Navigating the Legal Challenges of ESG Implementation

ESG is crucial for businesses today. Legal departments face various challenges, such as managing climate risks, supply chain sustainability, shareholder activism, and board accountability. KPMG Law Switzerland offers comprehensive support in ESG governance.

Embedding ESG principles across all aspects of business operations is crucial and increasingly seen as a prerequisite for conducting business. ESG represents a comprehensive framework for assessing a company's sustainable and ethical practices. Governments, regulators, business partners, investors, consumers and other stakeholders nowadays expect a high level of commitment to ESG and responsible business practices that can have a lasting positive impact particularly on the environment, human rights, and society as a whole.

Anticipating ESG trends and related regulatory changes is therefore key to facilitating sustainable business transformation. By the same token, failure to comply or, simply, being left behind can lead to long-term negative effects on a company’s reputation and positioning.

The current ESG landscape is characterized by a multitude of laws, regulations and standards at the local, national and global levels and is expected to become even more complex in the coming months and years. As a result, companies and their legal departments are faced with various new challenges, including the following:

• Effectively managing climate-related risks and ensuring accurate disclosure is an ongoing struggle. Legal counsels will need to help companies identify, assess and appropriately disclose these risks, while considering the potential legal implications, such as climate-related litigation or liability concerns.
• Navigating responsible and sustainable practices throughout the supply chain remains a pressing concern. Legal counsels are tasked with advising companies on how to comply with due diligence obligations, manage human rights issues, source responsibly and prevent violations of labor and environmental standards.
• The surge in shareholder activism related to ESG matters presents unique challenges. Legal counsels must provide guidance on proxy voting, engagement strategies and on how to effectively respond to shareholder proposals, ensuring that companies align their practices with shareholder expectations.
• Board and Management accountability for ESG integration requires legal counsels to assess directors' fiduciary duties and potential liability with regard to ESG matters. Ensuring that ESG considerations are properly integrated into corporate decision-making processes is crucial, and legal guidance in this area is essential.
• Finally, legal counsels can help foster stakeholder engagement and collaboration on ESG issues. This involves facilitating effective communication, building partnerships and addressing concerns raised by stakeholders, allowing for sustainable and inclusive decision-making.

The ESG challenges outlined above for corporate counsel are facing have several implications for the legal function itself:

Legal departments of a company may need to develop or enhance their knowledge and understanding of ESG-related laws, regulations and best practices. This might involve hiring or training legal professionals with expertise in environmental law, social responsibility, sustainability and corporate governance. Since ESG issues are typically cross-functional in nature and require collaboration across multiple departments within a company, the legal department may have to work closely with departments such as sustainability, human resources, compliance, risk management and communications so as to effectively address ESG challenges.

Given the evolving nature of ESG challenges, legal departments may need to provide training and educational resources also to other employees within the company. This can help raise awareness of legal obligations, foster a culture of compliance and ensure that employees understand their responsibilities regarding ESG matters.

However, it's worth noting that the specific changes for a legal department may vary depending on the company's industry, size and geographical location.