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The rise of ESG law firms part II: General Counsel respond to the regulation tsunami and litigation goes viral

Why and how law firms are becoming expert on ESG

ESG law hots up
ESG law hots up

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Part 2 of  a two-part special series on the rise of ESG within international law firms. Read Part 1.

General Counsel at companies did not take the same road to Damascus as their CEOs. Their conversion was not a blinding light which transmogrified the belief of businessmen, banks, investors and asset managers in short term profits into a devout faith in the need to protect the long-term value of the company. Rather, it was the necessity to survive a tsunami of ESG regulation and ESG litigation which threatens to drown them (see chart at foot of article). In May 2020, the Financial Times stated that: “Since 2018, there have been over 170 ESG (environmental, social and governance) related regulatory measures proposed globally – that is more than the previous six years combined.” The trend was confirmed by Datamaran, which estimated in 2018 that there had been a 72% increase in ESG regulations and that there were over 4,000 ESG mandatory and non-mandatory regulatory initiatives. If anything, the pace of regulatory change on ESG - with the EU, UN, OECD and national governments becoming very active in this space - has increased markedly since then. 

Many companies on the ESG critical list, and governments that had failed to grasp climate change and their obligations under the Paris Agreement were also faced with an exponential growth in litigation. This is, of course, a high-stakes game and the big casino for ESG litigation has largely been the United States. But that may be changing as ESG litigation spreads like a virus to the rest of the world. In the 20 years from 1986 to 2006, the Sabin Center for Climate Change at Columbia University and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science record that there had only been a handful of cases worldwide on environmental liability and climate change. However, in the 10 years from 2010 to 2020 there were over 1,000.[1] The Grantham Institute also records only 1 or 2 cases a year before 2020 against carbon majors. In 2020 there were 33 such on-going lawsuits in the US Courts.   

One of the largest carbon majors, ExxonMobil, stated after their recent and very convincing win against the New York Attorney General that: “Lawsuits which cost millions of dollars of taxpayer money do nothing to advance meaningful actions that reduce the risks of climate change.”[2]

ExxonMobil has a point on climate change risks, but sadly misses the point of a test-case strategy, which is neither based on financial prudence nor dependent on winning in court. A test-case seeks to resolve whether the better course of action is to pursue a legal remedy before the courts or, if that route is blocked, a political solution. Litigation therefore can be a win-win for interest-group litigants and local communities. It gives the oxygen of publicity to the claim and, if it fails, the loss confirms the need for political intervention.

The rise of class actions

Class action lawsuits, sometimes externally funded, are also increasingly bringing litigation into the ESG space. Recent examples include the shareholder action against Danish pharmaceutical company Novo Nordisk for misleading statements and failure to disclose inside information,[3] and the action on behalf of 2,000 Malawian tobacco farmers against British American Tobacco for unjust enrichment.[4]

The outcome of litigation is always unpredictable. That is why lawyers are extremely reluctant to answer the common demand from clients to give a clear indication of the chances of winning a court case.

Litigation, however, is predictably bad for companies and market value. After the Deepwater Horizon oil spill, the value of BP’s shares halved, knocking $105bn off its capital value. According to The Guardian newspaper, as of 14 July, 2016 BP had spent almost $62bn (including a record $18bn fine under the Clean Water Act ). The eventual sum paid out by BP was even higher and it sold off $75bn in assets to pay part of the costs.

CEOs step up

In August 2020, Corporate Counsel, the magazine, reported that General Counsel were becoming leaders on corporate sustainability! Brad Smith, President and Chief Legal Officer of Microsoft, announced that month that Microsoft was to have zero waste by 2030. Brad is not alone. Amongst leading General Counsel supporting ESG and corporate sustainability, the Financial Times reported in June 2020, are Rachel Jacobs of Springer Nature, Shannon Thyme Klinger of Novartis, Melissa Kennedy of Sun Life Financial, Carlos Brown of Dominion Energy, Marcus Brown of Entergy and Claire Chapman of Capita. To this list can be added many other GC with ESG-leanings, such as Nestle’s Leanna Gale.

The pressing need of General Counsel for legal advice on ESG matters has had a huge, if uneven, impact on law firms. A number of them hitherto had not been known as great enthusiasts for ESG principles or as being closely or generally associated with ESG areas of legal practice. For radical lawyers, human rights, modern slavery and supply chain due diligence may be the stuff that dreams are made of. However, with few notable exceptions and pro bono work, these areas of law were seldom to be found being practised in City or Wall Street law firms or uppermost in the thoughts of those lawyers drawn to practice law there. 

The lawyers set up

An outstanding example of this sea-change towards setting up ESG practices as a mainstream legal practice area for City and Wall Street law firms occurred in April 2020 when the US law firm Paul, Weiss announced to the world that it was launching a new Sustainability and Environmental, Social and Governance (ESG) Advisory practice. Headed by David Curran this new advisory practice was set up “to help boards and executives navigate the legal, business and political ramifications of developing and implementing Sustainability and ESG initiatives, including ESG-focused shareholder engagement.” Law.com later reported on 19 August 2020 (exactly a year after the US Business Roundtable CEOs meeting) that Wachtell, Lipton, Paul, Weiss, Freshfields and Winston & Strawn were guiding America’s CEOs towards achieving their ESG goal.

Prior to 2018-2020 few law firms had not ploughed this field. But, they had found stony ground, and expertise was spread randomly across different fields of legal practice areas with lawyers practising ESG law in legal silos rather than practising integrated ESG law. 

The Freshfields Report was published back in 2005 and Linklaters published the UN Compact Guide for General Counsel on Corporate Sustainability in 2015. However, between 2018-2020 a consensus appears to have formed amongst and within law firms that they had to develop a genuinely integrated ESG practice or suffer the consequences of failing to meet a pressing client demand. Announcing a second version of the UN Compact Guide for Legal Counsel on Corporate Sustainability in 2019, Charlie Jacobs, the Senior Partner and Chairman of Linklaters, said the new guide was the outcome of a “widespread growth in interest in sustainability and the growing demand from the legal community for practical guidance on how to integrate sustainability considerations into business as usual.”

ESG legal eagles

New practice areas in law firms (such as ESG) are sown but do not spring up fully-grown warriors as did the children of the dragon’s teeth. A critical factor propelling the development of ESG legal practices has been the emergence of ESG leadership, supported by senior management. Credit should go to ESG leaders who are driving forward integrated ESG initiatives in their firms: Martin Lipton of Wachtell, Lipton, Rosen & Katz (for over 40 years the doyen of the legal need for wider corporate responsibility), Vanessa Havard-Williams at Linklaters, Tim Wilkins and  Oliver Dudok van Heel of Freshfields, Sarah Barker at Minter Ellison, Doug Bryden at Travers Smith and Paul Davies of Latham & Watkins are names which spring to mind. 

The coronavirus pandemic, however, has also focused the minds of lawyers, fund managers, CEOs, General Counsel, Board Members and financial investors and intermediaries on ESG values and the purpose of corporations in ways which had not happened before; and importantly it has unlocked marketing budgets and garnered senior management support. Allied to these concerns are a ubiquitous acceptance of the deleterious impacts of global warming and the destruction of oceans, biodiversity and natural assets. Concerns which have been amplified by the rapid increase in ESG regulations and the actions against ExxonMobil and Chevron for misleading investors about the risk of climate change and against many European Governments for their failure to implement the Paris Agreement, as with, as an example, the Third Heathrow Airport Runway case, which is presently being considered by the UK Supreme Court. Together these many factors have all contributed to a major shift in the tectonic plates of the ESG regulatory landscape. 

This is a shift which requires pension funds, financial institutions and companies to meet more demanding standards of transparency, disclosure and accountability in respect of ESG matters. Conduct costs (excluding legal fees) have also focused minds as banks and companies have disgorged billions to regulators in fines, penalties, damages and compensation, decimating the capital wealth of those banks and companies which have transgressed ESG values and bringing former corporate leviathans to their knees. Such as US coal companies which have sought Chapter 11 protection and fossil fuel companies forced to abandon stranded fossil fuel assets in the ground. 

Forty years after Martin Lipton railed against Friedman and his acolytes and fifteen years after the Freshfields Report, ESG is taking central stage in business, financial, legal and governmental risk assessment and decision-making. 

Table 1: Some of the most significant, recent mandatory and non-mandatory regulatory initiatives

UN Sustainable Development Goals

Taskforce on Climate Related Financial Disclosure (TCFD)

EU Draft Human Rights Due Diligence Legislation

World Economic, KPMG, Deloitte, PwC and EY Measuring Stakeholder Capitalism: towards Common Metrics & Consistent Reporting of Sustainable Value Creation White Paper[9]

OECD Due Diligence Guidance for Responsible Business Conduct 

UK Modern Slavery Act 2015

The Principles for Responsible Investment (PRI) & the World Business Council for Sustainable Development (WBCSD) –representing asset owners, investment managers, service providers & businesses –new collaboration to create the enabling conditions for a sustainable financial system[10]

Californian The Transparency in Supply Chains Act 2010

UN Guiding Principles on Business and Human Rights

EU The non-financial reporting Directive (2014/95/EU)

EU Taxonomy Regulation

EU Benchmark Regulation

EU Conflict Minerals Regulation

G20/OECD Taskforce on Long-term Investment

UK the new Streamlined Energy and Carbon Reporting (SECR) Regulations

WBCSD The Reporting Exchange (global resource for corporate environmental, social and governance (ESG) reporting)

Sustainability Accounting Standards Board (SASB) launched 77 industry standards 2018

CDP, CDSB, GRI, IIRC and SASB Statement of Intent to Work Together towards 

Comprehensive Corporate Reporting 2020

IFRS Consultation Paper on Sustainability Reporting 2020 

IOSCO Sustainable Finance & the Role of Securities Regulators Final Report 2020

Task Force on Nature-related Financial Disclosures established 2020

The Securities and Exchange Board of India Consultation Paper on the Format for Business Responsibility and Sustainability Reporting 2020

Chinese Government Corporate Sustainability Compact for Textile and Apparel Industry (2018) (CSC9000T)

Australian Modern Slavery Act 2018

Australian Government Multi-Stakeholder Advisory Group final report providing advice on the prioritisation of issues and actions to implement the UN Guiding Principles on Business and Human Rights in Australia 2017

France Duty of Vigilance Law on supply chain due diligence 2017

Canadian Bill S-211, An Act to enact the Modern Slavery Act and to amend the Customs Tariff 2020

Fitch Ratings Expands ESG Coverage with Long-Term ESG Vulnerability Scores

European Commission Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment,

Japan’s Principles for Responsible Institutional Investors (Japan’s Stewardship Code) updated 2020

Nasdaq launches ESG Footprint measuring your portfolio’s ESG 2020

 Carla Parsons, Paul Watchman and Vanessa Wood are the ESG Advisory Group at The Blended Capital Group

Footnotes:

[1] Geetanjali Ganguly, Joana Setzer, Veerle Heyvaert “If at First You Don’t Succeed: Suing Corporations for Climate Change’, Oxford Journal of Legal Studies, Vol 38, Issue 4, Winter 2018 https://academic.oup.com/ojls/article/38/4/841/5140101

[2] ExxonMobil statement regarding New York Attorney General civil trial verdict, December 10, 2019  https://corporate.exxonmobil.com/Energy-and-environment/Environmental-protection/Climate-change/NYAG-trial-key-facts

[3] Omni Bridgeway, ‘Shareholder action against Novo Nordisk A/S’, 28 May 2020 https://omnibridgeway.com/insights/case-studies/all-case-studies/case-studies/2020/05/28/shareholder-action-against-novo-nordisk-a-s

[4] Leigh Day, ‘Malawi tobacco farmers in landmark legal fight against British American Tobacco’, 31 October 2019, https://www.leighday.co.uk/News/2019/October-2019/%E2%80%8BMalawi-tobacco-farmers-in-landmark-legal-fight-ag


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