First things first: General Counsels and ESG priorities

As featured on BusinessMirror: First things first: General Counsels and ESG priorities

Increasingly, organizations are adopting a business approach that goes beyond mere legal compliance into a ‘doing the right thing’ mindset, by integrating Environmental, Social, and Governance (ESG) factors into their everyday business decision-making processes.

ESG has also expanded the General Counsel role beyond being strictly a legal advisor to the Board, into becoming a strategic advisor, supporting the business and C-suite to navigate legal and reputational risks inherent in the ever-evolving ESG agenda, as well as highlighting opportunities presented by ESG. Those GCs who embrace their expanded competencies and maximize their involvement in ESG will become an even more valuable resource to their Board.

Business leaders in the Philippines are already integrating ESG principles and practices into their business frameworks and operations. They understand that mere compliance is not enough, and that real and systemic changes must be implemented in their organizations to ensure they truly live out ESG principles.

The Environmental element of ESG focuses on our impact on the world we live in. It also addresses the ‘what?’- as in what we need to do, what we need to reuse more and consume less of, and what we can do to nurture biodiversity and nature.

Climate change has dominated the Environmental, focusing on what organizations need to do to remove carbon from their business activities (known as decarbonization) to deliver the Net Zero economy required by the Paris Agreement. Decarbonization impacts an organization's core global business model and operations. Many clients are committing to material reductions in their carbon emissions well in advance of 2050.

GCs are well positioned to inform the board about ESG’s impact on different parts of their organization and specifically to lead on:

• Transition strategy - GCs play a pivotal role in creating and protecting long-term value through navigating the legal risks by supporting the business model’s transition, and by ensuring both strategy and products and services are designed to meet sustainable needs now and for the future.
• Compliance – Businesses are confronted by a myriad of ESG requirements to incorporate into their business processes e.g., risk assessments and decision-making, as well as into their operating models. GCs need to future-proof business operating models by anticipating the impact of ESG laws and regulations and ensuring operating models and products and services comply. Failure to comply with ESG laws may result in sanctions.
• Reporting and disclosures – responsibility for ESG reporting is often falling to GCs. As such, GCs must lead in identifying ESG reporting and disclosure laws, as well as maintaining collaborative business networks to ensure reporting is accurate and meets investor demands while avoiding reputational risks, including greenwashing.
• Access to capital and insurance – failure to demonstrate an ESG strategy may prove an obstacle to securing financing or obtaining insurance, including D&O insurance. GC’s existing legal risk management functions mean they’re already involved in numerous ESG-related challenges, and these new challenges require a further pivot by GCs to support continued access to capital and insurance.

The ESG Social element elaborates the ‘why?’ of promoting an organization’s economic and social contribution to the communities they operate in. GCs play a fundamental role in delivering:

• Sustainable supply chains - geopolitical impacts are forcing companies to rethink traditional supply chains. GCs need to examine the legal implications of supply chain changes as even the smallest shift can have implications for a business's operating model and legal risk appetite.
• Workforce – GCs and HR are creating workforces fit for the future in diverse and safe environments, and GCs are critical in implementing new laws to avoid human rights violations such as modern slavery and child labor - not just in an organization’s activities but also in their supply chains.

The ‘G’ in ESG stands for Governance, which focuses on ‘how’ an organization achieves ESG objectives using traditional governance structures, policies and procedures, board oversight, Enterprise Risk Management, and ethical behaviors that must be consistently demonstrated.

An organization’s license to operate is a familiar concept to all GCs. ESG-related laws, together with increased stakeholder capitalism scrutiny, transparency, and accountability, are requiring a further considerable investment of a GC’s time.

GC priorities in this area include:

• Corporate purpose – intense public scrutiny of corporate governance is challenging long-accepted legal concepts which GCs must ensure remain ‘fit for purpose’.
• Board expertise – commentators have criticized some Boards’ lack of ESG sophistication. KPMG’s view is for GCs to partner with ESG experts to upskill and guide the Board.
• ESG risks - GCs have a unique view of their organization, enabling them to identify where risks might be better mitigated. While managing legal risks has always been a function of GCs, ESG requires GCs to extend their focus to reputational risks, especially in relation to accusations of greenwashing, climate change litigation, and shareholder activism (which has become personal with derivative actions against Directors).
• Horizon scanning – GCs lead the challenge to keep apprised of laws impacting business activities in all jurisdictions in which their businesses operate. Continually evolving ESG laws, including ‘soft law’, makes horizon scanning more difficult especially as individual elements of ESG can result in overarching ‘false friends’ and cross-border conflicts.
• Data - GCs can save their C-suite from drowning in a potential ESG data lake. The GC role again extends beyond legal compliance here to balancing the need to disclose quality data required to inform investor decisions, while ensuring that data disclosure is controlled and does not lead to competitive advantage or incur risk from ESG activists.
• ESG policies – GCs are taking responsibility for ESG policies and initiatives aligning financial and societal performance, and ensuring accountability, effective decision-making, and compliance by integrating the organization's ESG commitments into the wider corporate framework. This includes its supply chain, contractual precedents, and recruitment, retention, payments, and promotion practices.

_{The excerpt was taken from the KPMG Thought Leadership publication: https://kpmg.com/uk/en/blogs/home/posts/2022/11/-esg--general-counsels-and-esg-priorities.html}