Like it or hate it, ESG is no longer a fringe part of business, and lawyers have a key role to play in ensuring organizations develop clear, consistent and credible goals for their environmental, social and governance frameworks.
Radha Curpen, the managing partner for the Vancouver office of Bennett Jones LLP, says the evolution in ESG over the past few years has been remarkable.
Radha Curpen, the managing partner for the Vancouver office of Bennett Jones LLP, says the evolution in ESG over the past few years has been remarkable. “The way in which it is being scrutinized and the momentum and demand for ESG performance by organizations is rapidly accelerating,” he says. “ESG can help bolster a company’s reputation, its investment potential and its dealings with regulators.”
Warren Ragoonanan, a partner with WRD LLP, based in Toronto, says that he prefers to refer to ESG as an organization’s “triple bottom line.”
“It’s the idea of building a business that not only generates a financial return, but a social and an environmental one as well,” he says. “I like that framework for thinking because it almost depoliticizes it.”
Ragoonanan, who practices corporate law, recommends that organizations look at their environmental and social impact as well as their financial success. “A business has to be run profitably and efficiently. That is still a good thing,” he says. “But social and environmental considerations need to be built into that.”
Curpen, who is her firm’s lead on ESG, says that not having clear ESG goals is risky for organizations. “Stakeholders, including investors, employees, customers, regulators, suppliers, communities, are all looking to evaluate organizations based on the ESG performance,” she says. Not having clear ESG goals can affect an organization’s reputation, which can complicate efforts to attract investors, stakeholders and new talent. It can also undermine community engagement.
The risks will vary depending on the organization, says Ragoonanan. “The reputational and financial risk largely depends on the culture of the people you are dealing with,” he says. “If you are in an organization where a lot of people care about being socially and environmentally responsible, then ignoring those things will cause people to quit and leave.”
Walking the walk
Even more important than setting goals to be socially and environmentally responsible is achieving them, says Curpen. “Once a company makes a public commitment, it will be held accountable for its commitment — by the general public, by the regulators, by the market and by communities in which it operates, including Indigenous communities who are rights-holders,” she says. “The broader and more ambitious the corporation’s ESG goals are, the more the corporation is at risk of setting goals that it may not be able to meet.”
A company might find itself exposed to legal claims or penalties for breaching regulations or for reputational harm suffered by investors, stakeholders and even employees. Regulators investigating an organization could use a breach of its publicized ESG goals against it, says Curpen. “Investigators may look to some of the things that you have committed to and say, ‘You haven’t even shown diligence in achieving what you said you were going to achieve.’”
The role of lawyers
All of which are good reasons to get lawyers involved in drafting an organization’s ESG framework. “Lawyers need to be talking to their clients about what they are trying to accomplish. Usually, that is something that even the business owners don’t know,” says Ragoonanan. “A lot of work has to be done to take these high-level abstract ideas and turn them into something concrete and getting very large teams of people in different fields to work together.”
Having said that, lawyers need to know that developing ESG goals cannot be done alone.
“You have to work in teams with different people with different skill sets,” says Ragoonanan. “You are bringing the legal insight to that skill set. You are looking at these different areas of the law and bringing them together to help craft a legal strategy.”
Curpen also recommends that organizations involve many different departments in developing an ESG framework, including management, legal, compliance, financial and operational. “The ESG requirements will look different for different organizations. There is no ‘one size fits all,’” she says. “It will depend on the priorities of the business, the business sector, the interests of the key stakeholders and the location where the business is operating.”
Consistency is key
It’s essential that ESG goals are carefully reviewed. What’s more, organizations need to make sure they are properly challenged to ensure they are accurate and consistent, particularly if they are going to be made public, says Curpen.“The information will be scrutinized whether it is by the public, by the company’s employees, investors or regulators,” she advises. “So anything that is inaccurate and incomplete can be harmful and can result in reputational harm or legal risk to the company. It can also undermine the ESG narrative and make it difficult for stakeholders to understand the commitments and progress on ESG issues.”
It’s up to the lawyers advising on ESG frameworks to help their clients understand that dealing with these issues is more than just liability and compliance, says Curpen. “In the past, when we were giving environmental advice, it was just concerned about compliance and liability and the risk,” she says. “These issues now are more complicated and nuanced than that.”
They can involve a broader base of stakeholders and rights-holders, such as Indigenous groups, demanding more sustainability and greenhouse gas emission targets, dealing with human rights issues within a supply chain, water usage and biodiversity, she says.
Ragoonanan expects organizations to increase their focus on social and environmental issues in the future.
“When other people in your industry start paying attention to this, you will start paying attention to this too,” he says. “One way or another, everyone is going to start having to participate.”