ESG & The Commercial Sustainability Crisis

ESG ratings are provided for companies and their practises and investments. They measure their commitment to ESG standards. ESG includes considerations such as, energy efficiency, health and safety, shareholders’ rights, diversity and regulatory compliance.

On the one hand, this rating can help clients with the decision-making process when it comes to successful investments. A client will not want to invest in a company that is at risk of legal liabilities, for example, as this can cause the client to lose money in the long term.

On the other hand, company’s can use ESG ratings to improve their practices and performance, therefore increasing revenue and high-profile clientele. Following an increased spotlight on ESG, companies, like LEGO and Patagonia, have incorporated goals such as, becoming net-zero, increasing women in leadership and reducing real estate.

Following the recent global pandemic, a spotlight was put on unsustainable practices and business models within the commercial world. This subsequently highlighted an increased need for ESG considerations. Firstly, it showed how the poor management of risks associated with not considering ESG standards greatly affected economic value for companies and their shareholders.

For example, following the implementation of work-from-home and social distancing measures, commercial buildings became vacant. This brought awareness to the poor waste management companies have. Despite being vacant, commercial buildings were still utilising approximately 80% of their resources. With also having to invest in equipment for employees, remote technology, furlough, sick pay, etc, companies were at a greater loss for not maximising waste management – not to mention the unethical components of waste and inefficiency.

Secondly, the pandemic also highlighted the need for companies to take responsibility for the potential consequences of their actions on the environment and society. For example, as awareness amongst investors on deforestation risks has been growing, in 2020, BlackRock announced it would exit investments with high environmental risks.

However, the multi-billion-dollar investment company suffered reputational blows and client distrust after being accused of ‘climate hypocrisy’ after a data tool found that the firm’s ESG funds held companies with high deforestation risks. Since then, BlackRock has endeavoured to instil more environmentally sustainable practises, for example, achieving its 100% renewable electricity goal in 2021.

These revelations sparked an increase in a new approach to investing, one that focused on sustainable and responsible investing. Sustainable investing is the practise of analysing ESG risks using ESG data and insights to inform the allocation of capital (investing). In other words, sustainable investors want to put their money into things that do not cause adverse effects on our world and seek to also improve it. By the first half of 2020, net inflows into ESG funds in the US reached $21 billion.

Whilst ESG has been on the increase, there is a sentiment by some that it is still not that valued in the commercial world. ESG investing is tough – currently there is not enough evidence to show that ESG investing generates more value for money. As a result, a lot of the time, ESG compliance becomes reliant on the ethical standards and sense of responsibility of investors/ businesses to generate a more positive return.

Nonetheless, ESG investing is soaring and over the next few years, this market is expected to provide significant opportunities. For example, there are opportunities to create and lead in ESG technology. Moreover, as ESG is becoming a market driver, investors and companies have opportunities to use this to counter-balance possible portfolio underperformance.

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There are two main challenges that law firms face with these recent trends in ESG. Firstly, law firms must now look at their own practices and start implementing their own integration plans for ESG strategies and business models. As their clients begin to do so, it is important for law firms to develop business practices that ensure their client base remains loyal and that they become more attractive to prospective clients.

As law firms become more competitive, this will be an opportunity for them to stand out in the commercial world and become pioneers within this new market. Law firms can become more ESG conscious by looking at their carbon footprint, employees’ rights, regulatory compliance, diversity in the workspace and leadership, real estate, etc. Many law firms have started making tremendous feats already.

Secondly, as demands from clients on ESG guidance are increasing, law firms need to expand their knowledge and expertise in this area to meet their clients’ needs. Many law firms have recognised this, and as of 2022, 50% of law firms across Europe and the US have been reported creating an ESG practise in the past three years.

However, reportedly, only 20% of law firms feel prepared to meet their clients demands for ESG services. Overall, this new market disruption has its challenges but has also created endless opportunities for the commercial world to create more positive outcomes. If done with speed and innovation, law firms can help create great impact for their clients.

1. What opportunities do ESG trends provide for law firms? 2. What challenges do you think the commercial world will face considering recent ESG trends? 3. How beneficial, or not, is it for clients to start focusing more on ESG strategies and investments? 4. What ways can employers help their workforce become more ESG-conscious? 5. What do you expect to see be done differently in the commercial world following recent ESG trends?

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