There are two main ways in which the work of ESG lawyers can be important. The first is performing transactional work in order to assess materialities that impact the ESG performance of their clients, thus helping them navigate an increasingly complex regulatory environment. The second is litigating judicial and extrajudicial cases challenging ESG matters.
To properly consider these two fronts, it is necessary to quash the idea that ESG is essentially voluntary. It is true that it still involves a good deal of self-regulation, but there is a clear tendency towards heightened regulatory scrutiny. As with financial disclosures, the world is moving towards harmonization and comparability of ESG disclosures and, at the same time, towards increasingly mandatory standards. Robust examples of this include reporting requirements based on the Taskforce on Climate-related Disclosures (TCFD) in the UK and Brazil, and, in the US, recent Federal Reserve and Securities and Exchange Commission initiatives to take ESG and climate-related risks expressly into account.
In my home country of Brazil, several recent developments regarding ESG regulation – or lack thereof – are noteworthy. Reform of the securities exchange commission CVM’s ‘Instruction 480’ is expected to order public companies to periodically disclose non-financial ESG information – a welcome initiative, although the level of granularity is yet to be defined.
Oversight of the financing of high-impact projects is also on the rise. The Brazilian Central Bank recently launched three public consultations: one on the sustainability criteria applicable to rural credit, one on regulation of risk management and social, environmental and climate responsibility, and another on the annual publication by financial institutions of a standardized Social, Environmental and Climate Risks and Opportunities (GRSAC) Report.
The GRSAC proposal is inspired by the recommendations of the TCFD, but its expanded scope also encompasses ESG aspects at large. Its first phase covers qualitative aspects, while its second phase – scheduled for 2022 – will establish mandatory disclosures of quantitative information (goals and metrics).
Conversely, however, the Brazilian parliament’s Lower House recently passed a bill exempting financial institutions from environmental liability for the activities they finance – a provision that may still be reversed by the Senate, and is at odds with the mounting perception that shutting down the money pipeline is key to curbing activities that are ESG-noncompliant.
Although Brazil has been mostly moving forward in terms of ESG regulation, there is still much ground to be covered: the economy is sure to be affected by increased supply chain scrutiny and trade barriers such as the EU Carbon Border Adjustment Mechanism, but the country is lagging behind in preparedness. Lawyers have been closely following these developments, in both the advocacy and litigation fronts.
So, rather than being voluntary, ESG integration goes hand in hand with compliance. As the sustainability agenda globally integrates aspects as varied as greenhouse gas emissions, diversity, data protection or management remuneration, it is evident that the ESG performance of companies hinges on their capacity to meet a myriad of related regulations. Lawyers play a central role in identifying materialities and advising clients in each of the areas involved. But ESG law is not limited to minimizing liabilities. Take environmental law, for example. Beyond risk management, it can also help clients take advantage of the opportunities created by the incorporation of ESG variables into their businesses, particularly in the context of green recovery and transition to a low-carbon economy.
The second front of action is that of ESG litigation. As companies are increasingly subject to binding ESG obligations, it’s possible to anticipate new types of strategic litigation – both to challenge those rules and to challenge those flouting them.
In this context, the importance of the recent Milieudefensie v. Shell decision, whether it holds or not, cannot be understated. It was the first of its kind, but most certainly not the last. In the Netherlands, a Hague district court extended obligations arising out of the Paris Agreement, a treaty negotiated among States, to Shell, a private company. Significantly, the decision encompasses a duty to curb Scope 3 emissions.
Against this backdrop, we anticipate that strategic litigation will undergo a shift from catch-all, rights-based concepts to more granular ESG arguments such as exposure to stranded assets, climate stress tests in different global warming scenarios, impact investment, and the financing of projects with ESG and climate-related implications.
Another relevant trend concerns transnational ESG litigation. This includes claims challenging pollution and emissions outsourcing – that is, targeting entities that are relatively cleaner in their countries of origin, but are major polluters in other jurisdictions (for example the Total, EDF and Casino cases, based on the French Duty of Vigilance Act of 2017, challenging activities in Uganda, Mexico, and Brazil and Colombia, respectively). It also includes supply chain disputes spanning multiple jurisdictions, or disputes under trade agreements, which increasingly involve sensitive and potentially contentious environmental issues, such as carbon trade barriers and deforestation associated with the production of export goods.
Another relevant ramification of the ESG Zeitgeist, for which law firms are perhaps less prepared, impacts organisational culture. Structuring an ESG practice depends on the attraction and retention of lawyers who master increasingly sophisticated and transdisciplinary concepts. The ability to hire the best talents is affected by a generational component that should not be ignored by managers: the negative perception of younger generations regarding economic activities deemed as unsustainable or insufficiently diverse. An example of this trend is the Law Students for Climate Accountability initiative, which maintains a scorecard based on the analysis of litigation, transactional and lobbying work detailing the scale of top US law firms’ role in the climate crisis.
More than just a buzzword, ESG is a call to action to all relevant actors, state and non-state alike. For all the reasons above, lawyers are especially well-positioned to contribute to the implementation of the ESG agenda.
Alessandra Lehmen is Head of Environmental, Climate, and Regulatory Law at Juchem Advocacia in Brazil. She is Vice-President of the Brazilian Bar Association’s Environmental Law Commission in Rio Grande do Sul State