on enforcement. After all, no amount or quality of legislation will be enough if there isn’t an effective enforcement system.

Data

Another big issue raised by both Boyle and Professor Lee is data. The EU Environment Agency (not to be confused with the UK Environment Agency) collects a significant amount of data every year, providing a clear picture of the environmental situation at hand, which in turn helps governments discern which environmental policies are working and which ones aren’t. This information is extremely useful when it comes to developing new environmental legislation.

While the UK can still access public data relating to this, it no longer has governmental access to it. For example, chemicals and chemical pollution matters are dealt with under two main provisions in EU law, and since 2008 EU member countries have been forced to register chemicals circulating in the market (under the REACH regulation). Those data sheets contain valuable information, which the UK can no longer access.

Similarly, the European Atomic Energy Community (EURATOM) Treaty established a single market for the trade in nuclear materials and technology – after Brexit, the UK is no longer a part of it, and as a result has lost access to important data on nuclear testing facilities as well as nuclear scientific collaborations.

Data is also important when it comes to environmental permitting, which is based on best available technique reference documents or BREF notes in the EU (these set out how to prevent or control pollution and other adverse environmental impacts originating from a number of activities). Again, the UK will have access to public information on this, but it no longer sits at the table which determines what the best techniques for industrial processes are, and it is no longer a part of the data generation exercise.

There are certain areas, such as biodiversity, where both the EU and UK currently lack data: This is a key issue which needs to be solved soon, and one which the UK could take the lead on.

More obstacles

In addition to a lack of uniformity across governments, a lack of data, and a lack of enforcement, another issue that could get in the way of the UK developing effective environmental policy is a lack of resources. As Professor Lee states, ‘How much we can achieve will depend on how ambitious each one of the four governments in the UK are, and also on how much resources they have.’

In Boyle’s opinion, too often, the UK government puts policies in place which aren’t ambitious enough. As he puts it, ‘It is time to make it clear, we can’t carry on like this.’ It is essential that we have individuals in the government who understand the importance of uniformity, resources, enforcement and data gathering, and are willing to push for a change, matching their words with actions.

Yet another key point to consider is that of sustainable development: balancing social, environmental, and economic concerns. Boyle comments: ‘We need to focus a bit less on economic growth, and a bit more on sustainable development.’ Whilst there are important economic issues to consider, prioritising environmental protection over short-term economic growth would be beneficial for everyone – including from an economic perspective – in the long term.

An opportunity?

Both Boyle and Professor Lee agree that at first glance Brexit is not beneficial for environmental legislation and protection in the UK for multiple reasons. However, we should be thinking about how we can benefit from it. While Brexit undoubtedly brings many challenges, the UK could potentially use Brexit as a means to create even better environmental legislation and therefore ensure even better protection than the EU.

Having different devolved governments implement their own environmental laws may not always be negative. In fact, certain nations could be more progressive than others, taking a stronger approach than even the EU, and serving as an example for other countries to follow.

When it comes to environmental protection, climate change issues, biodiversity and water pollution are all tightly interconnected, affect each other and can’t be separated. If the UK takes this into consideration, Brexit could also be used as an opportunity to take a more holistic and consolidated approach to environmental legislation compared to the EU.

With growing pressure from the general public, other governments, and not least natural disasters and the consequences of climate catastrophes around the world, the UK now has the chance to develop strong, meaningful and informed environmental legislation and get ahead in this area. Bearing in mind that EU law grew and developed over decades, it is however clear that the UK will need ambition, political will and sufficient allocated resources to do so.

When the worst offenders for climate change are trotted out, the usual suspects from the worlds of oil, gas and mining are generally front and centre. However, while fashion’s green credentials have for some time flown under the radar, scrutiny of the sector is now on the rise. 

The fashion industry is responsible for roughly 10% of annual global carbon emissions, more than all international flights and shipping combined, and major brands are now facing more pressure than ever to make good on their eco-friendly claims. 

Some retailers have already begun their moves towards sustainability, with H&M’s Green Machine utilising technology to recycle blend textiles, and Patagonia’s founder Yvon Chouinard giving the company away to a charitable trust which will reinvest the company’s profits into fighting climate change; the company already has a notable standing in the sustainable space thanks to its previous eco-friendly practices such as offering lower-cost clothing repairs and its ‘Don’t Buy This Jacket’ advertising campaign, encouraging consumers to only purchase what they need. 

However, while the actions of some have garnered praise, the words of others have come under increasing scrutiny, and the misleading marketing of supposedly “sustainable clothing” is firmly in the firing line of regulators. 

New season, new rules 

‘The Competition and Markets Authority (CMA) has put the fashion industry front of the queue when it comes to investigations and enforcement activities’, comments Geraint Lloyd-Taylor, a partner in Lewis Silkin’s advertising and marketing practice. ‘Consumers and fashion companies are focusing on sustainability, but it is difficult to sort the truth from the puffery and to ensure consumers are not being misled, so the UK’s CMA has made fashion a top priority’. 

In that vein, the CMA announced in July 2022 that it would be launching an investigation into claims made by ASOS, Boohoo and George at Asda about their “sustainable” fashion products. Lloyd-Taylor comments: ‘It is important to not assume these companies have done anything wrong – the investigation is at a very early stage. Nevertheless, the fact the CMA has named these companies and announced its investigation will be very unwelcome for those involved’. 

In September 2021 the CMA set out a six-point ‘Green Claims Code’ to provide guidance for business and consumers on avoiding misleading green claims, and Lloyd-Taylor also adds that further challenges may be on the horizon: ‘The CMA has set a very high bar with the Green Claims Code, but it is yet to be seen whether a court would share its interpretation of many of these concepts and ideas’. 

However, Stephen Sidkin, head of the fashion law group at Fox Williams, questions how long these issues will be under the purview of the CMA: ‘The legislation currently influencing the future of fashion’s sustainability has to be the relatively old Consumer Protection from Unfair Trading Regulations (CPUT), which underpins the CMA’s Green Claims Code. In cases such as those facing ASOS, Boohoo and Asda, I anticipate that over time, encouragement will be given by the CMA for actions concerning CPUT to be taken by individuals rather than the CMA. In one sense, this can be regarded as the privatisation of the enforcement of consumer law’. 

International trend-setters 

Further afield than the UK, Bird & Bird’s Constantin Eikel and Ariane Le Strat – counsel and senior associate in the firm’s Düsseldorf and London offices respectively – highlight the international challenges: ‘Globally, international fashion companies often aim to have consistent promotions across many markets. This raises the challenge of finding common legal ground on the lawfulness of sustainability claims throughout the EU, the UK and beyond’. 

As Eikel explains: ‘The rules of sustainability have not been harmonised across the EU. Claims allowed in one country could be seen as an infringement in another. Similarly, the laws on green advertising are in rapid development and the rules are tightening. Companies need to keep up with recent developments and scan the horizon to futureproof upcoming marketing campaigns’.  

Efforts to level the playing field across the EU are on the horizon though, as Eikel comments; ‘The harmonisation efforts of the EU regarding green advertising (e.g. the Proposal for a Directive on empowering consumers for the green transition) should help to find common ground and make compliance more achievable’. 

He continues; ‘The proposal sets a very high bar for so-called “generic environmental claims” such as “environmentally friendly”, “eco-friendly”, “carbon neutral” and many more. Advertising with such generic claims will be prohibited unless brands can provide evidence of “excellent environmental performance”, defined as compliance with an officially recognised ecolabelling scheme’. 

The legality of claims around sustainability are being challenged in other regions as well. The US Federal Trade Commission is increasingly focused on sustainability claims in the fashion sector and several states are proactively introducing legislation regarding sustainability requirements for large fashion companies; a key example is the proposed New York Fashion Sustainability Act. 

And while much of the focus is currently on fast fashion brands, luxury fashion houses are also a key part of the puzzle.  

As Sidkin comments; ‘Generally, luxury brand consumers are older than those who purchase fast fashion, and what is important to one demographic group is not necessarily important to the other and vice versa. As a result, fast fashion brands are likely to have to develop lower cost alternatives to the actions taken by their luxury cousins’. 

Lloyd-Taylor adds, ‘It’s also important to keep in mind that where high-end fashion leads, the rest of the market tends to follow. So luxury brands can keep flying the flag and showing that sustainability is at the top of their agenda, and this should have a trickle-down effect on the whole fashion sector’. 

The new look for GCs 

When it comes to the ways in which general counsel can steer the ship towards a sustainable future, Lloyd-Taylor suggests that every stage of the product lifecycle holds possibilities; ‘There is so much that GCs can do, including encouraging the business to consider sustainability at an early stage during supplier negotiations. Contracts could include basic targets or more complex sustainability-related KPIs. The next step will be to consider how best to manage performance and monitor compliance’. 

‘It is also vital that suppliers provide accurate information so brands can rely on it as a foundation for their own environmental claims. GCs can introduce tough options, termination provisions, warranties and indemnities when those requirements are not met, even if they may have previously been considered relatively trivial obligations’. 

Lloyd-Taylor also adds that looking backwards may help with the path forward; ‘GCs can help the business think more creatively about whether longstanding practices, which might have been introduced to offer consumers greater convenience, might be contributing to its inability to meet sustainability goals’. 

For Eikel and Le Strat, awareness is key; ‘GCs should aim to be as informed about changes to national law as possible until a more harmonised approach can be found. While the somewhat fractured legal landscape on green advertising may seem daunting at first, there are many common themes including the ability to substantiate claims made and to stick to precise languages, avoiding vague terms, and only advertising within the common ground’. 

Law firms, chambers and other legal service providers around the world have signed up to pledges committing to greener forms of dispute resolution, illustrating both the legal sector’s concern around the carbon footprint of their practices and also pointing to a way forward. But what are the sustainability challenges involved in litigation and arbitration, and can lawyers really make dispute resolution greener? 

A study by the Campaign for Greener Arbitrations revealed that almost 20,000 trees could be required to offset the carbon emissions from one international arbitration, a staggering figure that demonstrates the urgent need to adopt more sustainable practices. 

Covid-19 lockdowns made virtual hearings an obligation rather than a sustainability-driven choice for large parts of 2020 and 2021, but the campaign pre-dates the global pandemic. International arbitrator Lucy Greenwood founded the project and the corresponding Green Pledge in 2019 with the aim of raising awareness and reducing the carbon footprint that comes with arbitration.  

Clear solutions for clear problems 

International flights are an obvious contributor to the carbon emissions associated with arbitration, with virtual meetings and hearings an equally clear solution. However, the pledge looks beyond videoconferencing, and also encourages those who sign up to opt for electronic correspondence over hard copies, and to use suppliers and service providers who are likewise committed to reducing their environmental footprint, among other measures. 

Ben Sanderson, of counsel at DLA Piper, explains: ‘The purpose of the pledge is to get arbitration practitioners and all stakeholders in arbitration to commit to making their arbitrations as green as possible. What that means in practice is fewer paper documents, more electronic filings, more electronic bundles, holding hearings virtually, and cutting down on the carbon footprint of flying.’ 

The Campaign for Greener Arbitrations was part of the inspiration for the Greener Litigation Pledge, which was set up by Mishcon de Reya and a group of other law firms, chambers and providers of legal services. The Pledge encourages signatories to take practical steps to reduce the environmental footprint of litigation. Avoiding unnecessary travel, using electronic bundles for court hearings and taking public transport to court are just some of the ideas put forward. 

Reducing emissions, increasing efficiency 

The benefits to the environment of more sustainable dispute resolution practices are clear, and clients are also starting to see the advantages. As Sanderson points out, ‘if you’re cutting out photocopying, paper and flying, that not only reduces the carbon footprint but also potentially reduces the costs involved. It’s a much more efficient way of managing a proceeding.’ 

In many cases, clients themselves are considering their suppliers’ policies when it comes to carbon emissions. ‘Big multinationals in their own reporting will have to look at their supply chains and at how their providers are behaving. Anything we can do to demonstrate to our clients that we are embracing their values, and embracing the things they need to comply with, become part of a conversation in pitching,’ Sanderson notes. ‘Clients are looking at your ESG credentials.’ 

It is not just clients that are getting on board with greener practices either. Tamara Oppenheimer QC of Fountain Court Chambers, which was one of the founding signatories of the Greener Litigation Pledge, has also seen the courts themselves taking an active role in promoting efficient and sustainable dispute resolution practices. ‘This is an area where you might think that we are dragging the courts, but actually the courts are trying to get us to go in that direction as well. A lot of judges now are insisting on electronic bundles,’ she comments. ‘There’s a tremendous impetus coming from the courts, which is good, because that’s going to accelerate things more.’ 

 Resistance, progress and ongoing challenges 

This is not to say that there is no resistance at all from courts, lawyers and clients, some of whom may have concerns about the potential impact of greener practices on their proceedings.  

Furthermore, with the world returning to some form of normality since the Covid-related chaos of 2020 and 2021, there are fears that the progress made in terms of virtual hearings and less travelling could be unravelled, as people seek more in-person meetings and hearings since restrictions have largely lifted. However, many people’s mindsets have shifted, perhaps irrevocably.  

Reflecting on this, Oppenheimer QC notes: ‘Things have very quickly changed. People used to think nothing of saying to solicitors, “can I have all of that in hard copy”. Now there’s a sort of moral pressure not to have things in hard copy.’ 

Challenges remain, however, not least because electronic bundles and virtual hearings themselves have their own carbon footprint and hence are not the end of the story. As Oppenheimer QC points out: ‘Not printing things out is one way of reducing [carbon emissions], but you’ve still got an incredible volume of material, whether it’s electronic or paper, and that translates into needing other devices to deal with it, and that has its own carbon footprint.’ 

While it is easy to visualise the environmental impact of paper – particularly the chopping of trees – the carbon emissions from the electronic devices needed to view non-paper documents may be harder to envisage and quantify. Yet there is a growing awareness of the sustainability problems associated with laptops, tablets and phones, both in terms of the materials needed to produce the devices, and the electricity needed to power them. 

Likewise, remote hearings, through applications like Zoom and other platforms, also require power to run. These are not unsurmountable problems, but they show the value of the pledges’ additional focus on internal policies – including encouraging signatories to consider clean energy suppliers – and not only working practices in dispute proceedings themselves.  

Mediation as a more sustainable choice 

Despite all the progress that has been and continues to be made, serious concerns persist about the carbon impact of the court system itself. Going some way to addressing this was a £40m government investment, announced in October 2021, to reduce the carbon emissions of courts and tribunals in England and Wales. 

The investment was directed to the installation of solar panels, the upgrade of lighting and heating systems to make them more energy efficient, and the roll-out of electric vehicle charging points. The government estimated that this would help to reduce the emissions generated by courts by 10%, or the equivalent of approximately 6000 tonnes of carbon, by 2025. 

Mediation offers well-known advantages over litigation in terms of time and cost-saving, and this efficiency may also make it a more environmentally friendly alternative. Mediation is positively encouraged but not currently mandatory in England and Wales, though there are some calls for mandatory mediation to be introduced.  

For Damian Croker, chair of the Latin America committee of the Campaign for Greener Arbitrations, this push towards mediation could make a significant difference: ‘That is the single best thing that could happen to make the legal system greener. Mediation is far greener than arbitration or litigation, so a move towards mediation will make things a lot greener. And law firms have a big impact on that in terms of their clients.’ 

The Mediators’ Green Pledge likewise suggests a number of ideas for signatories to consider in the process of mediation, including bringing the pledge into workplace conversations. 

Climate change in commercial agreements  

Beyond the dispute resolution forum itself, there are other important ways in which climate change considerations are making their way into dispute resolution. One is through green contract clauses. The Chancery Lane Project (TCLP) produces ‘climate aligned’ clauses for lawyers to include in their commercial agreements, covering everything from sustainable soil management obligations to reductions in food waste in supply chains. The TCLP, which has 325 participating organisations, also provides a net zero toolkit to guide lawyers in aligning their practice with the greener economy. 

The transition to a greener economy may also form part of the factual matrix when a court is called upon to consider commercial disputes. Thomas Karalis, counsel at Ashurst, points out that in contractual disputes there is always an element of contractual interpretation, and often, the courts and tribunals will have a certain level of discretion. 

‘For example, a court or tribunal would say that the factual matrix was that there is a climate emergency, and there is a certain direction of travel, of industries, of the world, of the economy, and surely that must have been in the minds of the parties,’ Karalis notes.  ‘These are ways in which climate-related considerations can influence a decision.’ 

The path to greener dispute resolution 

Of course, all of these actions could appear mere drops in the ocean in a dispute in which a lawyer is defending a client in a highly polluting industry. Indeed, one could argue that the best way a lawyer can make dispute resolution greener is by acting for parties in climate actions against companies engaged in problematic activities. 

While a lawyer is duty bound to act in the best interests of the client – whoever that may be – there are myriad ways in which they can make the process of dispute resolution greener, whether by reducing paper use, auditing their internal policies and suppliers, or prioritising virtual hearings wherever possible. 

For Croker, the pledges highlight the need for working practices to change: ‘That’s the number one thing. Pressing print has got to stop; there is no need. Electronic bundles work. They’ve worked fine during the pandemic, and they’ll continue to work,’ he says. ‘So use electronic bundles, stop getting on a plane. If you can do it online, do it online.’ 

Education is also key – of lawyers, judges and ultimately, the client. ‘It’s a question of both educating ourselves and making suggestions to clients’, Karalis comments. ‘Educating ourselves as to what solutions could be out there, how we can make things better, and what we can concretely advise our clients.’ 

The undeniable existence of the climate emergency means we can expect climate change considerations to have an increasingly prevalent role in commercial disputes. Meanwhile, initiatives like the greener pledges and The Chancery Lane Project are making it easier than ever for climate-conscious legal professionals to adopt more sustainable practices. 

 As Karalis notes, ‘when clients come to us, they come to us for our knowledge, they come for our advice, but they come for our experience as well. Where we have seen things work, where we can propose something which is better, then we should definitely do so.’ 

Whilst geopolitics have taken centre stage in 2022, the beginning of the year also saw a significant development in the business world, as the European Commission published the long-awaited proposal for a Directive on Corporate Sustainability Due Diligence.

Originally a proposal for a Directive on Sustainable Corporate Governance, it was expected to be published in June 2021 but was delayed by the Commissions’ Regulatory Scrutiny Board and, rather than providing general governance rules, the corporate due diligence duty is focused on ending, preventing and accounting for the negative human rights and environmental impacts of a company’s operations, including across its subsidiaries and value chains.

The latter point is key, as global ESG and sustainability partner at Ashurst, Anna-Marie Slot, explains: ‘What it’s trying to do is to get European companies to look down the value chain, which is a bit wider than your supply chain.’ This value chain covers the broad spectrum of a company’s production, marketing and after-sales services, compelling it to work with its established business relationships to ensure compliance across the chain.

‘You have to adopt certain policies and codes of conduct that you make sure people in your value chain are also following, then you have to check on it’, says Slot. ‘Conceptually the law is building on UN and OECD principles that are already out there about corporate responsibility and human rights.

The main goals of the proposal

Integrating due diligence into the company’s policies

Identifying actual or potential adverse human rights and environmental impacts

Preventing, mitigating and remediating potential and actual adverse human rights and environmental impacts

Establishing and maintaining complaint procedures

Monitoring the effectiveness of the company’s due diligence policies and measures

Publicly communicating on due diligence

Why was it needed? 

Businesses play a key role in creating sustainable and fair economies and societies, however, the increasing complexity and global nature of supply chains creates challenges for companies to get reliable information on suppliers’ operations. The fragmentation of national rules on corporate, sustainability-related due diligence obligations further hampers the drive for good practices. Stand-alone measures by some EU member states are no longer enough to encourage and assist multinational companies with acting sustainably, particularly across their global value chains. 

In order to begin addressing these issues, under the proposed directive companies ‘must do due diligence to identify what might be happening in that value chain which would negatively impact human rights or the environment’, says Slot, pointing out that the proposed directive ‘mandates companies to undertake due diligence around human rights in a way that hasn’t been mandated before.’ 

How does climate change fit into the proposal? 

Another core consideration of the directive is how it interacts with the ever-increasing importance of climate change in corporate policy. Environmental impact is a big part of the proposal, with the EU increasingly looking for ways to transpose ESG goals and trends from the private sector into law.  

Large companies affected by the proposed directive must plan to ensure their business strategy is compatible with the 1.5°C global warming goals set out in the Paris Agreement. Under the directive, directors are incentivised to contribute to sustainability and climate change goals and a company’s plan must identify the extent to which its activities impact, or risk impacting, climate change. 

‘You are seeing climate risk being forced more and more on to the corporate agenda’, says Slot. The directive aims to increase the pressure in this area, something Slot suggests the EU is committed to following through on: ‘I think the EU is very dedicated to progressing its sustainable goals; that is very high on their agenda and absent some big change in EU leadership, I think there will be a lot of pressure for the member states to implement it.’ 

Who is affected by it and how will it be enforced? 

The directive is aimed at large EU limited liability companies which are broken down into two main groups: Group 1 includes companies of 500 plus employees and a net turnover of more than €150m worldwide; group 2 includes companies with more than 250 employees and a net turnover of €40m worldwide, as well as companies operating in high impact sectors such as textiles, agriculture, and extraction of minerals. 

For companies in group 2 the new rules will start to apply two years later than for those in group 1. Also affected are third country companies active in the EU with a turnover threshold generated in the EU and aligned with either of these groups. 

These companies will be compelled to comply by a combination of administrative enforcement and civil liability. With this two-pronged approach compliance will be supervised by EU member states which have to designate an authority to ensure effective enforcement, and EU member states will hold companies liable for damages if they fail to comply with the due diligence requirements. 

Where a fault is found, states can impose fines or issue orders requiring a company to comply their obligations. In addition, the proposal includes an extension of directories’ duties, requiring directors to incorporate sustainability matters into their decision-making as part of their directors’ duty of care. 

On the face of it, this is a positive move affecting a broad range of multinational companies within the EU, with potentially significant repercussions should they fail to comply. However, it remains to be seen how effective this enforcement will be and what version of the directive comes out of the legislative process. 

As Slot notes, ‘there’s a lot of challenges; there’s the objective of the law and the implementation of the law, and then there’s how it actually works out in practice.’ 

Possible stumbling blocks 

One of the principal hurdles to the success of the directive could be where it comes into conflict with competition law. This is a concern of Anna Kuusniemi-Laine, head of sustainability at Castrén & Snellman Attorneys: ‘The corporate sustainability directive itself will not be sufficient, because it doesn’t offer cooperation tools; it says that companies need to cooperate, but that refers to competition law.’ 

Herein lies the contradiction, as states and regulators are not famously comfortable with too much inter-company cooperation. 

‘If we think about agreements where companies would, together, agree to pay attention to minimum working conditions in the developing countries or agree on minimum wages etc, it’s possible that that would be treated as a competition law violation’, says Kuusniemi-Laine, who sees this as ‘one of the most urgent things that should be corrected [in the proposed directive], because if companies on the one hand are told that they need to cooperate, and then on the other there’s a message that if you cooperate we investigate this as a cartel, then this whole thing doesn’t work.’ 

Slot shares some of these competition law concerns: ‘If you’re creating an industry standard, you necessarily have to be speaking amongst the industry, and that always gives rise to concerns that in fact you’re not talking about standards, you’re using it as an opportunity to collude.’ 

So what is the solution to this competition law catch-22? 

‘I think it’s not sufficient if we just have this corporate sustainability due diligence directive, because in practice there are issues where companies need to cooperate, and the competition rules should allow this kind of cooperation’, says Kuusniemi-Laine. 

Fortunately, for the possible success of the directive, discussions are underway with the EU Commission on ways the laws and competition rules could be changed to mitigate this contradiction, the aim being, as Kuusniemi-Laine suggests, ‘to allow more cooperation between competitors and to really allow faster and more progressive development, both in terms of the fight against climate change and also in human rights issues.’ 

While some wrestle with the sticky competition law aspects of the directive, another potential hurdle is the legislative process itself. The proposed directive is currently undergoing the EU legislative process and is not expected to be adopted before 2023. Once adopted, EU Member States will have two years to transpose it into national law. 

This process will be far from clear sailing. As Slot suggests, ‘bear in mind that what’s going to happen to this draft is that it has to go through each country’s processes, so it’ll probably be another year before it actually gets reflected in countries’ laws.’ 

Cautious optimism 

Despite these challenges, the proposal is widely seen as a positive move from the EU commission. 

‘I think it’s a big step forward’, says Kuusniemi-Laine, ‘but it’s not sufficient in itself; there are other measures that need to be taken as well’. 

If these other measures can tackle some of the competition law and supply chain issues arising from the proposal, and then navigate the tricky legislative process, then there is optimism that the directive on corporate sustainability can achieve some of its goals. 

Stumbling blocks aside, at its core the directive aims to create a more accountable, responsible and sustainable business world, and whether or not it succeeds in this lofty pursuit, as Slot point out, ‘to the extent that you are driving people into doing due diligence and being transparent, those are never bad things for a functioning market.’ 

Businesses around the world are beginning to accept wider social and environmental responsibilities. This means extending the business’ purpose beyond merely seeking profits to look after stakeholders other than shareholders. Supporting local communities, protecting the environment, inclusive gender and race policies and the fair treatment of employees are all now part and parcel of including the notion of people and planet as stakeholders in corporate decision-making.

Companies depend on the trust of their consumers, clients, employees and suppliers, which means aligning social and environmental activities with business purpose and values is viewed as increasingly necessary in order to maintain this trust.

Fighting climate change and social and economic inequality will require a comprehensive people-centred green transition, and it is largely down to governments to make this happen. But businesses – including law firms – also have a crucial role to play in solving the climate crisis.

While democratically elected governments can be held accountable for their decisions, it is less clear how business can be. How do we determine which companies are putting in the work to ensure their businesses are sustainable and adhere to stated values?

Arguably, a shift towards an organisation’s purpose beyond profits requires a framework for ensuring transparency and accountability. One such framework is B Corp certification. Certified B Corporations (B Corps) are companies ‘verified by B Lab to meet high standards of social and environmental performance, transparency and accountability.’

Within the B Corp agreement, the business is legally required to consider the impact of decisions on all stakeholders. This means, crucially, that shareholder value cannot be the primary consideration but rather, is just one factor among many other stakeholders’ interests, including employees, society and the environment. In a nutshell, B Corp certification ensures a genuine commitment to becoming a so-called purpose-led business.

The B Corp movement began 15 years ago and there are now almost 5,000 B Corps globally in 79 countries and across 154 industries. The UK is currently the fastest growing B Corp market with over 700 B Corps. So far mostly consumer brands have taken the plunge and obtained certification, but some law firms have also signed up. Two such firms are Bates Wells in the UK and Abreu Advogados in Portugal.

Bates Wells is known for its large, dedicated charity and social enterprise team, so it is perhaps not a huge surprise the firm was the first UK law firm to achieve B Corp status. In fact, the firm was involved in drafting the legal test for B Corps and the establishment of B Lab in the UK.

At the time of publication, the only other law firm in the UK to achieve and maintain B Corp certification is Radiant Law. Mishcon de Reya – another UK firm with an established partnership with B Lab UK – became a B Corp in August 2021 but the following year decided to withdraw from the scheme. Stated reason was the difficulty of balancing sustainability commitments with professional obligations.

While Bates Wells and Radiant Law are not the only firms with a longstanding commitment to reducing their carbon footprint and a mission to make a positive impact by addressing social injustice and climate change, unlike others, their B Corp status ties the firms to these pledges.

As Angela Monaghan, the firm’s purpose & impact manager, explains, ‘Being a B Corp means that we have a tangible way to hold ourselves accountable and a framework that helps to keep us striving to go further and work harder to achieve these goals.’

Abreu Advogados is the first, and at the time of publication the only law firm with B Corp certification in Portugal. It too sees B Corp status as a useful framework for its business actions. The firm defines itself as ‘more than a legal services provider’, a ‘humanist project that aims to create a relevant impact both on society and in people’, according to Pedro Pais de Almeida, corporate, M&A and tax partner and head of the firm’s sustainability committee.

He elaborates: ‘We value transparency in all our actions and promote a corporate governance structure that is accountable to all stakeholders. By doing this we are building trust not only with our clients, but also with our professionals and external suppliers.’

For businesses that provide advisory services to clients, such as law firms, incorporating sustainability into a firm’s DNA helps to meet client demands as well as create business. Firms are arguably better able to advise clients on ESG matters if they themselves have implemented their own goals, and Bates Wells has used its experience of becoming a B Corp to establish a practice advising others on the process.

‘A number of organisations come to us to support them to become B Corps and to embed purpose in other ways if B Corp isn’t right for them’, says Monaghan.

Being a B Corp is, after all, about balancing purpose and profit, rather than entirely doing away with the latter. In fact, one of the requirements of B Corp certification is that the business competes in a competitive marketplace; it’s just that it needs to do this without compromising on sustainability.

As Monaghan confirms, ‘Aside from being the right thing to do, being a B Corp helps us to really live our values and means that we are able to attract and retain really excellent people, clients and partners.’

While Abreu Advogados promotes the values of the B Corp movement via its extensive ESG practice but does not have a dedicated practice advising clients on the transition, the firm has also ‘seen a growing interest from organisations as they seek a concrete response to the global challenges of sustainability and green economy.’

But will law firms themselves increasingly seek B Corp certification in their pursuit to embed ESG in their business?

Pais de Almeida thinks so. He argues: ‘Law firms are gradually adapting to the fast-paced world we live in and are increasingly aware that to be (and remain) competitive in a global market, it is critical to take a broader view on society’s challenges and have a hands-on policy to create a resilient future for everyone.’

Monaghan agrees that organisations, including law firms, which respond to the general shift in making business more sustainable as well as accountable ‘are likely to be more ready to face the challenges that we face as a society and to remain relevant to their future consumers, clients and workers.’

Ultimately, Monaghan would like to ‘see lots more firms certify’, and Pais de Almeida believes that ‘this new mindset’ will indeed ‘lead to more law firms certified as B Corp in the coming years.’

As more and more firms are trumpeting their ESG credentials, there will be a growing need to determine and verify who is truly ‘striving to do business in a sustainable way by putting the needs of people and planet on a par with profit’, as Monaghan puts it. B Corp certification might be the answer.

The shipping industry, a sector that has traditionally not earned a reputation for being very environmentally friendly, is heavily investing into a greener future. Whether building more efficient vessels, upgrading existing ones to meet higher standards, or improving ship recycling and dismantling – more sustainable ways of doing business by water are continually rolled out.

‘Not only is this fact driven by unanimous understanding of why decarbonisation is necessary in the current climate but also by the wave of environmental regulatory change – national, European, and international’, says HFW partner Alessio Sbraga.

One of these regulatory changes is the ‘Fit for 55 package’ that was proposed by the European Commission in July 2021 in order to help achieve the EU’s target of reducing greenhouse gas emissions by 55% by 2030. The package includes several initiatives and legislative changes that would directly impact the maritime sector, such as changes to the taxation of heavy oil fuel. However, the biggest change would be the revision of the EU emissions trading system (ETS) and its extension to shipping, an industry which had previously been exempt of the scheme.

More recently, at the beginning of 2022, rapporteur of the EU Parliament Peter Liese published a draft report to revise the ETS Directive which includes several amendments to the proposal. Were those to come into effect, reporting on emissions would be gradually phased in from 2023, with 100% of emissions needing to be accounted for by 2025 – a year earlier than in the original proposal. It would also give the EU commission the power to extend the ETS to include all incoming and outgoing global EU voyages, as opposed to the 50% suggested in the Fit for 55 package.

The biggest uncertainty, however, remains the question of who will be held accountable for trading and reporting emission allowances. As it stands, commercial operators seem to be the responsible party, a decision that continues to be heavily debated in the industry.

Watson Farley & Williams senior associate Valentina Keys and partner Nick Walker speak of this scepticism: ‘Whilst ship owners are naturally supportive of this direction of travel, charterers, ship managers and operators are concerned that the ETS Maritime does not capture all the commercial realities of maritime structures and operations and that a one size fits all approach may be too artificial.’

New rules, more questions

Establishing a system that is both enforceable and effective is no easy feat, and opinions on how beneficial the proposed measures will be in practice are manifold. The European Sea Ports Organisation criticises the limited scope of the proposal, arguing that ‘evasive port calls at neighbouring non-EU ports could seriously jeopardise the effectiveness of the maritime ETS’ and even ‘increase overall emissions, in particular when evasion leads to longer voyages’. Contrarily, the World Shipping council claims the changes should remain on an intra-EU geographic level to avoid market behaviour such as carbon leakage and distortion.

According to Sbraga, the biggest challenge for the maritime industry will be to ‘understand how this regulatory jigsaw puzzle will fit together so that responsibility can be allocated accordingly in everyday commercial shipping contracts.’

This puzzle is only made more complicated through recent turbulence in Europe: Because it is no longer a member of the EU, the UK will not be participating in the scheme. However, that does not mean the nation will be free of its consequences, as the proposed amendments suggest all ships calling at EU ports will be held accountable regardless of which flag they fly.

In addition, the UK has already established its own emissions trading scheme (UK ETS), which currently applies to the aviation and power sectors. With an extension to the maritime industry rumoured to be in the works, law firms and businesses could have even more on their plate trying to conciliate the two, should this come into effect.

The impact that a maritime ETS will have on the shipping sector is difficult to scope. Demanding regulations and an added carbon cost could potentially heavily influence freight rates, meaning the landscape of maritime players might face significant change. Keys and Walker predict that smaller companies will be hit the hardest and face being swallowed by larger ones in light of unmanageable costs and a continuous rise in carbon allowance pricing.

Rough seas ahead?

The ESG agenda has been making its way through sectors and nations alike, a changed sensibility of which Sbraga says: ‘Gone are the days when these were considered merely aspirational or, at best, pigeonholed as being a simple tick box exercise for measuring corporate responsibility – they are now quickly becoming a key driver of decision making and policy decisions of companies and countries alike.’

Law firms are no strangers to dealing with questions of sustainability and ecological impact, and maritime practices have been increasingly involved in such issues. At Watson Farley & Williams, Walker and Keys attest to this observation, noting how ‘advising maritime clients on ESG issues and helping them map their ESG journeys now forms one of our main focus areas.’

Both HWF and Watson Farley & Williams already report an influx in inquiries relating to the ETS. Maritime practices could be tasked with guiding clients operating globally through a kaleidoscopic mix of legislation, a challenge which could see firms with comprehensive international expertise be favoured by those clients.

According to Keys and Walker, litigation and disputes relating to liabilities and enforcement are to be expected should the package and amendments come into legislation. To what extent these might increase is impossible to predict, however, as it remains unclear just how strictly the regulations will be enforced.

Sbraga similarly speaks of an ‘uneasy transition’ in light of the challenges that come with ‘adapting and complying with carbon emission regulations implemented by international, regional and national bodies serving diverse objectives, even as the industry grapples with alternative fuel solutions.’

Voting on the final amendments is currently expected to happen in summer 2022. Until then, it will be unclear to what extent the proposed changes will be included in the final draft. Regardless of the outcome, opinions will surely continue to diverge on the system and its role in making the shipping industry a greener sector.

‘There is no one uniform approach, and, quite possibly, no one right solution’, says Sbraga. As it stands, the only certain thing seems to be the industry’s agreement that, however the rules might be adapted, the maritime ETS will prove to be anything but smooth sailing.

In case any doubts persisted about the importance of ESG to businesses around the world, a recent report by legal and business services provider DWF made clear the pressing need for companies to have a solid ESG strategy. Published in November 2021 and based on a survey of 480 senior executives around the globe, the report highlighted various ways in which poor ESG practices are affecting businesses. 

One of the most striking findings looked at how companies are missing out on business opportunities: 59% of respondents said that they had lost work as a result of ESG issues within their business. Not only does this confirm the pressing concern about ESG, but it also illustrates the need for businesses to have solid ESG practices in place now, not just in the near future.  

‘I think the report very clearly demonstrates that everybody is on a journey, and there are very few organisations now that have not understood their part in the need to improve. Everyone is at varying standards, and most people are looking for support from their advisors to progress on that journey,’ says Kirsty Rogers, head of ESG at DWF. 

Securing experts

Another ever-present risk – to both law firms and clients – concerns the recruitment of top talent. The DWF survey highlighted that 40% of companies found it difficult to hire talent because of a perception that their ESG policies are weak. ‘The ability to attract talent is very high on the ESG agenda,’ Rogers points out. ‘If you don’t have a good strategy and you’re not authentic, talent will walk away. It’s very clear that top talent expect businesses to deliver on ESG, and rightly so.’ 

For law firms, perhaps the clearest manifestation of young lawyers’ expectations from their prospective employers was the establishment of Law Students for Climate Accountability, which has the goal of holding the legal industry accountable for its part in climate change.  

It is not just prospective employees and business partners that are making clear their expectations of companies when it comes to ESG, though. Pressure on businesses comes from multiple sides, with 46% of respondents saying that stakeholders, like regulators, employees, customers and suppliers, have increased pressure on ESG matters in the past one-to-two years.  

‘Corporates have realised that they operate in markets where they’ve got stakeholders all around. It’s consumers, it’s employees. And all of them want to see your ESG credentials,’ notes Michael Barlow, environment partner and head of ESG at Burges Salmon. 

With ESG presenting both risks and opportunities for companies, it is no surprise that businesses are looking to bolster their in-house ESG expertise. In December 2021, recruitment company Robert Walters reported an uptick in the number of job vacancies in the UK centred around ESG – representing over 35,000 new jobs in 2021 – with even more anticipated in 2022. 

‘I think there’s going to be a greater need for people who’ve got climate expertise and an understanding of various requirements such as the Task Force on Climate-related Financial Disclosures (TCFD) and science-based targets (SBTi) to help organisations and law firms to improve carbon footprint and understand climate risk,’ argues Rogers.  

However, demand may outweigh supply. DWF’s report highlighted the increasing demand for ESG experts, combined with a lack of qualified professionals in this field. There is significant competition for businesses to find and hire experts in what is still a relatively new discipline, though we can speculate that more people will move into ESG-related careers given the ever-increasing importance of this field. For now, the DWF report notes, many ESG experts have so far established their careers in academia and the non-profit sector. 

Walking the walk

For law firms, there is a dual purpose to having in-house ESG and sustainability expertise. Internally, it allows firms to improve their own practices, and externally, it makes them better placed to advise clients on their ESG matters. ‘I do think it’s important when offering those services, that you as a firm are walking the walk yourself,’ says Barlow. A law firm’s experience in establishing its own ESG practices and processes can become part of its offering to clients as well. ‘You’re saying to clients that you’ve been on this journey too, so it’s possible to offer practical support as well.’  

In this context, law firms have been busy figuring out the most effective ways to provide advice to clients on ESG, sustainability and climate change. It is clear that the expectations that clients have of their legal advisors have evolved. ‘It is definitely more of a holistic advisory role now. The “tick the box” legal advice is a given. We are expected to really understand a client’s business and make sure that sustainability is integrated and embedded throughout it,’ notes Laura Houët, financial services partner and co-head of ESG at CMS.  

Many firms have already established multidisciplinary teams to tackle clients’ myriad ESG issues. Such an approach – combining the expertise of environmental, finance, labour and corporate lawyers, among others – mirrors the interlinked nature of ESG’s impacts on clients. ‘If you look at any one of our big clients, they will be impacted by sustainability in numerous ways, whether in relation to the real estate that they occupy, the products they provide, or their employees,’ Houët continues.   

In some instances, though, clients’ needs in ESG cannot always be met wholly by law firms and legal advisors, and collaboration between technical ESG experts and law firms may become more commonplace. ‘In the old days you would have the M&A advisor working together with the corporate partner,’ notes Joachim Kaetzler, banking and compliance partner at CMS, who co-leads the ESG group from Frankfurt. ‘I think in the future we’re going to see more cooperation between technical specialists and the legal specialists. In the new world, we might have the environmental advisor working with the M&A partner. This form of cooperation will increase.’  

Getting it right

Tailoring services to the needs and position of clients is, as usual for law firms, also paramount. Kaetzler points out: ‘As a global firm, you need to accommodate everyone. You need to accommodate the person who’s running the safety and environmental aspects of an energy plant, or the board member of a global financial institution. Finding the right balance in the granularity and technicality of services is key.’  

Different companies will be at different places when it comes to ESG and its implementation, but there may be similarities in what they require from their advisors, legal or otherwise: tailor-made advice that allows them to incorporate ESG best practices and sustainability seamlessly throughout their operations. 

While names and acronyms change over time, it is clear that ESG, its importance, and the risks and opportunities brought by it, are here to stay. Businesses that are on top of these issues give themselves a better chance of staying competitive, meeting the expectations of their many stakeholders, and avoiding the costs associated with not having a good strategy. ESG professionals – both technical and legal – could help companies to achieve their much-needed ESG goals.  

‘For me, ESG seems to be quite a unifying factor globally, because it affects all jurisdictions,’ Rogers notes. ‘The rules and regulations are different in each location, but they’re all on the same theme: we’ve got to improve the environment, we’ve got to improve the way we behave. This is encouraging, but in equal measure, the stakes are very high if we don’t get it right.’ 

In 2008, the global economy collapsed and sparked a chain of events that would alter the world’s financial markets forever. Financial regulations were thrown out and rewritten, household names in the banking world disappeared overnight and how people viewed finance and money was permanently changed. In amongst the chaos, a new idea emerged, which has increasingly dominated headlines and discussions in the last 14 years – cryptocurrency. Where Bitcoin forged a path, many others have followed, and the digital currency market is now overflowing with cryptoassets.

Since its inception, cryptocurrency has (to put it mildly) divided opinion. However, in recent years, one notable factor has risen in prominence in the crypto debate – its energy consumption. Certain methods of mining cryptocurrency and the sheer amount of electricity required to power these processes have made headlines in recent months and years and encouraged critics and enthusiasts alike to debate whether cryptocurrency can find its place in the sustainable investment movement.

Cryptocurrency processes – a short summary

Cryptocurrency mining is regularly powered through one of three models: proof of work (POW), proof of stake (POS) or proof of authority (POA). Under the POW method, which is by far the most energy intensive, computers are used to calculate complex mathematical problems to either create or ‘mine’ cryptocurrencies or process a transaction. These computing processes (or ‘work’) are then used as a method of verification for the blockchain transaction, which is confirmed by other participants in the blockchain.

The POS model validates a transaction in the blockchain based on the amount of coins a miner holds, i.e. coin owners offer their coins as collateral in order to validate blocks within the blockchain; while the POA method is more reputation based and relies on verification from block validators that have been arbitrarily selected as trustworthy entities. Both of these methods are generally acknowledged as more eco-friendly than the more widely used POW model.

The current situation

As previously reported by the Cambridge Bitcoin Electricity Consumption Index, the energy use of Bitcoin, which utilises a POW method, is approximately 0.6% of the global energy consumption, which is roughly equivalent to the annual energy usage of countries like Norway or Ukraine.

“Where a cryptocurrency relies on a consensus mechanism (such as POW) over a distributed network, there is an enormous environmental cost” states Neil Robson, a financial regulatory and crypto expert based in Katten’s London office. “The negative environmental impact that some crypto have, such as Bitcoin, is bound to become a bigger issue as cryptocurrency gains more popularity”.

This massive energy usage has recently caused several governments and legislative bodies to take drastic action to counteract the negative climate impact. In late 2021, China banned all cryptocurrency transactions and crypto mining, the largest in a growing group of countries to do so; Russia has recently proposed a similar ban due to its effect on the country’s green agenda, and Swedish regulators have suggested a ban on Bitcoin mining to ensure Europe can meet its obligations under the Paris Climate Agreement.

However, the approach to cryptocurrencies globally has been far from consistent. As highlighted by James Burnie, a financial services regulation and fintech partner at gunnercooke, “Different local lawmakers have different priorities, cultures and philosophies. In the EU there is a focus on the importance of the individual, in the US there is a focus on the corporate and in China the focus is on the importance of the state. Therefore, there is a lack of a single unified stance on how cryptoassets should be dealt with. When this is overlaid by the fast-changing nature of cryptoassets, it means that those who create and understand the technology tend to innovate, whilst regulators are left to catch up”.

It would also be reductive to suggest that sustainability is the only issue facing the crypto market. Undeniably, the other prominent narrative around cryptocurrencies is the volatility of the assets themselves. Large volumes of crypto scams and wildly fluctuating prices have led to some arguing that a cryptocurrency’s value is solely driven by supply and demand, with no intrinsic value in and of itself. Celebrity endorsements have also added to the chaos, with recent examples leading to allegations of misleading marketing and, at worst, class actions alleging intentional ‘pump and dump’ schemes.

Similarly, the idea that cryptocurrency’s impact on the environment is contained to its energy usage ignores the other side of the proverbial coin. As reported by the BBC in late 2021, cryptocurrency mining processes produce 30,700 tonnes of electronic waste (also known as e-waste) a year, the majority of which ends up in landfills. This averages out to 272g of e-waste per transaction and is equivalent to the small IT equipment waste of a country the size of the Netherlands.

So, is there a green solution?

Several jurisdictions around the world have attempted to offer up solutions to the crypto sustainability issue with varying degrees of success.

“In terms of using green energy sources for POW, a great example is Iceland”, states Robson. Nearly 100% of the country’s electricity stems from renewable energy sources, with excess created every year to attract energy-intensive businesses to the region, including cryptocurrency miners, which have long been drawn to Iceland for its abundance of cheap geothermal energy.

However, as Robson points out, “Just last December, Iceland began turning away new Bitcoin miners due to issues with energy allocation and problems in its power station, so it appears that using green energy sources for POW mining may not be a long-term option”.

Kazakhstan has also followed a similar trajectory, initially welcoming cryptocurrency miners but shutting down mining centres or cutting of electricity supplies to miners in January 2022 due to nationwide electricity shortages.

The cryptoasset market has also seen an increased presence of sustainable cryptocurrencies in recent years. Burnie comments, “So far, the issue around sustainability has predominantly centred around Bitcoin. However, some new cryptoassets, such as Avalanche, have made sustainability a core part of their USP and are actively geared towards those who are focused on ensuring sustainability”.

Other notable examples of sustainable cryptocurrency include Cardano, which utilises a POS system; SolarCoin, which creates one coin for every megawatt hour generated from solar energy; and Bitgreen, which rewards users for environmentally friendly behaviour.

“As the techniques behind making these cryptoassets sustainable become increasingly used and accepted”, continues Burnie, “then sustainability may become less of a criticism to cryptoassets. Indeed, as there can be inherent inefficiencies in non-blockchain solutions, it may be that, in some cases, using a cryptoasset becomes more sustainable than the traditional method”.

Can regulations play a role?

Additionally, it seems increasingly likely that the future of crypto will be within a regulated landscape and, if current trends are an indicator, a landscape that focuses ever more on sustainable investments.

As Robson suggests, “Given the green incentives published by countries such as the UK, US, EU and China, it’s important to highlight that we are seeing a shift in what investors are looking for. ESG assets have become incredibly popular in the past few years and the transition to sustainable finance is only going to get bigger in the coming years”.

Burnie adds, “There is an issue here of perception. If consumers are faced with two alternatives, one of which is sustainable and the other not, then they may decide to use the former preferentially”.

Similarly, notable players in the traditional financial market have become increasingly vocal about the potential for cryptocurrency regulations. In 2021, HM Treasury and the Bank of England announced they would be creating a taskforce with the aim of looking into the possible creation of a UK Central Bank Digital Currency (CBDC), a form of digital currency issued by the Bank of England.

In January 2022, HM Treasury released the results of its consultation on cryptoasset promotion, confirming that the UK government will introduce measures to bring a broader range of cryptoassets within the scope of the UK’s financial promotion regulation. The FCA also got involved in early 2022, setting out its intentions to strengthen financial promotion rules relating to high-risk investments, including cryptocurrencies.

Given the volume of proposed changes on the regulatory horizon for cryptoassets and the wider shift in the financial markets towards a more green-conscious approach, the two seem on an inevitable collision course.

Robson suggests, “It’s worth noting that, alongside increased regulation, the UK has recently committed to a net zero economy by 2050, and we are seeing this commitment trickle down into the financial sector. For example, the UK is proposing to impose an obligation on certain UK firms to make public ESG disclosures. These include possibly requiring asset managers to disclose carbon emission data and carbon intensity metrics of the investment portfolios they manage. If this proposal is successful, and crypto becomes fully regulated, we may see crypto mining emissions being included in these portfolios in the years to come”.

Burnie adds a slightly different take: “An interesting point is regarding the assumption that crypto will have to adapt to the existing regulatory framework, whereas in fact it may be in some cases that the existing regulatory framework should adapt to crypto. It may be that these firms shape the future of regulation to come as regtech solutions are developed using this technology as part of ensuring better outcomes for markets and consumers”.

Overall, the reality is that the discussions around climate change are set to become increasingly prominent throughout the financial world, and with ESG assets predicted to exceed $53tn by 2025, the cryptoasset market will have to consider its environmental footprint when looking ahead.

As Robson concludes, “The focus on climate change and the need for sustainability has brought intense scrutiny to cryptocurrencies’ energy usage. Cryptocurrencies and their underlying blockchain technology will need to evolve in line with market needs if it wishes to be successful in the future, though it remains to be seen how sustainable or green crypto will be as an industry in one, three or five years’ time”.

Poland has been slow off the mark in its green transition. It has a historically powerful coal industry, which has brought with it a large degree of scepticism towards environmentalism. This began to change when Poland joined the EU with its environmental politics and regulation. However, larger scale changes are afoot, and lawyers I spoke to believe that corporates and even state-owned energy companies are beginning to really buy into the so-far alien concept of ESG.

While there are still a number of challenges, Poland’s renewable energy market is developing quickly, from a miniscule base, while the country’s prominent manufacturing sector is also starting to rise to the challenge.

I spoke two Polish lawyers to find out more: CMS’ Agnieszka Skorupińska, who leads the firm’s environmental law practice in the CEE region, and head of the energy practice at Rymarz Zdort, Marek Durski.

The historical challenge of coal

According to Skorupińska, ‘there are massive social issues associated with coal extraction and a coal-based energy generation. So, this is something that cannot be thrown into the bin easily’. The region of Upper Silesia is home to a large number of Poland’s mining communities that have formed a politically influential bloc backed up by a strong mining union.

Coal is also a large part of the country’s energy mix (coal-fired plants produced roughly 70% of the nation’s electricity in 2020 according to the IEA) and it is a major exporter of the material. There are geopolitical implications for Poland’s coal-dependence.

Durski observes that while the rest of Europe is struggling with high natural gas prices, electricity remains relatively cheap in Poland, which has remained wary of gas imports from Russia. ‘The starting point for Poland is definitely different than you would have in the UK or Germany or France with nuclear power’, he adds, ‘you have to invest a lot of money to actually switch’.

Coal consumption has fallen in recent years, and the slack has mainly been taken up by bio-fuel and natural gas electricity production. Durski sees this as a more positive move, because ‘in a country that has to switch from coal to cleaner energy, natural gas is treated as a fuel that will be used for quite a long time to allow for the transition to a fully, carbon-free economy’.

The Polish government has shown signs that it recognises the need to decarbonise the economy and its long-term plan (known as Polish Energy Policy 2040) aims for coal to make up no more that 56% of the energy mix by 2030, with coal being phased out completely by 2049. Skorupińska notes, ‘it’s good that there is a declaration that we won’t cross this level. But on the other hand, still, this is very high.’

The state of renewables

So where does that leave the green transition? Wind and solar have proved to be the most viable renewable energy sources for the Polish market.

Skorupińska notes that onshore wind initially ‘flourished’, however that market was stalled in 2016 when the Polish government imposed a distance requirement banning projects near settlements; it is thought the law will be amended in the near future to allow for more onshore development permits.

Offshore wind has been more successful, and there are a number of Baltic Sea wind projects in development, attracting significant foreign investment, including from Orsted and Equinor. The offshore projects are particularly symbolic, as they are a visible reminder of Poland’s energy independence and its intentions in the green transition.

There have also been positive moves in relation to solar energy. The Polish government has encouraged the micro installation of photovoltaic panels by property owners. According to official figures, in 2018, there were 490 MW of installations in Poland, of which 340 MW were micro installations. In 2021, this figure rose to 6126 MW, with private capacity accounting for 4757 MW.

Durski points out that there are also favourable conditions for industrial photovoltaic projects, under the contracts for difference mechanism, which provides a guaranteed energy price for 15 years, although these projects are slowing down as it is necessary to update the grid’s interconnection capacity.

These are, of course, positive developments, but renewable energy remains an infinitely small part of Poland’s energy mix. Despite this, there is reason to believe that economics will ultimately drive change, aided by European green policy and the burgeoning adoption of ESG.

The global change in attitudes and policy

Durski sees economics as having had a significant impact on Poland’s green transition. ‘All of the utilities that were very slow progressing transition projects to invest in natural gas sources or renewables, suddenly they realised that they could go bankrupt if they don’t do that’. As part of the EU, Poland is subject to its emissions trading scheme, which is becoming more costly every year.

Additionally, foreign investors are adopting ESG strategies that prevent them from investing in non-renewable energy generation. This is perhaps a game-changer. As the majority of power generators in Poland are state-owned, the government is working to transfer its coal-fired power plants to a “bad bank” until they reach the end of their operational lifetime.

Explaining the concept, Durski points out that ‘the idea is that all of those utilities are facing problems with securing new financing for as long as they are operating coal assets.’

Skorupińska has noticed that ESG is becoming more important outside of the energy industry, albeit among large Polish companies rather than smaller businesses. Polish chemical companies are adopting decarbonisation policies, on the back of the European Green Deal.

Citing the example of one client’s development of chemical recycling technology, she states that ‘this is something that the biggest players have built teams to deal exclusively with, in order to develop something that will probably change their business model as a company’.

Durski also identified a media industry client that had invested in an operating solar installation to hedge themselves against increasing energy costs.

Finally, at the COP26 summit in Glasgow in 2021, the Polish government signed a declaration committing to phase out coal power generation in the 2030s and transition away from coal entirely by the 2040s. Following the summit, the ministry of climate and environment clarified that Poland will phase out coal in the mid-2040s. Exemplifying the political balancing act, these promises contradict a contract signed with the mining union before the summit that the transition is scheduled for 2049.

Law firms and Net Zero – Advisors and leaders?

The race to reduce carbon emissions remains at the top of the global agenda, particularly with the recent hosting of COP26 in Glasgow, which saw broad commitments from UN member states to reach net zero in emissions within the next 30 to 50 years. Previous holdouts including Russia, China, and India joined the global movement, with the focus now turning to how governments, and perhaps more crucially, the private sector, can sharply reduce their carbon footprints.

The role of law firms in this process is, somewhat obviously, traditionally that of a legal advisor, with corporate governance, energy, and tech lawyers, among others, advising their clients on matters such as energy transition schemes, renewable infrastructure projects, and internal ESG commitments. Crucial developments such as the EU Green Deal have placed new pressures on businesses to comply, a panacea for corporate governance and regulatory compliance teams advising global blue-chip clients.

Even more indirectly, we see firms play a role – as advisors to impact funds investing in green infrastructure, or activist shareholders seeking to divest from fossil fuels, as well as representatives of climate protesters facing criminal charges.

Brussels-based White & Case partner Jacquelyn MacLennan explains: “Public companies, most visibly, are facing pressure from institutional investors who are increasingly engaging with them via ‘stewardship teams’ that are urging them to adopt more sophisticated due diligence, disclosure and management of ESG risks in their operations and supply chains.”

Elaborating on the changing role of lawyers amidst these new pressures, MacLennan says: “Environmental activists have been using climate change litigation as a means of putting pressure on governments and corporates to meet emission reduction goals. Lawyers are increasingly called upon to advise on these corporate governance and litigation risks.”

These pressures have resulted in a change in attitude at board level, according to Darren Walsh, head of power and utilities at DWF: “What’s really important is the buy-in we’re now seeing from companies. Six or seven years ago we would suggest renewable energy sources to clients and they just wouldn’t be interested. Now, even in the last six months there is much more of a buy-in from boards, CEOs, and CFOs.”

Similarly, leading law firms and their partners have also contributed to thought leadership on the topic of climate change mitigation, both in the form of opinion and as advisors to intergovernmental organisations dedicated to keeping climate change on the global agenda, as well as developing potential policy responses.

Law firms as climate actors

Another way to look at the role law firms play, however, is to examine their own contribution to climate change. Law firms across Europe and globally employ millions of employees, and many have multiple international offices and significant global footprints, not to mention the vast amounts of paper utilised in briefs and bundles. While curtailed by the pandemic, international legal work has necessitated the heavy use of air travel for client negotiations, conferences, and even job interviews.

To put it simply: law firms are polluters too. Like all major companies, their day-to-day activities create carbon emissions, in some cases more so than other businesses, or at least in ways other businesses do not. As the global private sector looks to how it can ‘go green’, the legal industry finds itself under the spotlight.

For the first time, Legal Business’s LB100 requested information on carbon emissions from City-based firms, sorting the firms’ responses into a table calculated via dividing total emissions by headcount.

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As noted above, firms with larger global presences and headcounts have a higher environmental impact than others. Peter Duff, chair of Shoosmiths, a national firm who feature among many City-only operations in the second-bottom category, speaks on the role firms can play, and the importance of setting an example, adding:

“We believe that with collective action and visible leadership from the global business community on climate change, a greater, faster reduction of carbon can happen. We have found that sharing the knowledge we’ve accrued on our journey towards net zero has helped clients and contacts’ businesses, and we would encourage other firms to have these conversations to share best practice.”

At international operators such as White & Case, efforts are also being made. Per MacLennan: “Law firms such as White & Case are undertaking the same efforts to reduce our carbon footprint as our clients. For example, we have conducted multiple GHG emissions assessments [and] instituted a global Environmental Management System of some 60 actions that we expect each of our offices worldwide to adopt.”

These assessments have proven fruitful, translating into direct action, as MacLennan points out. “So far about a third of our electricity is powered by renewable energy”, she reveals, demonstrating the very similar pressures law firms face to their corporate clients, resulting in efforts to directly reduce emissions.

Law firms and ESG

The rise of the ESG agenda within businesses does not exclude law firms, which face new pressures to meet internal sustainability targets, both internally and externally. One firm taking the lead in this space is listed firm DWF, which faces unique pressures as a public company.

Darren Walsh and Kirsty Rogers, who administers the firm’s ESG programme, discuss the firm’s work as advisors and its obligations as a listed law firm.

Rogers explains: “As a listed company, we are required to report and are rated on ESG requirements. We have also committed to the SBTi and keeping emissions under 1.5 degrees by 2030, and to be net zero by 2050. It’s a journey lots of firms aren’t on yet – because they don’t have to be. We do and we want to be.”

DWF has a UK-wide and global presence, which creates difficulties further detailed by Rogers, with office rental contracts cited as a key issue: “We’re adopting a science-based approach, looking at emissions from our global offices. This includes looking at leases, and areas where there may be a break or opportunity to revise the energy supply to improve emissions. Manchester is already 100% renewable in terms of the energy we use and this is our largest office.”

For Walsh, action as a legal advisor is equally important as the work the firm does internally, both in terms of promoting action, as well as helping the firm meet reporting targets: “Working with clients on these projects isn’t just work for us, it’s genuinely important that we see positive changes as a result of what we do. It also helps us demonstrate that we’re committed to our climate and ESG targets as a public company – which we sincerely are.”

MacLennan also notes the role firms play in ESG initiatives, arguing that “ESG is also a key area of opportunity for organisations. Law firms are at the cutting edge here, developing innovative solutions in terms of the existing and evolving legal frameworks.”

Duff echoes these sentiments, expanding on Shoosmiths’ own ESG efforts: “We feel a responsibility to help make the planet a better place for future generations and have been tracking our ESG impacts since 2012. We’ve made a commitment to decarbonise our business. In January 2020 we set a target for Shoosmiths’ operations to achieve net zero status by 2025, and are proud that in November this year, our near-term science-based emissions reduction targets applicable to our entire value chain were approved by the Science Based Targets initiative”.

It is perhaps reasonable to argue that law firms themselves cannot turn the tide as far as global carbon emissions are concerned. Their role as legal advisors is ultimately limited to counsel and implementation of wider schemes, both governmental and otherwise, and their carbon footprints pale into comparison against the oil and gas, air transport, and manufacturing industries.

However, it is clear that the combined role firms can play – both their traditional one and increasingly as contributors to net zero themselves – is crucial, and one that is increasingly on the radar of firms and their leadership teams.

In Italo Calvino’s Invisible Cities, a fictionalised version of the famous 12th century merchant Marco Polo speaks with Kublai Khan about various cities along the Silk Roads. Khan is naturally curious about his vast, seemingly endless (and endlessly diverse) empire, and Marco Polo is only too keen to share stories about the various cities he has supposedly seen in his travels.

Supposedly, because the accounts Marco Polo gives aren’t always realistic: some cities float, others are impossibly extravagant. The great emperor loves listening to him regardless, because with each city he describes, Marco Polo reveals some fundamental truth – not about a specific place, but about human nature.

One of the cities Marco Polo talks about is called Euphemia, where merchants gather in the bazaar and exchange goods, the way merchants naturally would in any other city. But in Euphemia, the bemused Khan hears, those merchants don’t just exchange goods. They also tell each other stories about their experiences of how they came across those goods. They tell each other about wolves, battles, hidden treasure.

What makes Euphemia truly special, Marco Polo says, is that afterwards, when those merchants are on the long, solitary journey home, they each think about the stories they’ve heard and discover that now, their own recollections of wolves, battles and hidden treasure have changed. In Euphemia, Marco Polo tells the enchanted Khan, people don’t just exchange goods; they exchange memories.

The new German law that puts supply chains under scrutiny

Trade in today’s heavily interconnected (and real) world is immeasurably more complicated than this. Even with our straining global supply chains, we are still able to manufacture, grow, assemble, and deliver an astounding variety of goods right to our doorstep.

In fact, the intricacies of the world’s supply chains are of such staggering complexity that often artificial intelligence is utilised to manage all aspects productively and maximise efficiency. There is no time to sit around idly and exchange fanciful stories about how those products came about – not if we want those presents home in time for Christmas.

But it is also possible that by connecting the world in these new and exciting and often ingenious ways, we have also disconnected ourselves from the stories each product brings with it along its journey. Products have no memories themselves, but the humans that made them do.

And when a product comes from the other side of the world, it is not always easy to know about the conditions in which it was made – if the desire to know is there at all. Reports of any human rights and/or environmental abuses often go missing along the way, even if the products themselves are able to reach us without issues.

It is possible that a step away from that status quo may have been taken with a new German law that forces large companies to take a closer look into their supply chains. The German Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains (Lieferkettensorgfaltspflichtengesetz, “LkSG”) was adopted by the Bundestag in June 2021 and is due to come into effect on 1 January 2023.

Under the LkSG, German companies will, for the first time, be obligated to implement due diligence procedures so that they can demonstrate compliance with core human rights protections in supply chains (and, as we will see, a limited few environmental rights protections too). This not only applies to German companies, but to foreign companies that have branches in Germany as well.

It is important to note that this version of the law initially only affects companies that have 3,000 employees or more, and from 2024 onwards, that threshold will drop to 1,000 employees, significantly raising the number of companies that will fall within the scope of the law.

In essence, with the LkSG, the burden falls on German and German-registered companies to demonstrate that they have taken reasonable actions to ensure no human rights abuses take place in their own operations and in the supply chain (primarily their direct suppliers) – irrespective of sector.

Paving the way towards addressing environmental concerns

Of note here isn’t only the vast scope of the law (as it is expected to impact a substantial number of companies and their suppliers worldwide), but its potential implications for the future. It is possible that by addressing human rights abuses, the LkSG could one day pave the way towards addressing environmental concerns in supply chains as well – even as the initial focus remains on protection of human rights.

Dr. Lothar Harings, partner and head of the International Trade practice group at Graf von Westphalen, explains: “With respect to environmental concerns, the act only stipulates due diligence obligations in regard to the use of mercury and persistent organic pollutants, and aims to safeguard the prohibition of exporting or importing hazardous waste to or from certain countries.”

Dr Harings goes on to clarify that there are currently no signs that LkSG will be expanded to include further environmental provisions, including in regard to climate change. He goes on: “Taking into account recent court judgments in EU countries that oblige member states to take action against climate change, it seems questionable why climate protection has not already been included in the scope of protection. Despite this, it is more likely that Germany will wait for EU legislation on the matter of environmental due diligence obligations. The draft EU directive suggested by the EU Parliament indicates that environmental concerns may receive a stronger focus – in this case, Germany would have to amend its supply chain legislation accordingly.”

Dr. Marc Ruttloff and Prof. Dr. Eric Wagner, partners at Gleiss Lutz, agree that environmental concerns are more likely to be addressed at an EU-wide level: “This legislative development is supported by recent trends in Germany’s jurisprudence: in spring 2021, the German Federal Constitutional Court decided on the constitutionality of the Federal German Climate Protection Act in a landmark judgement, determining that, inter alia, the legislator is obliged to enact an effective climate protection law under the German constitution. From a European perspective, the global significance of climate protection could lead to substantial regulation of climate protection-related obligations, particularly at EU level.”

Birgit Schreier, salaried partner at Heuking Kühn Lüer Wojtek, comments on the wide scope of the LkSG: “We do expect that the LkSG will affect the provisions in the supply chain – with regard to the environmental risks mentioned – as the law requires the companies to impose the due diligence obligations on their contract partners. That’s why the LkSG will also affect small and medium-sized companies not exceeding the thresholds for direct application of the law. Such a transfer effect of the obligations under the law along the entire supply chain is particularly intended by the LkSG.”

Something to be taken seriously

The fact that the LkSG can have far-reaching implications for companies can be further demonstrated from the fact that certain interest groups appear to have lobbied to limit the scope of the act, while NGOs tried to expand it. In the form it was adopted, there are indications that the LkSG is something companies have to take quite seriously indeed.

Dr. Marc Ruttloff and Prof. Dr. Eric Wagner explain: “the enforcement of the LkSG is supported by the threat of severe sanctions like extensive fines and the exclusion of procurement procedures for years.”

Birgit Schreier, however, also clarifies what the limits of the LkSG are: “LkSG explicitly states that a breach of the obligations under this act does not give rise to a civil liability” and that “on a general basis the companies are only required to check their own business and their direct contractual partners for human rights risks”.

Nevertheless, Birgit Schreier also states that the LkSG’s adoption in itself is substantial: “The law has been passed and indeed sets a new standard for German companies to consider a human rights due diligence in their supply chains.”

The beginning of a conversation

The LkSG is, therefore, significant, not only for the basic human rights it helps safeguard, but also for the blueprint it may provide for the future. It is unlikely that on its own it is going to be enough, of course. One swallow does not make a summer.

But dismissing its significance is also dangerous. It might just be possible that, along with those vital, and long overdue, human rights safeguards, the LkSG’s most significant contributions could lie in helping us recognise our own capacity for change: to help us look into the ways our modern supply chains operate and realise that things we thought static and immovable don’t have to be that way.

The desire for change is there, sometimes in unexpected places. As Dr. Harings mentions: “In our current practice we see a strong commitment of companies not only to implement the minimum legal requirements, but to take the new legal act as a real chance to create a new working culture and to contribute to the improvement of the global human rights situation and environmental crisis.”

That might be the best way of viewing the LkSG in its current form: not as the final word on anything, but the beginning of a conversation that, for the longest time, we did not want to have. New memories that reach us from far away. It is not all wolves and battles in Euphemia: there’s also talk of hidden treasure.

Environmental, social and corporate governance compliance has become a household term for companies, investors and law firms. All across Europe, sustainable investments are booming, and surges in ESG considerations have been widely reported. In the DACH region alone, the market is said to have more than doubled from 2019 to 2020.

The DACH countries Germany, Austria and Switzerland are not only located next to each other in Central Europe, but also have de-facto nation-wide language as well as a strong, stable economy in common. The countries, with a population of just under 100m between them, all have a high density of SMEs as well as significant activity in the industrials and chemicals, IT and telecoms, and consumer goods industries.

While the most common transactions are still purely corporate ones, other forms of investment have increased steadily over the years. With the world’s continuous high interest in the aforementioned sectors, it is no surprise that private equity and venture capital funds as well as other investors often look to the DACH countries for promising and secure business.

Although a focus on the ‘E’ aspect of ESG has been around for some years, it started to have an undeniable influence on the private sector when the Paris Agreement was finalised in 2016. Germany, Austria, and Switzerland all ratified the agreement in October 2016. Since then, various laws have been passed in the countries to reduce or neutralise greenhouse gas emissions. Nonetheless, as the recent elections in Germany have shown, even in 2021 it remains a divisive topic.

Investors, however, have continued to increasingly take a target’s impact on the perceived factors of climate change, as well as sustainability efforts, into account in their investment decisions. While it is too early to have a fully number-backed link between ESG investing and financial returns, the market has had to react to the growing demand from consumers, employees and limited partners.

According to Lucina Berger, who focuses on corporate governance at German full-service firm Hengeler Mueller, society is a key driver: ‘Campaigns such as the Fridays for Future or the Black Lives Matter movement contribute further to making ESG an omnipresent topic.’

In Berger’s opinion, it is also due to the public’s interest that ESG could hold its ground during the last two turbulent years. With Covid-19 spreading across the globe, the demand for transparency and an environmental conscience took centre stage for consumers. This has led to an all-time high in instructions for law firms to advise on ESG-related matters.

Berger sees not only large companies inquiring but also SMEs – or the Mittelstand – seeking advice.

While ESG concerns climb higher on DACH region companies’ agendas, one of the main challenges continues to be the directive – or rather the lack thereof. Austria, Germany and Switzerland all struggle with the sheer volume of guidelines, laws and standards existing at federal, state and international levels.

Mandatory sustainability reporting, as well as incentive structures, seem to be measures that have caught on well in all aforementioned jurisdictions. Nevertheless, ‘due to the lack of a uniform rating and classification systems, the risk of greenwashing cannot be excluded,’ according to Wolf Theiss partner Sarah Wared.

As a corporate and M&A lawyer in Austria, Wared increasingly assists clients with developing their sustainability efforts and ESG compliance. ‘It is a challenge to adhere to all regulations as there has been no real uniformity,’ she states, but is also hopeful about the new EU regulation which intends to address this issue: The EU Taxonomy, a classification system establishing a list of environmentally sustainable economic activities.

A first delegated act was formally adopted in June 2021, with more to follow. These acts aim to provide companies, investors and policymakers with appropriate definitions, protect from greenwashing and subsequently increase sustainable investment. ‘Time will tell how the Taxonomy plays out but it’s a step in the right direction,’ says Wared.

While not a part of the EU, Switzerland also has an eye on the new classification system. ‘We have to make sure that whatever we do here isn’t in a vacuum. Alignment with the EU and other jurisdictions is of massive importance,’ says Christoph Vonlanthen, a partner in Schellenberg Wittmer’s M&A and Capital Markets teams in Switzerland, and an ESG specialist.

‘Climate change is going to have a profound impact on the economy,’ he states, and refers to a tangible example in the form of a study published by the Swiss Sustainable Finance (SSF) association. In its Swiss Sustainable Investment Market Study 2021, data on the funds and mandates reported by banks and asset managers and internally managed asset owner volumes shows that sustainable investment funds overtake conventional funds for the first time.

‘Besides the regulatory changes and the public’s role, climate-related disputes are another key driver for awareness’ says Berger, referring to the recent, prominent Shell litigation. Dutch environmental group Milieudefensie, together with four Nigerian farmers, brought proceedings against the oil giant alleging pollution caused by oil spills that took place in 2004-2007. In early 2021, the Dutch Court of Appeal in The Hague held Shell liable, and the company is now also required to install equipment to prevent damage in the future.

These cases set precedents and serve as a warning sign for those who neglect to keep their house in check. However, by now, most take heed: ‘Wanting to get ESG expectations right is at the forefront of board members’ minds and for that, they seek counsel more than ever,’ says Berger. All three firms report a significant uptick in ESG due diligence mandates.

By implication, clients also expect their law firms to have integrated ESG criteria into their business. ‘Especially if you want to get on a panel, companies will request insight into their providers of legal services’ initiatives; interestingly enough, while this was traditionally more regarding (gender) diversity, sustainability efforts are now equally inquired about,’ says Berger.

In 2021, being involved in ESG matters as well as working on internal sustainability efforts contributes to a law firm’s competitiveness. In conversation with Schellenberg Wittmer, COO and Sustainability task-force member Alexander Rohde mentions, ‘When hiring new talent, you want to be a firm that’s at the forefront of contemporary behaviour.’

As part of the firm’s measures, Schellenberg Wittmer launched a working group to reduce its carbon footprint, and as Rohde states, ‘It is important to engage the full breadth of firm members here; thinking with ESG in mind is in our DNA.’

‘By involving firm members across the board in our initiatives, we can advise on the full spectrum of the matter,’ Sarah Wared agrees. Wolf Theiss, a firm with offices not only in Vienna but in numerous CEE/SEE countries, recently launched a dedicated ESG practice which also recognises that ‘the assistance in drawing up new business models needs to be tailor-made to the industry. A company in oil and gas has to work out a different plan than others.’

Even though ESG is often called upon in connection with finance and litigation expertise, it is a cross-sectional topic both in regard to legal practice areas and industry sectors. Hengeler Mueller therefore also pursues a holistic approach with ESG specialists in the various different practice groups. ‘This way positions you closer to the market requirements as well as being able to provide specific advice,’ according to Berger.

With this rise in ESG practices and internal ESG pledges by various law firms in the market, a sensitive question arises: will it be controversial for them to advise companies that are either environmentally harmful or not genuine in their efforts?

‘So far, I’m not familiar with law firms doing ESG due diligence on their own clients, except for what is statutorily required or needed from a reputational perspective, but I’d be curious to see how this area develops,’ says Berger.

Wared adds, ‘It always depends on which areas of ESG are neglected. It is always important to differentiate.’

Vonlanthen agrees: ‘At the end of the day, there are very few black and white cases. Most companies want to do the right thing, even though they might be in the wrong industry and have to reposition themselves. Our legal assistance would be very valuable here.’

While all three partners share the opinion that the number of guidelines can be challenging at times, they are in good spirits. ‘It is telling how pervasive the whole conversation has become. ESG used to be a soft topic, rather reputational and a lot of commercial consideration would trump it; this is no longer the case in Switzerland. Enormous progress was made in a short amount of time,’ says Vonlanthen.

Berger adds, ‘Even though it comes with hurdles and additional effort, ESG has made it into the German boardrooms. The fact that this topic gained so much significance and attention at the highest levels of companies is a positive signal. In a few years, these efforts will hopefully pay off.’

Wared also highlights that: ‘In Austria, you can even see companies which are not subject to regulatory obligations establishing a dedicated ESG task force. To sum it up, all in all, quite positive developments.’