Environmental, social and governance (ESG) has evolved at a rapid pace in recent years. We’ve seen a meteoric rise in stakeholder engagement and interest well beyond the investment community where the concept initially started to gain mainstream attention. This really accelerated in 2020 around the Covid pandemic when the importance of pressing global issues like the combined climate and biodiversity crises were re-evaluated. This was followed by well documented labour and sourcing issues as global economies opened back up after lockdowns. We are now entering a phase where there is a clear shift in progress, away from voluntary standards and best practice ESG frameworks, towards mandatory reporting and stricter disclosure requirements. These can be linked to specific issues such as physical and transition climate risks, but also to the more general ESG issues, for example supply chain and the associated issues of modern slavery and forced labour.
As a consequence, there is now more ESG data than ever before, and an ever-growing demand for good quality, accurate information, not just on or for an individual entity, but data and insights on its wider value chain.
ESG data has therefore become increasingly important for organisations, none more so than for law firms who have practice areas and touchpoints across many sectors and rely on up-to-date, precise information to fulfil their responsibilities to clients. Law firms with corporate practices will need to advise their clients on ESG risks and opportunities associated with ESG due diligence, emerging or recently introduced regulations such as Corporate Sustainability Reporting Directive (CSRD) or Corporate Sustainability Due Diligence Directive (CSDDD) in the EU.
One of the major developments that has occurred in the last 12 months has been the move via the International Financial Reporting Standards (IFRS) to consolidate a number of ESG standards such as the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD) into a single standard. This led to the development and release of International Sustainability Standards Board (ISSB) standards. Long heralded as the start of the global baseline for ESG standards, the objective was to streamline and simplify ESG, and reduce the alphabet soup of standards across multiple jurisdictions. As this regime beds in, challenges remain to have such a unified set of ESG standards that should bring much needed clarity and precision into ESG terminology.
The challenges and opportunities for law firms
This historic lack of standardisation was in part responsible for the patchwork of regulatory and disclosure requirements. This in turn created uncertainty about the quality and reliability of data which then led to greenwashing by many businesses, with the consequent well publicised greenwashing litigation and investigations by the Competition and Markets Authority (CMA).
These uncertainties create very real challenges when advising private equity firms on ESG diligence. The complexities include the jurisdictions of your clients, the target companies being acquired, their industry, size, structure and whether they are private or listed entities. To navigate this minefield, there is a clear need for a robust standardised and repeatable risk screening approach to enable key global ESG issues to be framed during the diligence phase.
‘While the current ESG landscape does present major challenges, it also presents a unique opportunity for law firms to position themselves as leaders.’ Tom Venables, Landmark
But while the current ESG landscape does present major challenges, it also presents a unique opportunity for law firms to position themselves as leaders in this fast-emerging space and build out their own services to support the needs of their clients backed by the best data and insights. Many firms have made great strides in developing dedicated ESG practice areas and, with surveys over the past couple of years indicating, many more have plans to do so in the future. With the development of these teams comes the need for robust and reliable data that can be incorporated into a firm’s ESG processes and systems.
The role of technology
Technology is already playing a critical role in the utilisation of ESG data in a number of contexts, with many firms integrating software solutions or systems to enhance their existing processes. Notable advancements such as the prerequisite for CSRD reporting to have digital tags and for the reports to be machine readable so submissions can be easily accessible within an EU-wide central database all point towards a future of abundant and accessible ESG information.
When considering ESG data for specific scenarios such as due diligence, technology provides a powerful tool to identify and draw out difficult to find information, whether that’s specific information hidden in company disclosures and annual reports, or interrogating regulatory databases to identify information on product recalls or data breaches.
‘There will be a fine line to tread for all organisations between the exponential increase in energy consumption needed to power the AI revolution, against the backdrop of the transition to a net zero world.’ Tom Venables, Landmark
The future of ESG data will undoubtedly revolve around generative AI models and machine learning combined with the oversight and input from expert consultants. We can anticipate the development of forward-looking projections that consider global changes around complex interrelated factors including political instability, climate change, biodiversity loss and systemic risks. Of course, there will be a fine line to tread for all organisations between the exponential increase in energy consumption needed to power the AI revolution, against the backdrop of the transition to a net zero world.
Introducing Risk Horizon ESG Screen Report
Landmark’s ESG risk screening tool Risk Horizon, and its managed service ESG Screen reports, have been supporting leading national and international law firms over the last four years. Risk Horizon has been used to provide analysis and insights to aid ESG diligence on PE advisory, corporate mergers and acquisitions, client and supplier screening, in addition to gap analysis on law firms’ own ESG credentials.
Data and partnerships
Landmark is an IFRS Sustainability Alliance Member and licensee for using SASB standards data and IP forming the underlying Risk Horizon framework for industry risk. Key Risk Horizon features include:
- Scope of topics covered by Risk Horizon are aligned with additional recognised global standards such as GRI, CDP and TCFD.
- Risk Horizon is also home to Anthesis Group and Landmark created datasets and business logic supplementing SASB framework data.
- Data is regularly reviewed and updated by our consultancy team
- Risk Horizon includes global datasets and indexes covering 50 risk topics from organisations such as Transparency International and International Trade Union Confederation
- Through our managed service reports, platform data is supplemented by consultant reviewed information from additional resources such as the Business and Human Rights Resource and a range of regulatory databases and digital media sites. This ensures potential compliance and reputational issues are sourced at the earliest stage possible.
Legal context
Risk Horizon’s ESG Screen report is an ideal first step when acting on behalf of a client for PE advisory work or M&A corporate transactions. The report is suitable as an early stage due diligence screening report that frames the key ESG issues that should be considered especially where information is limited for private companies. The following use-cases demonstrate the variety of contexts in which the report can be utilised, as well as how it can be focused into these areas:
Private equity/M&A
- Quick and efficient risk profile of potential target company
- Suitable for both public and private companies
- Focused ESG diligence questions
- Reduces costs incurred and time taken in diligence process
Capital markets/regulatory
- Identify ESG risk areas for disclosures
- Standardised approach with SASB standards aligning with company reporting frameworks
- Global tool covering 50 risk topics, 85 industries and thousands of data points
Client pitches and client screening
- Clear and concise layout to present ESG risks and opportunities
- Objective assessments that can form the basis for the client pitch and from which discussions can be based
As well as the above, the Risk Horizon ESG Screen report can also provide value when assessing any reputational ESG risks when looking to act for potential new clients.
Risk Horizon helps to make sure the right issues are being looked at based on the appropriate geographies and industries of a given company.
By requesting a Risk Horizon report from Landmark, you and your client will benefit from the combination of a world-class specialist ESG consultant, combined with the power of the Risk Horizon software and its global data points to complete the assessment.
