As America emerges from the COVID-19 pandemic, many people are grateful to have jobs and a home to live in knowing that many have been and are not so lucky. The pandemic led to a rapid and far-reaching change in the way people live and work. It shook businesses and individuals out of their indolence – and they discovered new ways to do things. This dynamic can lead to permanent, positive and sustainable improvements.
“There were good things we learned from the pandemic and challenging things we still understand,” said Cone. “The jury has not yet decided what society will be after the pandemic – and we are the jury. Will the lessons of the pandemic lead us to a better future? “
The pandemic has shown that businesses can help address society’s most pressing challenges and help “rebuild better”. The current focus on ESG partly reflects these concepts.
The rise of the ESG movement
Fifty years ago, famed economist Milton Friedman declared, “The social responsibility of corporations is to increase their profits.” But seeking shareholder returns regardless of other concerns may not be in the best interests of a company or its shareholders in the long run. Put simply: companies cannot survive in societies that fail. Almost all companies now recognize that social impacts must be part of their business strategy.
“But for too many companies, social impacts and shareholder returns are tracked separately; that’s not enough anymore – if it ever was, ”said Cone.
ESG offers a more holistic approach by taking into account the entirety of a company’s impact on society. The pursuit of social impact is an integral part of strategy and value creation and not of separate functions.
“A company’s values are inextricably linked to a company’s value,” said Cone. And, as core business decisions, social impact and responsibility issues belong on the board, not a side committee of volunteers, and should be part of the regular board of directors agenda.
Back in 2010, the ESG issue was discussed by a group of CEOs who urged companies to think longer-term. In August 2019, the Business Roundtable, a group of CEOs from nearly 200 large US companies, released a statement redefining the purpose of a company. This new definition includes investing in people, creating value for customers, dealing ethically with suppliers and supporting external communities as core business goals, as well as increasing profits and maximizing shareholder value.
The 2020 theme of the World Economic Forum in Switzerland also reflected this broader purpose, as the meeting was about “Stakeholders for a Cohesive and Sustainable World”.
Blackrock’s Larry Fink also says climate risk is a major concern for businesses. Fink’s influential 2021 Annual Letter to CEOs stated, “I believe the pandemic is such an existential crisis – such a powerful reminder of our fragility – that it has led us to be more energetic about the global threat of climate change and above think about how the pandemic will change our lives. “
From transactional to transformative – the evolution of ESG
“The pandemic has raised awareness of the connectivity of all of us,” said Cone. Decisions and actions of a company or an individual affect the well-being of others – and that has to be part of the equation, she said.
Even as life returns to normal, employees, customers and other stakeholders increasingly expect companies to take a stand on important issues. Making a statement is important, but it’s only the first step. Stakeholders expect companies to make systemic changes in the way business is conducted and corporate decisions are made.
Cone identifies three phases of social impact programs. The first, which she calls transactional, is based on random good deeds with no real driving purpose or goal. The company can invest money in these programs, but rarely time or talent. The second phase is the transition phase, during which a company puts its social investments first and incorporates time and talent contributions. The third phase is transformation as companies use their highest and best skills and partner up to produce results that make a difference.
The transformative impact is at the core of the business, consistent with its overall purpose and nature of collaboration, said Cone. For example, Cisco Canada ran a pilot program to use its video conferencing technology to connect indigenous community schools in northern Canada with educational, art, and cultural resources. The program has been extremely successful and more and more churches are seeking to participate.
How lawyers can advance ESG
“Lawyers are in a remarkable position to promote ESG and help manage the risks involved,” said Cone. Lawyers operate in all industries around the world and are often viewed as trusted advisors, either within an organization or as external lawyers, so they are well positioned to advance a company’s ESG efforts.
Claudia Toussaint, General Counsel and Chief Sustainability Officer of Xylem, recently told Corporate Counsel magazine that ESG initiatives are “a natural accompaniment to the development of the General Counsel”.
As with most business activities, there is a legal risk associated with ESG. Whether in-house or outside lawyers, attorneys are required to ensure that actions comply with applicable law and that company liability is minimized. Current ESG-related legal concerns include anti-discrimination efforts, data protection, human rights, supply chain, regulatory requirements related to climate change and FTC rules regarding “green” displays.
Standard Chartered Senior Legal Counsel Layla El-Wafi writes in an ACC Docet 2021 article: “In-house lawyers can take a multi-faceted view of their role in mainstreaming ESG in the business world and their role in advising their clients on compliance consider more fully with laws and guidelines. They can and should be part of defining the ESG strategy and subsequent steps to operationalize responsible business practices. ”The same advice can apply to outside lawyers acting as a trusted corporate advisor to a client.
ESG tools, metrics and goals
As companies become more ESG aware, it becomes increasingly important for companies to be on the same page when discussing these issues. Enter the UN Global Sustainable Development Goals. This program aims, among other things, to develop health and education systems, eradicate extreme poverty, promote equality for women, provide sustainable energy and clean water for all and protect the environment.
The United Nations Global Goals have quickly become the common global language when it comes to society’s most pressing problems, said Cone. It is assumed that the participating companies will work with other companies that share these goals.
Identifying key goals is one step – measuring a company’s progress is another. Various metric-based reporting tools (e.g. SASB, GRI, CDP, TCFD) help measure ESG efforts, but no one knows which tool or tools will become standard, Cone said. Instead of spending time answering this question, she advises that companies instead focus on identifying metrics and objective goals and then working towards achieving them.
Where are we going from here on climate change?
Cone sees climate change as a significant problem that companies are well equipped to help – and one that has a high cost of inaction. She referred to a report by Plan C Advisors that identified four trends that are driving companies to take action against climate change:
The financial effects of climate change are increasing;
World governments act;
The attitudes of the population are changing; and
Investors hold boards accountable.
“Many of us are already feeling the effects of the climate emergency. It is no longer a problem of the future, ”she said. Governments around the world are already taking steps to contain climate change. For example, the UK has passed a law on net zero emissions by 2050. The Biden administration recently issued an executive order for federal agencies to assess the risk climate change poses to the US economy and make recommendations on how to reduce those risks.
“The attitudes are changing. Did you ever think you’d see an electric Ford F-150? ”Asked Kegel. Growing public / consumer demand for private action on climate change is something that businesses need to consider.
And many are. In the past five years, the number of companies committed to reducing CO2 emissions has quintupled. For example, Apple has made a commitment to be 100 percent carbon neutral by 2030 – and vendors, suppliers, outside law firms and other partners must work towards these goals as well. Large companies will not allow business partners who are part of their Scope 3 calculations to prevent them from achieving these stated goals.
Climate change and other ESG initiatives should not be seen as a challenge or barrier to businesses, but rather as an opportunity, said Cone. Companies that adopt social responsibility and climate sustainability are best positioned to serve a market that demands such measures from private companies.
“This is the chance of our generation – of our life,” she said.
Copyright © 2021 Womble Bond Dickinson (US) LLP All rights reserved.National Law Review, Volume XI, Number 154
Read More Now