Together, these new laws create an uneven regulatory patchwork that has already resulted in the divestment of billions of dollars in state funds from investment managers. Investors and businesses increasingly face a choice between complying with these new state laws and achieving the ESG goals promised to investors and stakeholders. New laws introduced in 2023 expand the scope of anti-ESG laws and present significant uncertainty for an increasing range of businesses.

Fiduciary duties & non-pecuniary factors

Federal regulators and conservative lawmakers in some states are taking opposing approaches to defining the duties of fiduciaries. Investors making decisions using ESG frameworks include factors such as greenhouse gas emissions, which go beyond traditional fiduciary criteria like return on investment. The conflict reflects a philosophical disagreement between the belief that companies should work only to maximize returns, on one hand, and consideration of the interests of a wider range of stakeholders and outcomes, on the other.

In 2022, the U.S. Department of Labor (DOL) released a final rule addressing when fiduciaries may consider ESG factors in accordance with their fiduciary duties under the Employment Retirement Income Security Act of 1974 (ERISA). Under ERISA, retirement plan fiduciaries have a duty to act solely in the interest of plan participants and beneficiaries. The new rule clarifies that fiduciaries may consider ESG factors such as climate change and may select from competing investments based on collateral economic or social benefits. In late-January, 25 states filed a lawsuit in federal court seeking an injunction against the new rules.

Even before the release of the DOL final rule, several states proposed laws prohibiting the use so-called “non-pecuniary factors” in making investment decisions for state pensions and other funds. Earlier in 2022, the American Legislative Exchange Council introduced the State Government Employee Retirement Protection Act, model legislation that closely mirrors fiduciary duty bills later introduced in several states.

On March 24, Kentucky Governor Andy Beshear (D) signed House Bill 236 into law. Under the statute, “environmental, social, political, or ideological interests” not connected to investment returns may not be included in determining whether a fiduciary or proxy of the state retirement system is acting solely in the interest of the members and beneficiaries. Five non-exclusive factors, including statements of principles and participation in initiatives, are listed as evidence a fiduciary has considered or acted on a non-pecuniary interest.

In 2023, legislators introduced fiduciary duty laws of varying scope in several large states, including Ohio and Missouri. In total, legislators in more than 20 states have introduced bills amending the fiduciary duty laws covering investing and proxy voting for state retirement systems.

To further complicate matters, state pension funds in states like New York and California take the opposite approach, setting net zero carbon targets for their portfolios, for example.

ESG as boycott

Conservative politicians often claim ESG uses economic power to enact political agendas through alternative means. They argue goals like decarbonization amount to a boycott of fossil fuel companies and are a threat to the economies of states dependent on the extractive industry. New legislation expands on previous anti-boycott laws to include targeting companies that consider ESG factors.

Several states have already started the process of divesting retirement system and other funds from financial companies they claim boycott fossil fuel companies. For example, a 2021 Texas law requires the State Comptroller to publish a list of boycotting companies. The Comptroller’s initial criteria for inclusion included membership in Climate Action 100 and the Net Zero Banking Alliance/Net Zero Asset Managers Initiative, two major financial industry initiatives focused on climate change.

Utah Governor Spencer Cox (R) signed a bill into law on March 15 that goes beyond state investments to prohibit companies from coordinating or conspiring with another company to eliminate viable options for another company to obtain a product or service “with the specific intent of destroying a boycotted company.” A boycotted company is defined by the law as one that engages in aspects of the firearms industry or does not meet certain ESG standards.

Social Credit scores

Speaking in support of the Utah anti-conspiracy bill, state Rep. Mike Petersen (R) said: “I’m convinced that ESG is not a conspiracy theory, it is a conspiracy truth.” To many of its opponents and skeptics, ESG is an unaccountable shadow regulatory system that takes specific aim at industries and policies supported by conservatives.

The belief that the stated goals of ESG mask other motives is at the source of bills introduced in several states to prohibit financial institutions from using a “social credit score” to make lending or other decisions and defining the term to include ESG. The language invokes the Social Credit System in use in China, which monitors and punishes individuals and businesses for certain behaviors and serves as a type of blacklist.

Though some ESG frameworks produce numerical scores for various metrics, the comparison to the Social Credit System is rejected by ESG experts. There is no substantive overlap between China’s surveillance apparatus and ESG in goals or application.

This distinction has not dissuaded lawmakers in Florida, who enacted legislation amending state banking law to make the use of social credit scores by lenders an unsafe and unsound practice in violation of state financial institutions codes and unfair trade practices laws, subject to sanctions and penalties. The law prohibits the use of a social credit score based on factors that include, among other things, ESG standards on topics including emissions and corporate board diversity.

The Florida bill and others like it expand previous efforts by the state to divest state funds to restrict decisions on private lending, potentially involving many more financial institutions.

On the horizon

The volume of anti-ESG bills introduced in state legislatures is growing. Many are passing as the topic gains political salience, particularly on the political right. As these laws pass, they serve as models for similar legislation in other states. However, the success of future legislation faces significant headwinds.

Anti-ESG laws have been passed predominantly in states where Republicans control the governorship and both houses of the legislature. So far, there is little indication many Democrats will support these anti-ESG laws. Indeed, the growing scope of anti-ESG laws pose another roadblock to their widespread adoption. Newer laws impose restrictions on a much broader range of companies, which only increases the complexity of enforcement and increases the risk of a legal challenge.

A lack of uniformity means businesses operating in more than one state may have to make difficult choices. The broader economic consequences of anti-ESG laws are still undetermined, but compliance with these new laws presents immediate challenges.

This is the first of a three-part series looking at the rise of AI-based tools and several other drivers of change in the way law firms train new lawyers and how some firms are approaching learning and development.

The legal profession finds itself in a new wave of hype about artificial intelligence (AI) due to the popularity of ChatGPT and other forms of generative AI. There’s no question that AI has now made significant inroads in legal practice, with machine learning methods currently at work in eDiscovery, contract review and analysis, document generation, and legal research.

The amazing interest in the public facing ChatGPT, and ongoing discussions about how it might be leveraged in legal work, is largely driven by the fact that anyone can test it out and use it today. Even in its current, fairly primitive form and with all its limitations, it’s easy for lawyers to see how generative AI could take on some of the tasks that are now handled by human lawyers.

The recent Thomson Reuters Institute survey report, , shows how a new generation of AI-based tools is attaining high levels of awareness and interest in a very short time — much more quickly than earlier generations of AI tools. In fact, 80% of the respondents to the survey say that generative AI can already be applied to legal work, while just more than half say it should be. Contrast that with the skepticism that earlier applications for AI had faced, in eDiscovery or contract analysis, for example.

What will AI mean for training & development?

Traditional training of new lawyers in law firms can be described as informal mentoring combined with throwing young associates into routine tasks such as document reviews. However, what happens when technology automates many of those routine tasks?

A 2022 study, the Litera Technology in M&A Report, looked at some of the impacts of AI-based tools on firms’ M&A practice. The survey’s respondents identified both positive and negative impacts of AI on the career development of young associates. On the one hand, most agreed that the use of AI in M&A deals is creating new career paths, and that freeing young associates from menial tasks gives them time to focus on their analytical and advisory skills. Almost as many respondents, however, thought that the use of AI-based tools in document review makes it harder for young lawyers to learn the craft because they don’t get the experience of identifying and extracting contract terms.

It’s an odd paradox that AI tools make legal work more efficient and accurate but might also make it harder for young lawyers to learn their craft. Josh Kubicki, Director of Legal Innovation & Entrepreneurship and Assistant Professor of Legal Practice at the University of Richmond, describes the problem as the removal of cognitive friction from the learning process. In a recent edition of his Brainyacts newsletter, which explores all things generative AI, Kubicki described cognitive friction as “the mental effort, challenges, or obstacles encountered when processing information, solving problems, or learning new tasks.” The struggles that young lawyers have when tossed into a sea of documents that need review, and the realization that they are in over their heads, is a source of that cognitive friction.

Dealing with cognitive friction in legal work provides pathways to learning. It’s a “valuable catalyst for growth, as it encourages critical thinking, creativity, and problem-solving skills by pushing individuals to engage more deeply with the task at hand,” says Kubicki.

Yet, what happens to learning when AI takes the menial, routine, ambiguous, and complex out of a new lawyer’s day-to-day? Where will the learning come from?

Drawbacks of traditional training methods

“To teach associates, we’ve thrown them into the deep end of the pool, let them struggle, and maybe or maybe not, a partner or senior associate will catch them and help them figure things out,” says Kubicki. “But that’s incredibly uneven. It’s not managed properly. And it’s a heavily biased ecosystem.” Indeed, new AI tools may be taking away lawyers’ opportunities to learn by overcoming cognitive friction, but the old way was never applied consistently or effectively either.

The answer, says Kubicki, is a more intentional approach to learning and development. “How can we manufacture cognitive friction in a controlled environment? Well, then you start looking at structured learning programs.” Such programs are more interactive, planned, and just-in-time. They move beyond the legal profession’s preferred model of sitting in a room watching someone narrate a PowerPoint deck, and instead they tie training to the work at hand and vary the pace, medium, and format.

And some firms are already putting that kind of intentionality into practice. However, it’s not just the training challenges presented by AI that are driving them there.

Other drivers of change in professional development

Interestingly, the growth of AI is not the only factor pushing law firms to take a closer look at how they train associates. The pandemic, and the technological accommodations that many law firms had to make to enable remote work, have also had a big impact. In addition, law firms are increasingly influenced by trends and research in learning and development outside of the legal industry.

When the pandemic struck, law firms that were dependent on the older model of in-person mentoring and classroom-based training were suddenly forced to leverage collaboration technology and establish new hybrid working models, in which it was no longer a given that person-to-person training or mentoring would always be possible.

Hybrid work limited spontaneous learning and created uneven experiences for live training sessions in which some lawyers attended in-person, but others only viewed remotely. This also made it more difficult for associates to build social relationships with peers and leaders who were traditional sources of training and mentorship.

Even before the pandemic forced the issue, however, many organizations outside the legal profession were already re-examining their learning and development efforts. Recognizing the importance of training in employee satisfaction and retention, a number of new techniques had become commonplace, including:

• • • Continuous learning, a focus on embedding learning throughout an employee’s experience.
    • Blended learning, where classroom-style learning gives way to training that combines some online portions, which users can access at their convenience, as well as in-person experiences.
    • Gamification has become more common, with competition and rewards built into the training.
    • Increased use of technology to create more engaging and interactive online learning tools that go beyond simply transmitting a canned curriculum of information.
    • Emphasis on soft skills training, including critical thinking, problem-solving, and creativity.

Similar to organizations outside the legal industry, law firms are starting to professionalize the management of their learning activities. Firms have created Directors of Learning & Development and similar roles to better adopt these and other techniques, and they are taking a more strategic view of lawyer training that recognizes its role in building value within the firm.

In the second part of this series, we will look at some of the specific techniques that law firms are using in response to these trends.

The regulator’s monitoring of the marketplace in 2022 found 1,882 promotions from unauthorized firms that required amendment or withdrawal following intervention by the agency, an increase of 34% over the 1,410 promotions that received such treatment in 2021. An additional 8,582 promotions from authorized firms were similarly required to be amended or withdrawn, compared with just 573 in 2021, a massive increase of 1,398%.

The FCA notes that “[l]ast year we saw an increase in the use of bloggers and influencers on social media such as Instagram, Facebook, and YouTube, promoting financial products, particularly investment products, to younger age groups. We also saw an ongoing trend in the number of bloggers promoting credit on behalf of unauthorized third parties, with a particular growth in financial promotions targeting students.”

Finfluencers & regulations

The emergence of finfluencers (short for financial influencers) – individuals on social media who advocate a particular type of investment option – is highlighted in the Royal Mint’s 2022 Gen Z Investment Report, which found that 23% of young investors are followers of finfluencers.

… finfluencers need to be aware that social media is not an oasis where consumer protection law, advertising standards and intellectual property rights can be ignored.

Some see the dissemination of financial information via social media platforms as a healthy way of engaging people in investment activity, and they welcome the greater transparency inherent in this mode of communication. However, finfluencers need to be aware that social media is not an oasis where consumer protection law, advertising standards and intellectual property rights can be ignored.

Regulators around the world have begun to issue guidance to both finfluencers and their followers. The 2021 Statement on Investment Recommendations on Social Media by the European Securities and Markets Authority (ESMA), explores the boundaries between providing financial information and providing financial advice and recommendations online. Also, the Securities and Futures Commission of Hong Kong’s Guidelines on Online Distribution and Advisory Platforms stipulates that any licensed financial adviser will be held accountable through all channels, including social media. The New Zealand Financial Markets Authority has a Guide to Talking about Money Online, providing tips for consumers and finfluencers. Meanwhile, the Australian Securities and Investments Commission has an information sheet for finfluencers who include details of financial products and services in their content.

If finfluencers provide financial advice and recommendations per regulators’ definitions of those terms, they must adhere to regional regulations on authorization and conduct of business. However, the popularity of finfluencers, which is being fueled by shifting attitudes among investors and the more varied range of channels through which they can enter the investment market, makes it difficult for regulators and firms to ensure that customers are being treated fairly.

New attitudes toward investing

Factors such as new technology, the global pandemic and climate change concerns have caused shifts in investors’ attitudes. The Royal Mint report paints a mixed picture of young adults’ investment behavior. On the one hand, social media was found to have caused 17% of those surveyed to adopt a get-rich-quick mentality, with people expecting to double or triple what they had invested within a short space of time.

On the other hand, the report also finds that when losses occurred, 64% of 16- to 25-year-olds actively looked to diversify their risk by adding what they believed were “safer investments” to their portfolios. A total of 80% of that same group now dedicates a portion of their income to investing in their future, with two-fifths stating the pandemic made them realize the value of having secure finances. As a result, more than one-third have taken it upon themselves to learn about investing as a way of helping to grow their money.

A 2021 research report by the FCA highlighted that, for those investing in high-risk products, “the challenge, competition, and novelty are more important than conventional, more functional reasons for investing, like wanting to make their money work harder or save for their retirement.

Case study of a finfluencer

Paul Pierce, a former Boston Celtics pro basketball player and NBA Hall of Famer, promoted EthereumMax (EMAX), a cryptocurrency coin or token, on social media as did many other celebrities. In his tweets, Pierce showed screenshots of alleged profits along with links where followers could make purchases. Pierce is one of many celebrities who made such claims of financial gain using these types of investments. During his promotion of EMAX tokens on Twitter, Pierce failed to disclose that he was paid for his promotion with EMAX tokens worth more than $244,000, the US Securities and Exchange Commission (SEC) alleged.

“This year, we will continue to put the pressure on people using social media to illegally promote investments, which put people’s hard-earned money at risk.”

— Sarah Pritchard  | Executive Director for Markets, Financial Conduct Authority

Pierce has now agreed to pay more than $1.4 million to settle charges he illegally promoted digital assets, the SEC stated in February. This settlement is larger than the $1.26 million paid by Kim Kardashian to settle similar SEC charges related to promoting EMAX. The settlements with Pierce and others mark the latest move by the SEC to crack down on celebrity endorsements of crypto products.

The increase in the number of noncompliant finfluencer promotions suggests that as investors appear more willing to take risks, firms’ marketing departments may be tempted to make financial promotions more exciting.

In the UK, for example, regulations are based on the principle of being clear, fair and not misleading. Regulations also provide detailed requirements for firms about including the need for financial promotions to give a fair and prominent indication of any relevant risks, and to be presented in a way that is likely to be understood by the average member of the group to whom it is directed. Further, these promotions cannot disguise, diminish or obscure important elements, statements or warnings.

The future

This year, there won’t likely be any letup in regulators’ focus on the use of financial promotions. Sarah Pritchard, executive director for markets at the FCA, gave clear indication what the future holds. “This year, we will continue to put the pressure on people using social media to illegally promote investments, which put people’s hard-earned money at risk,” she said.

As the number of tools and resources issued by regulators for monitoring promotions increases, so too does the risk to firms of being caught for noncompliant behavior. The FCA is consulting on the introduction of tougher checks for financial promotions and measures that will remove harmful promotions more quickly.

Finally, firms in the UK need to consider the impact of the new Consumer Duty, which many are due to implement in July 2023. “Under the duty, firms will need to demonstrate that they are providing consumers with information which helps them to make effective and informed decisions about financial products and services,” the FCA stated.

In the US, the SEC is moving to chastise all bad actors, not just celebrities, according to Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “The federal securities laws are clear that any celebrity or other individual who promotes a crypto-asset security must disclose the nature, source and amount of compensation they received in exchange for the promotion,” Grewal said.

However, one key area remains to be explored — specifically, how are clients reacting to these large jumps in hourly rates?

It should be noted from the outset that the fact that rate growth is higher in 2023 than last year surprises basically no one. Nearly every observer of the legal industry knew that the pace of rate growth would accelerate this year, and the only question was, by how much. We now have an indication of that answer, and it’s an appreciable amount.

Gauging client pushback

Many legal market commentators have also been speculating that clients will likely start pushing back more aggressively on rates. This is a nuanced proposition as there are several different ways clients may do this. Let’s explore some of the possibilities.

First, clients may be inclined to ask for larger discounts off published standard rates. In truth, this may or may not be happening, but it’s not particularly germane. Standard rates are the advertised top rates from a law firm, similar to the rack rate on a hotel room — it’s a number they publish, but almost no one actually pays it. The point of trying to increase the discount on standard rates would be to attempt to exert some influence over the actual rates being charged by law firms. Whether clients are requesting larger discounts or not, the fact remains that worked rates still went up by quite a bit. Even if clients are pushing back on standard rates, they are not doing so to a large enough degree to place much of a damper on the growth of agreed-upon rates.

Nearly every observer of the legal industry knew that the pace of rate growth would accelerate this year, and the only question was, by how much. We now have an indication of that answer, and it’s an appreciable amount.

Second, clients may be expressing price sensitivities to their law firms throughout the course of their matters, encouraging firms to increase the amount of the potential fee the firm writes down before the client receives an invoice. There is some evidence that law firms are, in fact, increasing the amount of potential fees they proactively write-down prior to invoicing, which is contributing to the reported decline in realization. Whether this is the result of actual or simply perceived pushback from clients is an open question. It seems more likely that any increase in write-downs is due to perceptions of possible client objections by law firm lawyers rather than anything proactive on the part of clients.

Third, clients may be seeking larger discounts on their invoices, once received. If this were the case, we would see a widening gap between what we call billing realization (the percentage of the agreed rate that’s billed to the client) and collected realization (the percentage of the agreed rate that’s collected from the client). If the gap between these two figures widens, it’s an indication that clients paid a smaller percentage of their invoice. While there is some evidence that the gap between billing and collected realization widened for the quarter, it is difficult to tell at this point if this is the start of a trend or just part of the regular realization cycle.

Finding the value proposition

While there may be additional actions clients could take in reaction to rising rates, there is one that merits particular attention: Clients might just vote with their feet.

An unhappy client has a plethora of potential law firms and alternative legal services providers from which to choose, particularly if the main issue of contention is cost.

At a series of roundtable discussions in which I’ve participated with general counsel this year, I often have heard of concern over the increasing costs of outside counsel at a time when in-house law departments are facing an uptick in their overall matter volumes along with pressure to curtail their budgets — clearly, a difficult conundrum.

For many of these GCs, one option that comes immediately to mind is to shift to lower-cost law firms for some of the legal work needed. This phenomenon of demand mobility is something we explored in our Report on the State of the Legal Market earlier this year, as well as our State of the Corporate Law Department, released in March. Indeed, clients are not shy about discussing their feelings on this among their peers. They will freely discuss not only the fact that they’re doing it, but what types of matters they’re shopping around, how they’re identifying potential new law firms, and even which specific law firms to whom they are giving additional work.

At a time when half of legal service buyers report switching at least some portion of their panel of outside law firms, we are in a time of nearly unprecedented volatility in terms of legal demand shifts. That’s not to say that all work is at risk or that every higher-cost law firm should be worried, however. Another observation I have heard frequently from GCs is that for some firms, cost is no problem because of the value the firm delivers.

Of course, value is a bit of an amorphous term in that its meaning is very much in the eye of the beholder, i.e., the client. But there is some commonality of definition: quality, efficient legal advice that meets the client’s need — without exceeding a reasonable scope — and which recognizes the client’s broader business objectives.

For those law firms that deliver value well, clients will often tell me something along the lines of, “I have no problem with what they charge me, because they’re worth it.”

Such a characterization would be a worthwhile goal for every law firm. Truly understanding what the client values and delivering against that value proposition requires a lot of discussion with and understanding of the client, their goals, and their business. But for those firms that can do it well, it is, perhaps, one of the best ways to ensure the long-term strength of the relationship with the client.

As workloads are increasing, there is also a limit on the finite resources available to manage these growing compliance burdens. These concerns are compounded by a diverse and expanding range of subject areas with which compliance officers need to be familiar as well as an expectation of a greater volume of regulatory change. This larger picture is set against increased costs and difficulties in recruiting skilled compliance staff.

Overall, survey respondents outlined a sector that held greater responsibility but also contained practical operational challenges that threaten to undermine efforts to provide their firms with the level of compliance support required in today’s environment.

Thomson Reuters Regulatory Intelligence’s 14th annual survey of compliance leaders — distilled into the 2023 Cost of Compliance Report — was undertaken against this backdrop. The report explores the challenges that compliance officers face in 2023 and exposes the depth of issues that compliance leaders have encountered. The survey was taken of more than 350 practitioners, representing global systemically important banks (G-SIBs), other banks, insurers, asset and wealth managers, regulators, broker-dealers, and payment services providers mainly in the United States, the European Union, and the United Kingdom.

Overall, survey respondents outlined a sector that held greater responsibility but also contained practical operational challenges that threaten to undermine efforts to provide their firms with the level of compliance support required in today’s environment.

Some of the key findings of the annual report include:

• • • The volume of regulatory change was expected to increase and was seen as a key compliance challenge for boards and compliance officers.
    • Cost pressure and balancing competitive and compliance pressures were reported as key challenges, yet 45% of respondents did not monitor their cost of compliance with regulations across their organizations.
    • One-third of respondents expected compliance teams to grow, and the cost of compliance staff was also expected to increase, while turnover of staff and budgets remain at 2022 levels. An increase in the number of firms using outsourced providers for their compliance functionality was also reported.
    • Retaining skilled resources is seen as essential to deliver on a growing range of subjects with which the compliance function is involved. The recruitment of the appropriate talent comes at a cost, and the appeal of becoming a compliance officer has been reduced due to the potential for increased personal liability.
    • Low staff morale is emerging as a key conduct risk for many financial services firms. This may lead to wider noncompliance issues due to staff error or manipulation. Couple this with the identification of cybersecurity as a prominent culture and conduct risk, and it becomes more important for firms to ensure internal security controls are robust.
    • Firms operated an effective compliance culture despite the conduct and culture risks, with respondents predicting they will spend more time on culture and conduct issues in 2023.

The findings of this annual report are intended to help financial services firms with planning and resourcing while allowing them to benchmark their own approaches with those of the wider industry. The experiences of the G-SIBs are analyzed where these can provide a sense of the stance taken by the world’s largest financial services firms.

You can download a full copy of Thomson Reuters Regulatory Intelligence’s 2023 Cost of Compliance Report, here.

Chatbots are basic computer programs designed to simulate a conversation with a human user and have become increasingly popular in recent years as a way to provide customer service, answer frequently asked questions, and even provide mental health support. The latest advanced chatbot, called GPT-3 (Generative Pre-trained Transformer), uses advanced artificial intelligence and machine learning to generate responses to user inputs in a way that is designed to be exceptionally human-like and natural.

Because the need for low-income individuals’ legal assistance greatly outweighs the number of lawyers who can assist, GPT can step in to help spot users’ legal needs, build out and maintain legal navigators, assist legal services organizations with client in-take, and make court processes and forms easier to navigate.

And because most low-income individuals with legal issues don’t even recognize their problems as legal in nature, GPT can be taught to catch and identify a legal issue as the person seeks advice through a search engine. The person might then be directed to a legal navigator that will share basic legal information to help address their problem. For example, a site might provide a step-by-step guide to getting divorced, explain how to file a claim against an unlawful landlord (after identifying what constitutes unlawful behavior), or provide legal and other support options for domestic violence survivors.

Organizations like the Legal Services Corporation (LSC) and Pro Bono Net have already made great strides in building out content-rich online guides, which will become even more intelligent, accurate, and efficient by using AI.

“Imagine a user being able to ask for help and a chat bot trained from curated, reliable legal information websites providing a plain language explanation with step-by-step guidance,” says Jane Ribadeneyra, the Program Analyst for Technology for LSC. “Obviously, we will need to be cautious about using these new tools and ensure they don’t provide authoritative sounding, but incorrect, information to users. But, I believe those challenges will have solutions and new AI-based technologies we haven’t even imagined are on the horizon.”

Life-changing legal guidance

Indeed, enhanced guidance for those navigating legal issues on their own will be life changing. For those directed to local legal services organizations, for example, GPT can assist with the in-take process to make client qualification, referrals, and communication easier. Many legal aid organizations have limited resources and are unable to serve all of the individuals who seek their assistance. A chatbot could be used to help screen potential clients and gather basic information about their legal issues, allowing legal aid organizations to prioritize their cases and ensure that they are able to serve the most vulnerable populations, while referring out eligible cases for pro bono services.

Legal-focused AI can also assist with legal research and document preparation to resolve cases faster. For example, a chatbot could be programmed to search for relevant legal precedents or statutes and provide summaries of the information it finds. In fact, this technology is already being developed and refined among the legaltech community, and it could also be used to help draft legal documents, such as contracts or pleadings, by providing template language and guiding users through the process of filling in necessary information.

Legal-focused AI can also assist with legal research and document preparation to resolve cases faster.

“We’ve started building bots for the public to access basic legal information using GPT technology,” says Tom Martin, Founder and CEO at LawDroid. “With GPT, we can build these bots 10-times faster than with intent-based natural language systems. GPT-powered chatbots are also much more effective in guiding people quickly to relevant information. It’s funny that systems like Dialogflow, which were state-of-the-art about two months ago, have now been rendered old-fashioned.”

Amanda Brown, Founder and Executive Director of the Lagniappe Law Lab, agrees that things are changing fast and access to justice and legal work processes will be the beneficiaries. “New AI tools like ChatGPT have the capacity to significantly support access to justice when paired with allied professionals like legal navigators,” Brown explains. “Lawyers and legal navigators trained to use these tools will be able to more efficiently provide user-friendly information and do basic legal drafting, leaning on their legal training to ensure accuracy and completeness. As we look ahead in legal education and the development of new delivery models, training on the use of these tools should be an essential component of curriculum development.”

Further, collaboration among legal professionals and those developing AI tools will be crucial to ensuring accuracy, relevancy, and effectiveness.

Chatbots in the courts

Finally, GPT has a place within the nation’s courts to make our legal system more approachable and accessible to those pursuing justice. “Currently, I am building a few different chatbots for different workflows (criminal, civil, and drug court),” says Judge Scott U. Schlegel of the 24th Judicial District Court in Jefferson Parish, Louisiana. “Each is being built to help court users better navigate the justice system.”

Judge Schlegel explains his chatbots have the potential to scale the court’s limited resources, provide necessary information to lawyers and litigants at the right time, and help set expectations, which is extremely important. “We also hope to integrate these chatbots with the clerk of court’s system so that court users can get case specific information and a database of Louisiana laws,” he adds. “The sky is the limit with all of the potential use cases,”

One potential limitation of using GPT to increase access to justice is the risk of providing incorrect or misleading information, of course. While the bots are designed to be highly accurate and generate responses that are similar to those from a human, they will need additional training and may occasionally provide incorrect or outdated information. The chatbots should be regularly reviewed and updated to ensure they are providing accurate and up-to-date information — a potentially complicated task.

Despite those challenges, new technologies like GPT chatbots have significant potential to increase access to justice for individuals who are currently underserved by our legal system. By issue spotting, providing basic legal guidance and documents, assisting with legal services in-take processes, and helping court processes, GPT would make it easier for individuals in need to understand and navigate their legal issues. While AI won’t replace lawyers anytime soon, it is a critical tool to narrow our justice gap and should be used responsibly.

In 2022, the significant changes to Section 174 went into effect. Enacted in 1954 as part of the Internal Revenue Code (IRC), Section 174 was created to eliminate uncertainty in tax accounting treatment of research and experimental development (R&E, or more popularly, R&D) expenditures and to simply encourage research and developmental experimentation as to way to grow innovation.

Section 174 allows businesses to either deduct or amortize certain R&D costs. Deductions can be made in the year in which they are paid or incurred, or they can be amortized over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from the expenditures. Below are five things to know now about the updates to Section 174.

1. Which entities are subjected to Section 174 capitalization?

In short, Section 174 applies to any taxpaying entity that incurs qualifying R&D costs independent of specific industry or business size. Specifically, there are several types of businesses that are impacted, including:

• • • Corporations — Regardless of size, once corporations have incurred qualifying research and development costs;
    • Small businesses including startups — Regardless of current profitability status, small businesses and startups that are heavily invested in R&D may capitalize or amortize their research expenses;
    • Sole proprietorships, partnerships, and LLCs — Also, these entities can take advantage of Section 174 if they have qualifying R&D expenses; and
    • Past-through entities including S-corporations — These too can utilize Section 174 for eligible cost associated with R&D, and the R&D credits can be passed through partners, individual shareholders, or members.

2. What qualifies? What are the kinds of costs subject to Section 174 capitalization?

There are several categories of expenses that can be subject to Section 174 capitalization, including:

• • • Salaries and wages — The salaries and wages of employees who conducting or directly supervising or supporting research activities can be capitalized;
    • Supplies and materials — The cost associated with supplies used in the research process can be capitalized, including anything from lab equipment to the software required for the research;
    • Patent costs — The cost associated with obtaining patents for a product or process developed through research activities can be capitalized;
    • Overhead expenses — There are certain indirect expenses that can be allocated to research activities, including utilities for a research lab or depreciation on research equipment; and
    • Contract research expenses — If a third party is used to conduct the research on a company’s behalf, the cost can be capitalized.

3. What kinds of items are excluded from Section 174 deductions?

Not all R&D expenses can be deducted under Section 174. For example, costs for land or depreciable properties are not deductible. Additionally, costs associated with research conducted after the beginning of commercial production, marketing research, quality control, and funded research (such as research funded by any grant, contract, or otherwise by another person or governmental entity) are generally excluded.

4. What is considered R&D as defined by Section 174?

For tax purposes, the following four-part test from the Internal Revenue Service must be met in order to qualify for R&D credit:

• • • Business purpose — The research must be intended to benefit a business component, which can be any product, process, computer software, technique, formula, or invention that is to be held for sale, lease, license, or use by the company in a trade or business of the company.
    • Technological in nature — The business component’s development must be based on a hard science, such as engineering, physics, chemistry, the life or biological sciences, engineering, or computer sciences.
    • Elimination of uncertainty — The activity must be intended to discover information that would eliminate uncertainty about the development or improve of a product or process.
    • Process of experimentation — The business must evaluate multiple design alternatives or have employed a systematic trial-and-error approach to overcome the technological uncertainty.

5. Which states have conformity to Section 174?

Companies will have to check with the individual state in which they are filling in to determine if that particular state has conformed. States either conform to the IRC Section on a rolling basis or a static basic. A state that conforms on a rolling basis means it will automatically adopt any changes to the federal tax code as those changes occur. Some states that conform on a rolling basis include Illinois, New Jersey, New York, and Pennsylvania.

States that conform on a static basis adopt the federal tax code as of a specific date and do not automatically incorporate subsequent changes. Some static states include Florida, Georgia, Virginia, and North Carolina. There are some states that have selective conformity (this means they adopt selective portions of the IRC), including Arkansas, Colorado, and Oregon.

It is worthwhile to note that levels of conformity can vary by state and may be subject to specific adjustments, additions, or exceptions based on the individual state’s tax laws.

Yet rather than a binary outcome, the global economy actually faces multiple scenarios which could heavily impact global trade, many of which are the result of means meant to actually bypass the debt ceiling and avoid default.

Thus, it’s important to map out the potential impact of the different options so that companies and organizations can both understand the implications of different strategies and prepare for the surprisingly varied outcomes, many of which would still massively impact global trade.

The trillion-dollar coin

One of the most talked about but seemingly comical scenarios involves the minting of a trillion-dollar coin. This possibility utilizes the U.S. Treasury’s relatively uninhibited ability to mint money to generate the funds necessary to continue government spending without increasing the debt.

The issue is that this amounts to little more than turning on the money printer, a measure which has historically caused intense inflation, an economic challenge only starting to come under control. While this would keep the United States from default, inflation would not be the only cost, as confidence in the U.S. government and the dollar would likely take a significant hit. Global financial markets could see a bout of instability due to this decrease in confidence, which may make financing operations more difficult.

This workaround is nothing new, as the temptation for government to print its way out of a debt crisis has been a longstanding fantasy with often dire results. One can think of this as the Ford Pinto scenario, a classically dangerous vehicle rolled out despite far superior options being available.

Premium Treasury bonds

If the trillion-dollar coin scenario is the Ford Pinto, then the strategy of issuing a series of premium Treasury bonds is the Ferrari Daytona: more powerful, more refined, and slightly more likely to get you to your destination uninjured.

This scenario relies on a legal quirk, where the debt ceiling applies only to the face value of outstanding government debt. Here, what the government would do is reissue already outstanding bonds with an additional payment premium, basically promising a higher interest rate in exchange for a burst of upfront cash. This both avoids default by injecting additional revenues into the government’s cash flow and avoids the inflation-fueling effect that minting a trillion dollars would have.

In addition, the savviness of the solution may bolster confidence in the U.S. government’s ability to manage itself, as well as lessen the potential impact of future debt ceiling crises if found to be a workable solution. For global trade, the primary challenge would be the possible mixed market reaction, but the turmoil here would be light.

The primary threat would be the exact opposite of the trillion-dollar coin. Rather than sparking inflation, the premium bonds could result in deflationary pressure. For global trade, deflation in the U.S. could be a greater threat than inflation, sapping consumer spending and creating a myriad of other issues which are relatively exotic and potentially dangerous. Some economic concerns already exist that suggest that the U.S. could go into a deflationary cycle soon, so adding further deflationary pressure could add fuel to this concern.

The sticking point is that this scenario is unlikely given the remaining time before the U.S. hits the default point. Bond programs like this take time to set up and every day closer to default-day the United States approaches, the less likely premium Treasury bonds can be implemented. Depending on how the current conflict resolves, premium bonds may be a more tempting solution in the future.

14^th Amendment Constitutional crisis

The 14^th Amendment of the constitution states that: “The validity of the public debt of the United States… shall not be questioned.”

This gives an opening for president to declare the debt limit itself as unconstitutional and the issue null and void. But this does not mean that the potential impacts of a debt ceiling crisis would be swept away. Rather, they would hang over the heads of the global economy like a sword of Damocles as an inevitable court battle rages though the U.S. legal system.

An unfavorable Supreme Court verdict could plunge the U.S. into default with little warning, throwing the global economy into turmoil and actually making things worse than if the U.S. defaulted on the original date. Simply the heightened uncertainty preceding a verdict could make currency markets unstable and roil other financial markets until the constitutional crisis is resolved. Any instability in such markets will only make global trade more difficult and riskier.

In the long term, if this move were to be upheld, it could potentially strengthen international confidence in the U.S.’s ability to meet its debt obligations and bolster its stability by removing the possibility of another debt ceiling conflict. This would thereby bolster U.S. trade negotiating positions and reinforce its standing as a central hub of global trade.

Non-technical default

As addressed previously, another option available to the Treasury to avoid default in the technical sense is to redirect its remaining cashflow towards paying back debt holders. Think of it like having a pitcher and two glasses: there may not be enough water to fill both glasses, but instead of evenly distributing the liquid, you could instead focus on filling one glass to satisfaction. Doing so with bonds would keep the U.S. from technically defaulting and deter the worst of the consequences.

The issue is that, with more of the cash flow going to bonds, there will be even less to go towards government spending such as social security, pay for government employees/military, and economic programs. The likely result is a deep domestic recession which could spread globally. Yet for global trade, this would resemble a more traditional economic crunch, one already well-explored. Some rearranging of global trade away from the United States and a loss of trade prestige for the dollar would be probable, but not quite to the scale as a full default would have.

Full default

The fallout of a full default is simultaneously well-explored and completely alien, with few available historical examples to guide expectations. What is most likely is global economic distress and financial market chaos as the most risk-free asset in the global market suddenly fails. The shift away from the United States both as an economic hub and the head of the world financial order would be a likely and swift outcome, with a large scale-rearrangement of global trade.

Indeed, the global ramifications would be deep and contagious, likely pulling the rest of the world down with the United States into recession.

A full default is the worst-case scenario, one where winners are defined by those who lose the least. This remains an unlikely outcome, in the same way that a nuclear war is unlikely due to its promise of mutual destruction. In the same way, however, its possibility cannot be ignored.

Negotiated Settlement

The traditional way that the debt ceiling crises has been resolved in the past remains the most likely. Congress and the president will find a negotiated settlement to raise the debt ceiling in exchange for some level of concessions.

For global trade, the only likely result is slightly higher interest rates and some minor movement in the financial world, escalating as negotiations approach the deadline. Fears will fade and the mainline expectations for global trade will reassert themselves as if this never happened in the first place… until it happens all over again.

But, how does a law firm go about calculating carbon emissions, also referred to as greenhouse gas (GHG) emissions, which is the first of many topics that U.S. regulators among others are starting to require? The process for quantifying this is known as carbon accounting.

Components of carbon emissions

The most common elements of the firm’s operations that are key to calculating carbon emissions are categorized in Scope 1, 2 and 3 type emissions.

Scope 1 emissions overview — Law firms are office-based and usually serve as tenants. Direct emissions (known as Scope 1) come from activities under control of the firm. Not surprisingly, law firms generally have smaller amounts of Scope 1 emissions. Typically, these emissions will come from any fuel and gas related to the operation of the building as well as from refrigerants (i.e., refrigeration, air conditioning) and fall into several areas of combustion:

• • • stationary (fuel and gas onsite);
    • mobile (firm-owned vehicles using fossil fuels); and
    • fugitive emissions (vapors directly released, like refrigerants, fire suppression).

Details of Scope 2 and 3 — Law firms will have most of their emissions come from Scope 2 and 3 categories. For Scope 2, indirect emissions come from purchased energy in the form of electricity, steam, heat, and cooling. Purchased electricity is the biggest emissions area in Scope 2.

For Scope 3 the most common indirect emissions are in the categories of measuring business travel, commuting, and purchased goods & services, including paper and waste. In the commuting category, some firms will include remote work by staff. Remote work emissions include emissions generated by equipment, such as lights, laptops, and other office equipment at home.

Key factors in carbon emissions calculations

Quantifying GHG emissions can get complicated pretty quickly, and this is why it is important to identify the subcomponents by Scope and focus on data collection first.

For Scope 1 and Scope 2, law firms will use their metered (or sub-metered) data, such as utility bills or purchase receipts and contracts. If they don’t have this, estimates based on square footage by region is the next best option.

For Scope 3, travel data can usually be found with the firm’s corporate travel agency or in the expense management system with purchase records. Commuting data and data related to remote work emissions can be obtained through surveys to employees.

In the area of purchased goods and services, it’s best to first try to obtain the data from the provider, but if the data is not available, using external databases, such as the data from the Intergovernmental Panel on Climate Change (IPCC), is the next best option. For water, the data can be obtained through sub-metered data or water bill. For waste, it is best to work with the building management.

Gather a multidisciplinary team for emissions data gathering & calculation

Compiling a cross-functional team within the support functions of the firm is necessary for the most efficient way to initiate and complete the data gathering process.

• • • Real estate, facilities & operations — Facilities and operations need to work with the building management to obtain critical data for utility data, water, waste, etc. The internal real estate department can be helpful as well.
    • Procurement & finance — Members in the procurement and finance function can help to view and track spending within the supply chain to gather Scope 3 data. Many positions within the procurement team now encompass the responsibility of emissions and decarbonization.
    • Technology — The firm’s IT group also play a role in emissions management by providing more insights on data centers, energy usage, life-cycle assessments, etc. from the procurement and e-waste perspectives.
    • Human resources — HR has a critical role to play in obtaining commuting data, sending out surveys, helping to determine remote work emissions, and other items related to the workforce.

Doing the calculation

Combining the carbon emissions is the next step once the Scope 1, 2, and 3 data sources are collected. The challenge in this step is understanding what emission factors to apply — not surprisingly, this is the point when some organizations choose to hire a consultant.

Some of the emissions factors, which is a representative value that attempts to relate the quantity of a GHG being released to the atmosphere with an activity associated with the release of the GHG, can be found on the Environmental Protection Agency (EPA) web site in the U.S., and on the U.K.’s departmental websites for the Department for Business, Energy, and Industrial Strategy; and the Department for Environment, Food & Rural Affairs. For other jurisdictions, the IPCC also has an emission factor database.

Measuring emissions will continue to evolve with the ability to gather more emission factors to create higher quality baselines. While it is important to start with the data collection, it is imperative for law firms to prioritize the biggest areas of emissions, such as travel, with low-quality data. This is where there is the opportunity for significant improvements, and law firms can refine the calculation over time.

Driving the need for continuous improvement in the calculations are the RFP requests to measure and disclose carbon emissions data from clients. Indeed, this number is likely to increase exponentially, and there will be increasing pressure for third-party verification and assurance.

An enhanced reputation is a huge benefit of carbon accounting and is a big driver to making meaningful change. Striving for this incentivizes law firms to find better ways to do things to reduce inefficiencies, waste, and consumption, which benefits everyone.

Fears of missing out on opportunities or alienating rainmaking lawyers trap some firms in the ambiguity abyss — that largely undifferentiated position of saying, We are a full-service firm that’s able to meet the complex needs of sophisticated clients.

Our analysis of the last 15 years of law firm brand positioning, recently reviewed alongside law firm financial data, has produced a compelling argument for law firms to build a differentiated approach to the legal market.

A differentiated approach

There are four ways to think about segmenting and differentiating a firm’s approach to the market:

1. 1. 1. Expertise — We are smarter than other firms in this area of law.
      2. Client type — We understand this kind of client better than other firms (e., public vs. private companies, start-up vs. mature companies, etc.)
      3. Geography — We offer strength in a defined geographic region.
      4. Sectors — We can navigate the dynamics of this sector and are well-positioned to serve all client needs in this space.

While law firms need to consider each of these factors as part of their strategic plans, competitive advantages are created when one factor is considered the key strategic priority that then informs the other three. Let’s look at this concept in action.

Case Study 1: A sector-focused approach to the market

Law firm ABC has a clear sector-focused approach to the market and is heavily entrenched in the technology sector — from traditional tech companies to fintech and e-retailers, this firm serves them all.

The good news for Law firm ABC is that their stated strategy is strongly corroborated when looking at our research of more than 2,300 General Counsel and senior corporate law department leaders. (Sadly, this isn’t always the case, which may indicate a poorly executed strategic plan.)

When looking at the types of companies that keep Law firm A top-of-mind, nearly 70% of those senior legal decision-makers are from organizations in a tech-related sector. This, unsurprisingly, also means a large proportion of these companies are based on the West Coast of the United States.

More proof of Law firm ABC’s effectiveness in executing this strategy comes when assessing the firm’s ability to gain access to new work or generate more legal demand.

Our Market Insights team undertook a conversion analysis, which involves looking at what proportion of legal buyer respondents who name a law firm top-of-mind then go on to say that firm is the one they consider hiring for different types of legal work. In other words, how well does a firm convert mindshare into market share.

Law firm ABC is twice as effective at turning awareness in new work with legal buyers in the technology sector compared to all other sectors combined — an impressive proof point that underscores how the firm’s focus in this sector is more than just lip service. And the firm’s financial performance? When looking at demand (billable hours), this firm has nearly 50% higher demand growth than the average firm over a three-year timeframe.

Why differentiation works

Of course, lots of factors go into a law firm’s ultimate success, and brand differentiation is one of the levers that law firms can control. In the case study above, Law firm ABC uses a sector-focused strategy to differentiate itself from other firms in the (extremely crowded) market.

And Law firm ABC is not a one-off example.

Our ongoing research with General Counsel shows that many outside law firms identified by clients as having deep sector knowledge earn, on average, 43% of their clients’ external legal spend — that’s nearly 2.5-times the typical firm.

With lack of time being one of the most pressing issues that General Counsel and other law department decision-makers face, a differentiated brand helps buyers quickly understand how your law firm can help them — rather than trying to figure out if yours would be the right firm to call in a specific situation.

For more on how your firm can differentiate in various ways, check out our latest video, which digs deeper into understanding the various ways firms can differentiate — and measure the success of their approach to the market.