Embedding ESG into the legal function of the future

As featured on BusinessMirror:  Embedding ESG into the legal function of the future

As ESG issues take top priority for global companies and society more broadly, today's legal teams are under fire from many directions. From geopolitical tension, trade disputes, and supply chain disruptions, to climate change adaptation, remote working, and diversity and inclusion issues, legal professionals are being challenged to understand how ESG is changing their company's priorities and manage all of the various legal implications.

With the focus on ESG getting sharper across their organizations, leading in-house legal functions are also finding new ways to add value and derive opportunities from ESG in all of its dimensions.

In the Philippines, the national government has already implemented various laws and regulations aimed at promoting sustainable and responsible business practices to ensure that the business industry does its part in mitigating the impacts of industrialization on the environment.

KPMG in the Philippines Vice Chairman, COO and Head of Advisory Emmanuel P. Bonoan shares “ESG practices can help companies identify risks associated with environmental and social issues, such as climate change and resource scarcity. By addressing these risks proactively, companies can minimize their exposure to potential legal, financial and reputational damages.”

Companies that integrate ESG practices into their business strategy can gain a competitive advantage from their competition. Consumers and investors are now increasingly looking for companies that prioritize sustainability, transparent ESG reporting and good governance. 

ESG matters have been moving up corporate agendas for the past 2 decades, but a number of factors are making legal considerations arising from ESG even more acute:

As company directors and officers become more accountable for ESG performance, they are increasingly exposed to risk from evolving regulations and their responsibilities to a broadening group of stakeholders, including their workers, customers, suppliers and broader society. Legal teams have an essential role to play in advising senior management as they oversee the implementation of their company's ESG strategy and comply with ESG law. There have been instances where legal action has been taken against company directors who were not seen as moving quickly enough toward an ESG strategy.

The UK is the first G20 country to require reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD). Other countries are expected to soon follow suit, and several other sustainability reporting frameworks are coming onstream. In-house legal teams need to know what data their company should report, especially given the level of scrutiny these reports will likely undergo — internally and externally. Boards and senior management may need advice on how to fulfill these reporting obligations without putting the company at reputational risk or giving away a competitive advantage.

In-house legal teams are well accustomed to managing backward-looking ESG data, but data is increasingly informing forward projections, often using sophisticated scientific methods. In-house legal functions should develop knowledge and skills in this area so they can help businesses navigate the risks of this new type of data and potentially identify business opportunities.

Lenders, investors and insurers are increasingly interested in the ESG credentials of a business, even for companies that are not directly pursuing a greener brand. Any company that is not ESG-compliant or cannot at least show how they plan to change their operating model may find it challenging to access capital and insurance.

As ESG has become central to social attitudes, younger generations are moving the ESG agenda forward, whether on environmental issues or diversity, equity and inclusion. Most want to work for businesses with a strong sense of purpose. In today’s fiercely competitive labor markets, companies that demonstrate their commitment to ESG principles can strengthen their appeal to their workers and potential recruits.

Of course, climate change is one of the biggest drivers of ESG risk, and companies are growing more aware of the potential financial consequences of not taking steps to change behaviors, including legal risks and litigation. These risks can be driven just as much by developing regulatory frameworks and the court of public opinion as they can by existing laws and regulations. Legal teams should be closely involved to help ensure these risks will be well managed in their operations and investments.

The current environment is seeing companies move on ESG at different paces. Some companies have not yet taken any specific steps toward an ESG approach, while others are approaching ESG in terms of regulatory compliance only. More forward-thinking companies are taking a strategic approach, seeking ways to turn ESG thinking and practices into a source of competitive advantage.

The companies that are furthest ahead in the ESG area are those that can go beyond strategy and adopt a purpose-driven approach, aiming to make sustainable contributions for the benefit of their communities and the environment.

ESG thinking is bringing previously siloed functions together as the accountabilities of each function broaden and converge. Legal and finance teams are increasingly integral to sustainability reporting and green financing initiatives, for example, while HR and legal may claim responsibility for human rights issues. Regardless of whether in-house counsel, the procurement function, or a chief sustainability officer formally "owns" the sustainability agenda, everyone else in the organization shares the same targets, making it more important to work together and deliver on them. This can be reinforced by linking mutual sustainability targets to compensation.

For legal teams, this journey involves a shift away from their traditional advisory role. It may no longer be enough to provide others in the business with legal advice to do as they see fit. In an ESG-led legal function, legal professionals are business partners who understand the business they're advising on, so they give the right advice to help sustain the business, implement the required changes and grow it responsibly over the long term.

_{The excerpt was taken from the KPMG Thought Leadership publication: https://kpmg.com/xx/en/home/insights/2023/03/esg-led-legal-function-of-the-future.html}