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.

For several years, the SEC has monitored firms’ practices in offering services based on clients’ preferences on ESG and other investing factors related to corporate responsibility along with other factors that go beyond immediate bottom-line concerns.

In the past, the agency has cited the broad provisions of Section 206 of the Advisers Act, which requires disclosure of material facts to bring ESG-related actions. But since last November, the SEC has gained broader authority under the newly implemented Marketing Rule to examine all of firms’ compliance processes for advertising and marketing material, including ESG claims. “We’re testing under the Marketing Rule previously known as the Advertising Rule where you know the basic principle is to not make any misleading advertisement (related to ESG),” said Ashish Ward, the SEC Los Angeles branch chief.

Rulemaking by examination?

Some critics have argued that examiners are pushing ahead with their reviews of ESG at a time when the agency’s own rulemaking process has been facing challenges in defining the basic terms of what constitutes ESG.

However, the SEC sees it differently. Its SEC examinations unit says it has avoided substantive concerns of investment advisers’ ESG decisions, focusing instead on disclosure and documentation. The SEC exam unit also argues that it is implementing risk-based principles based on existing securities law, and it has taken the view that financial services firms must document and disclose the factors that they are using in advising clients.

“While the concern over whether the commission is using its examination or enforcement powers to advance its ESG-related rule making agenda is a fair question to raise,” said Ken Joseph, managing director for financial services compliance and regulation at Kroll. “The commission has already demonstrated in recent enforcement cases that the federal securities laws — including the anti-fraud provisions of the Advisers Act — provide a legal framework for charging alleged false or misleading ESG-related claims or inadequate compliance policies and procedures.”

“Examiners are tasked with evaluating claims made to clients or actual or prospective investors — neither the Marketing Rule nor the proposed ESG-related rule changed that dynamic,” Joseph adds.

Firms face widening ESG compliance risk

With the expansion of rules and priorities by the SEC, what is clear is that the risk of action by the agency because of compliance issues has expanded. Investment advisers will face compliance concerns they have never faced in the past under the new Marketing Rule because the rule adds even more emphasis on raising the bar for compliance units to have processes in place to assure ESG claims are accurate. In addition, the SEC has also created a 22-member Climate and ESG Task Force in its Division of Enforcement to better monitor firms’ and issuers’ ESG practices.

Navigating the complexity in compliance risk for issuers will be tricky in the near term, but adding ESG evaluations in disclosures only adds to the murkiness. “Due diligence can be become difficult with respect to evaluating ESG factors at issuers given the varying types of disclosures that they provide,” explains SEC branch chief Ward, adding that those

Bill Singer of the Brokeandbroker blog, a securities lawyer and former counsel for the Financial Industry Regulatory Authority (FINRA), says some brokerage firms are worried about how the SEC exam unit is viewing ESG. “There are a lot of concerns at firms that the SEC exams can look all over the firm for ESG issues that could pose compliance problems,” says Singer. “I’m hearing from firms that this ESG focus in examinations — and now with a special ESG task force — they will be getting hit with more deficiency letters and enforcement actions. They see it as rulemaking by examination.”

The SEC’s proposed ESG rules in total should give firms a reason to work on their compliance practices in advance of new rules, states law firm Mayer Brown LLP in a recent client note. “Although not directly embedded in any new rule or amendment, an SEC expectation is clearly set out in the proposal: that funds and advisers would adopt new compliance policies and procedures regarding their ESG-related strategies in order to help ensure the accuracy of the various prospectus and brochure disclosures,” the client note states.

“You should look at everything you say [on ESG] and ask if you can substantiate that it’s true,” the SEC’s Ward adds. “That’s going to flow through everything, and that’s going to help fix a lot of problems.”

Environmental, social & governance (ESG) issues represent one of the key areas of complexity in global regulatory landscape. Yet, when asked specifically about ESG, it was the third-most cited risk on the horizon, with one-in-five law departments seeing ESG as a major future risk.

Even more interesting is that data privacy and cybersecurity were also in the top 5 risks on the horizon, according to the survey. Clearly, GCs and CLOs would agree that these two risk concerns are important governance issues as part of the G in ESG. Indeed, looking at top 5 risks on the horizon cited in the survey, one could easily argue that ESG, when including data privacy and cyber-risk, is actually among the most important risks on the horizon.

If we agree that ESG encompasses data privacy and cybersecurity, then ESG rises to the top as one of the most popular risk on the horizon over the next three to five years by corporate legal departments across the world. And while the regional variations are also quite interesting, they send the same message: ESG, including data privacy and cyber-risks, is a key governance issue that is top of mind for many corporate law department leaders.

Taking action on these insights

More importantly, law firms can use this market intelligence to invest in their practices. For example, law firms with ESG practices should be ramping up in the regulatory & compliance areas because this has been cited as the most pressing current priority and one of critical importance in the future. In particular, in-house legal departments are challenged to keep abreast of regulatory changes — and because ESG is a major area of fluctuations in regulatory requirements — law firms would be wise to prioritize their analysis and forecasts of ESG regulations across jurisdictions and highlight new details of reporting requirements of existing regulations and show how clients can meet compliance obligations.

In addition, spotting issues in emerging ESG areas, such as biodiversity, is another consideration. For example, the Task force for Nature Related Financial Disclosures  just released its Beta v0.4 with recommended disclosures, which clients may find confusing and complex.

Decarbonization of their supply chains is another major challenge for companies, particularly for those with complex value chains. There are many components of this issue with which clients may need assistance, such as implications for vendor contracts and outlining new requirements for data reporting in contracts, such as greenhouse gas emissions and certification in forced labor regulations. At the same time, companies need to increase their ability to conduct due diligence of prospective suppliers on human rights and other denied-party screening.

Antitrust issues also are a growing area of concern for companies, in large part because of U..S lawmakers’ recent allegations that industry collaboration on ESG violates antitrust laws, specifically, firms could focus on the “rule of reason” test through the lens of market impact or market power,  as well as delineating business justifications in the U.S.

Finally, employee well-being continues to grow in interest among shareholders and investors, and ESG and diversity, equity & inclusion (DEI) was cited as a top-5 priority for in-house legal departments. This represents a tremendous opportunity for law firms’ labor & employment practices, especially as companies continue to struggle with varied preferences in work flexibility amid remote working frameworks. In addition, companies are consistently in need of updated and expanding HR policies across pay equity, learning & development, as well as DEI, among others.

The existing regulatory landscape is a tough challenge for many in-house lawyers. Moreover, the future remains murky is in this space, according to corporate law department leaders, and in-house lawyers will need the assistance of outside counsel to meet expectations. This leaves law firms with an abundance of business opportunities across ESG practices to seize upon.

I sat down with Andrea Harris, Group Chief Counsel at WPP, the multinational communication, advertising & technology company, to understand what advice she would give to her peers as they determine how best to maximize support for their organization’s ESG strategy.

“ESG is complex, and responsibility for a company’s sustainability and climate change agenda often sits across many functions, which makes this an opportunity for GCs,” Harris says. “While there are many stakeholders already involved — and even though Legal is taking on an ever-increasing workload — my experience is GCs and their teams can successfully navigate this and create impact at scale in their organizations.”

Harris is also a participant in Lawyer for Net Zero’s Leaders Programme and like the other GCs in the program, gains peer-to-peer insight and support to influence their companies’ sustainability initiatives.

Understand the businesses’ approach to sustainability

Companies are seeing their employees increasingly keen to be part of its sustainability agenda. This enthusiasm is to be applauded, but it needs focus to help deliver effective and large-scale impact.

For Harris, a crucial step that GCs and their teams can undertake is to really understand the business’ sustainability aims and strategy, how those link with the wider corporate strategy, and then focus on linking this with the legal team’s day-to-day work. GCs need to think about the impact of climate change across the whole value chain, from the suppliers to clients, Harris says, adding that GCs need to “think about how different business functions are impacted and how Legal is currently supporting these areas.”

Build cross-functional relationships

Another successful tactic used by Harris and that she suggests to her peers is building effective internal cross-functional partnerships. Because GCs are usually part of the executive leadership team and their teams are embedded within all reaches and levels of the company’s structure, they are in a unique position to do this.

Sustainability and ESG teams often have less resources and in the early days of their creation, could have fewer established relationships. This is an opportunity for Legal to partner with the Sustainability Team. GCs and their teams can help them push their ESG agenda out into the organization and support the ESG team with their ambitions. “With its connections Legal can play a key role in being a champion for its sustainability colleagues. You can be their eyes and ears, heart and soul out in the business,” she explains.

By fostering connections and partnerships within the business and facilitating shared learnings, Harris says she believes that legal teams can also limit ESG activities being siloed within the business. To support the silo-breaking, she urges making connections.

“The more GCs and their teams can network and share learnings between different parts of the business, the less chance there is of everyone having their own well-intentioned but small projects in silo and the greater the scale and impact they can create,” Harris says.

Support board and senior management

Many corporate boards now understand that sustainability is not simply a nice-to-have component but is actually a business-critical element. Indeed, Harris notes that WPP is very alive to this agenda. “The sustainability agenda is an issue the board has to think about, in the same we think about how our figures are doing, or our people,” she says, adding that the company’s CEO and executive management are driving the agenda and ensuring the right caliber of people are in place to achieve the organization’s goals.

In turn, Harris has been supporting the CEO and senior management by ensuring the correct governance structures are in place and that sustainability and climate change are standing agenda items at the corporate board level.

By keeping corporate directors up-to-date and putting in effective accountability and committee reporting structures, GCs can ensure ESG is embedded within the company’s thinking and focus.

Collaborate with peers

Finally, Harris advises GCs to join like-minded peers to stay fresh on current ESG trends and to find ways to maximize effectiveness in the corporate legal function’s advocacy for the enterprise ESG strategy.

For example, Lawyers for Net Zero’s program, which supports Harris and other global GCs in organizations such as Rolls Royce, Specsavers, National Grid, and Centrica in creating an impact on their company’s sustainability goals, is one such way to stay abreast of ESG developments.

“GCs and their teams are busy, and sustainability can get pushed slightly to the side as other priorities take over,” she says. “The Leadership Programme keeps you on track of what you were trying to deliver and helps you best support your sustainability colleagues.”

Another key benefit of gathering with GC colleagues across different industries who are facing similar challenges is knowledge-sharing. “Learning from my peers can be incredibly powerful as you not only see that it can be done but how it’s been done,” Harris states.

ESG will only increase in importance in the coming years, of course. And as Harris points out, there will be many opportunities for GCs to help to increase the effectiveness of their companies’ ESG strategies. Indeed, momentum begets momentum.

In a recent interview, Tasha Grinnell, head legal and sustainability officer at The Container Store, underscored the importance of these issues for the company’s own ESG journey. Grinnell, who joined the company in early 2022 with a multitude of in-house legal experience across a number of industries, took responsibility for the packaging retailer’s ESG strategy later than year.

Three key drivers contributed to the decision to place ESG under The Container Store’s corporate legal function, Grinnell says. The legal team already was providing regulatory compliance for financial data, advising on product liability and safety, and had become central to ensuring the company’s ESG compliance to internal standards for new stores and the stores’ suppliers.

Key governance moves

The ESG program at The Container Store is still in its early days, Grinnell explains, with the strategy officially starting in 2021 with its initial ESG commitments reported in its first sustainability report in 2022. During that year, the company conducted a materiality assessment, which identified and prioritized areas of risk and opportunities across ESG topics important to the business.

One of Grinnell’s top priorities when assuming responsibility for the enterprise ESG strategy was to ensure the governance of the program was set up for success. At The Container Store, the ESG steering committee is the approving body of the company’s strategy set-up and execution. All of the voices of internal and external stakeholders — employees, investors, suppliers, and others — are represented to ensure full stakeholder feedback is considered on every initiative. “Our ESG leadership council is integral in The Container Store’s governance structure and is responsible for strategy execution,” Grinnell says. “Our leadership council consists of subject matter stakeholders from all areas of the business, including our leadership team, our associates, our suppliers, key business partnerships, our investors, customers, nongovernmental organizations, and our SG [social and governance] evaluators.”

The next priority areas for Grinnell that are currently underway, is memorializing comprehensive policies and programs that outline the environmental and social responsibilities for the company. For example, one of the recently updated key policies and procedures involves calculations of the baseline greenhouse gas (GHG) emissions for Scope 1 and 2 of the company’s stores, utilizing the Greenhouse Gas Protocol to calculate emissions. The policy execution also includes the company’s efforts to offset power usage of its stores, as well as its distribution and support centers, which derive 100% renewable energy from wind.

Coping with big challenges

No matter where companies are in their ESG journey, managing big challenges with a small team is almost universal. The Container Store’s ESG team is another example of the corporate adage that “1 equals 3” — the idea that one great employee is three-times as productive as a single good employee. Grinnell made it clear that the positive trajectory would not be possible without the everyday contributions of Ivet Taneva, the company’s Senior Director of ESG, and Ann Cunningham, a Senior Paralegal working as the internal ESG Project Manager. Both report directly to Grinnell.

Data volume and lack of automation slow progress — One of the biggest challenges for Grinnell and her 1½-person ESG team is the volume of data and lack of automation. Grinnell and Taneva now are in search of an enterprise solution that can capture all of the company’s ESG metrics. “Currently, we must work with several tools to streamline our key performance indicators — our aspiration is to move to digital when it comes to ESG,” she adds.

The team is using automation for efficiency in visualization and modeling around emissions and waste reduction reporting. To make sure the tool continues to meet the needs of the ESG strategy at The Container Store, a member of Grinnell’s team sits on the customer board of the company’s software partner to ensure the product fits its needs and external standards.

Employee education key to earn buy-in — Another challenge that The Container Store is prioritizing is employee education from the top of the organization down to local management of stores. “One of biggest hurdles is making sure those who have responsibility to report ESG information at the local level understand the purpose and value of the information that we are requesting, so that we’re receiving material information back from the business units in a timely manner,” Grinnell explains.

A key mechanism to strengthen the commitment and messaging to employees is the chief merchandising officer’s participation on the sustainability committee. The corporate merchandising division oversees a separate sustainability committee that the ESG team reinstated. The sustainability committee ensures that a good portion of The Container Store’s stock falls into the sustainable category. Having the chief merchandising officer on this committee is a critical tie-in to the corporate ESG strategy and helps ensure that products are sustainably sourced and that employees know about and understand the value and importance of sustainability.

Looking ahead, The Container Store is committed to meeting and exceeding benchmarks and standards that have been set by U.S. regulators, once they are finalized. Grinnell is confident in the team’s ability to execute, largely because of the intentional and strategic nature in which the ESG strategy and function was founded.

“The Container Store recognizes the importance of our impact on people, the planet, and the communities in which we operate, and we believe that it’s imperative to the success of our business to continue learning, proving, and advancing our vision in that area,” she says. “One way we’ve done that is by placing the ESG strategy into the legal department so that we can really implement and execute a strong, legally sound, and thoughtful strategy.”

At a recent roundtable, leaders from across a variety of sectors, mostly legal and healthcare, came together to discuss their insights on well-being at work, including the importance of employee health and well-being to the organization’s business strategy. One major component of this discussion was the question of what contributes to employee well-being? Many roundtable participants felt the issue largely revolves around employees feeling supported, understanding their position within the organization, and being trusted to work flexibility while taking initiative to balance their own work and life.

Addressing barriers to well-being as a priority

The group also sought to identify the barriers that workplace culture faces to cementing well-being into organizations’ strategic business priorities; and most importantly, how to move the needle in the direction of prioritizing mental health while also meeting business demands.

Many participants agreed that the barriers that keep well-being from being a top organizational priority are somewhat of a moving target. While some may look to managers as a starting point, those in managerial roles traditionally haven’t had to offer the level of mental health support that has become expected of them during the pandemic and since. Managers are rarely hired or promoted based on any soft skills, like empathy for example. In fact, many took on their managerial role to better grow their career and raise their earning power, not necessarily to nurture and develop employees. A cynical view, perhaps, but it’s only recently that a manager’s responsibility has been turned on its head to include an emphasis on employees’ well-being and positive mental state. Even for those managers who are deeply invested in the well-being of their team members, it’s still a heavy burden to carry.

Yet there are some potential steps managers can take. For example, the re-branding of “soft skills” to “human-centered power skills” has been shown to have the power to create a positive multiplier effect around employee satisfaction and build cultures of well-being, belonging, and inclusion.

Many participants agreed that the barriers that keep well-being from being a top organizational priority are somewhat of a moving target.

During the roundtable, participants noted that managers can’t be entirely blamed for low employee well-being, as they’re typically playing the role of the intermediary, passing along the pressure to hit certain key financial metrics from the leaders above them. And while there are leaders who buy into employee well-being as a sound business strategy, that’s not the case for all managers, especially in the legal industry, which is notoriously slow to change. Even for those managers that do fully buy-in, they don’t always know how best to balance business needs with ensuring that employees have strong mental health.

Industry disruptions & diversity needs

So, how have industry leaders successfully convinced the top bosses to embrace, or at least accept, well-being as a critical component of an organization’s talent management? Getting manager and individual contributor buy-in is critical — and having a critical mass showing support for well-being initiatives can get leadership on board, participants said. Another strategy is connecting well-being to financial metrics — showing the high cost that low well-being has on an organization’s productivity and attrition. Indeed, further research, echoed by our roundtable participants, shows how office locations that offer employees strong well-being initiatives actually have reduced medical costs.

To be sure, metrics are key to understanding where an organization sits in the well-being continuum; however, collecting such data is not the only piece of the puzzle, participants explained. A number of organizations have Organizational Health Index (OHI) surveys that can include well-being questions, but how companies approach these surveys will dictate their effectiveness. Those leaders that don’t act on the feedback from the surveys will find that in the future, employees will be less likely to take part if they feel that the survey is waste of their time, and nothing comes from the feedback they provide. Closing that feedback loop, then, is key to a successful well-being measurement program.

The group also broached the subject of disruption in the way we work and how that might affect well-being. Any discussion about the future of work is incomplete without the mention of ChatGPT and generative artificial intelligence (AI) — innovative technologies that certainly have the potential to disrupt a variety of industries, including the legal profession, in ways that we haven’t seen in quite some time. Participants pointed out that AI will likely take over the more routine and less complex tasks that lawyers currently do, leaving them with the more complex, challenging, and therefore rewarding work. While this shift has the potential be a boon to well-being, it all depends on how leadership engages with these technologies and how expectations may shift as a result.

Metrics are key to understanding where an organization sits in the well-being continuum; however, collecting such data is not the only piece of the puzzle.

Given the increased pressure on managers and leaders, many may be unsure of how to judge the potential for AI to transform work, especially legal work, several participants said. While it could lead to lawyers having a stronger sense of purpose at work because they can focus on more complex work that they enjoy, it won’t necessarily lead to a shift in the work/life balance if increased productivity brings the expectation that lawyers will produce exponentially more.

While it is relatively straightforward to identify the components that can lead to healthy employee well-being, how each individual employee can get there for is much more complex. People have diverse needs and challenges, leading many roundtable participants to suggest that establishing a work culture that promotes positive employee well-being is no one size fits all proposition.

In fact, one participant joked at the start of the discussion that he chose to participate in order to find the silver bullet to well-being at work — not surprisingly, the observation was met with laughter ringing throughout the room. Yet in the end, the group acknowledged that the complexity of the topic doesn’t mean it can be ignored — barriers to promoting healthy employee well-being at work should be addressed because the benefits to an organization’s business strategy are too important going forward.

Interested in learning more about well-being and our wider insights? Gain access to the evidence you need to make the best strategic decisions, here.

What is new?

The CSRD builds upon previous regulations such as the E.U.’s Non-financial Reporting Directive (NFRD) and increases the depth and breadth of organizations that are impacted. Some of what is in the CSRD includes:

• • • New regulations mandate reporting from companies of all sizes — According to the official CSRD guidelines, approximately 50,000 large, medium, and small-sized companies in the E.U. will need to apply the CSRD rules starting between 2024 and 2029. Indeed, large companies or large groups with consolidate subsidiaries must meet two of these three criteria — €40 million in net turnover, €20 million in assets, or 250 or more employees. International companies with subsidiaries located in the E.U. will need to abide by the CSRD if they conduct significant operations there.
    • Impact on society and climate is part of CSRD — A double materiality approach, which requires businesses to disclose climate change related risks as well as the impacts that such risks have on society and climate, will be required by the CSRD, which signals a new approach to unaccustomed U.S. and international companies.
    • The supply chain information mandate is here — The CSRD requires Scope 3 reporting, which includes the collection of sustainability information across a company’s value chain or supply chain. Many U.S. companies have only been reporting their Scope 1 and 2 emissions, if any. Target dates for reporting requirements vary, and reporting exemptions exist as well.
    • Third-party verification for assurance is required — Verification by an independent assurance service provider (g., a third-party audit) will assess the processes that a company has in place for gathering data. This, along with the need to digitalize data, will ultimately require companies to invest in technology to ensure reliable data-gathering processes and a reliable data trail. This is consistent for both the E.U. and non-E.U. parent scoping. At first, limited assurance is sufficient, but the European Commission intends to move to reasonable assurance in the future.

Digitization requirements & costs

Reporting in compliance with the CSRD will incorporate the increasing demand for digitization. Companies will be required to prepare their reporting in XHTML format in accordance with the European Single Electronic Format Regulation. Companies are also required to tag sustainability information within the report according to a digital categorization system, which should be developed with the European Sustainability Reporting Standards (ESRS).

Digitalization in sustainability reporting makes information transfer more efficient and easier to locate. It also promotes transparency and accountability and carries potential significant cost savings for companies. Digitization also allows greater accessibility of data for investors and key stakeholders.

The immediate downside to digitization is the cost factor. While the CSRD requirements will likely lead to higher costs in the short term, the E.C. notes that companies will likely face an increase in costs anyway due to the growing demand for sustainability information. At the same time, the short-term costs are likely to be negated with the goal to incorporate and harmonize reporting requirements in the medium- to long-term timeframe.

Another challenge that remains is the multiple overlapping frameworks and standards already in place, although efforts to align them are evolving. The ESRS need to be consistent with the ambition of the European Green Deal as well as with the E.U.’s current legal frameworks, the Sustainable Finance Disclosure Regulation (SFDR) and the E.U. Taxonomy.

Through the European Financial Reporting Advisory Group, the CSRD has incorporated key elements of the ESRS, which draws upon several existing frameworks including the Global Reporting Initiative (GRI) and the International Sustainability Standards Board-driven (ISSB) Taskforce for Climate related Financial Disclosures (TCFD) framework. In fact, the E.C. supports TCFD to develop the global baseline, and collaboration between GRI and ISSB continues to evolve.

Recommended actions to take now

With the E.U. and CSRD leading the way with the most stringent reporting regulations thus far, international companies need to prepare themselves for the future of reporting in their jurisdictions. For industry professionals facing the challenge of the sustainability regulatory environment, the following actions are recommended:

• • • Get familiar with CSRD regulations — Expanding the rigor of ESG reporting with the CSRD is a key first step. Studying the CSRD and implementing similar reporting standards, such as Scope 3 and double materiality, can give companies a head-start in their reporting journey. In fact, stakeholders and investors are likely to look favorably on the increased transparency and preparedness of the company for upcoming regulation, such as the Security Exchange Commission’s rules on Scope 3.
    • Benchmark with peers — Understanding how peer companies are engaging with Scope 3 emissions and how they approach sustainability reporting are a necessary action to stay up to date on where your organization stands against competitors. U.S. companies unaffected can use the CSRD regulation to analyze how their E.U. competitors are reporting to give them valuable insight for when the requirements from the SEC are updated.

Over the next five years, new regulations around ESG will continue to increase, while deadlines come due for implementation of existing regulations. At the same time, companies in the short term will experience headaches around increased costs and complexity around global frameworks and standards.

What is clear, however, is that ESG reporting requirements are more stringent than ever, and companies need to prepare themselves to meet these new requirements.

One consistently reinforced message from the group involves the interconnectedness of the ever-increasing pain our collective human decisions are putting on the planet and the continued degradation of nature’s ecosystems, which in turn is worsening the negative multiplier effects on the most vulnerable communities around the world. Indeed, the climate crisis is leading to irrevocable harm to the air we breathe, our food supply, and our habitable land, all of which instigates human migration patterns, geopolitical conflicts, and increased spending on reactions to the crises instead of proactive prevention.

The connection between these converging crises and the rise of investor institutional interest in ESG — including around climate transition risk — is clear. “Firms with trillions under management have become too big to let the planet fail,” stated a 2019 Harvard Business Review article. Yet, at the same time, the standing power of the hope and commitment of legal and justice strategists, leaders, and futurists is a fundamental element that’s needed to support the ambitions for positive actions now and in the future.

The legal community plays a pivotal role in the outcome and in transformational governance, a concept defined by the United National Global Compact. For “business to be more accountable, ethical, inclusive, and transparent to drive responsible business conduct, improve ESG performance, and strengthen public institutions, laws, and systems. This means fostering a culture of integrity, fairness, and inclusion beyond legal formality — asking not just what is legal, but what is right,” the Compact states. Indeed, it underpins the UN Sustainable Development Goal 16: Peace, Justice, and Strong Institutions.

Pushing for the need for transformational governance

Law firms’ commitments to their own internal ESG strategies and their own guidance and advice to companies are critical ingredients for transformational governance. For example, Timothy Wilkins, global partner for client sustainability at Freshfields, describes how his firm looks at the role of its lawyers in its holistic ESG strategy. Actions the firm urges lawyers to consider include:

• • • Working responsibly within the firm’s internal operations — seeking net zero and environmental targets, diversity, equity & inclusion (DEI) objectives, and sustainable procurement practices
    • Collaborating for impact — joining leading climate change and DEI initiatives and collaborations with governments on responsible business policy
    • Offering strategic advice and thought leadership — advancing ESG agendas and supporting the transition of business and finance to these goals

In providing strategic guidance to clients, law firms have a central role to play in legal foresight through issue-spotting and horizon-scanning across the four common areas of strategy on which law firms often advise on ESG-related matters: finance, regulation, disputes, and transactions (See Figure 1). In addition, firms’ guidance cuts across a number of corporate clients ESG concerns, opportunities. and issues.

Moreover, investors have been up front about asking for additional information on ESG while receiving many shareholder proposals around many ESG issues, such as those involving executive compensation and climate risk, says Wilkins. In addition, emerging risks continue to show up in the form of strategic litigation from investors and non-governmental organizations (NGOs) that are concerned about pushing a particular issue.

Law firms positioned to play a key role

In fact, the collective experience of providing strategic legal guidance across government, private sector clients, and other public sector institutions covering multiple matters and practice areas — including antitrust, labor & employment, litigation, tax, M&A due diligence, sustainable finance, corporate governance, shareholder activism, and regulatory and compliance disclosure and reporting — leaves firms positioned well to convene multilateral stakeholders to influence transformational governance.

For example, Freshfields was a founding partner among financial institutions, academic institutions, and consumer companies to launch the New York Circular City Initiative in order to drive positive impact and help create an economic system based on the re-use and re-generation of materials or products, especially as a means of continuing production in a sustainable or environmentally friendly way, often referred to as a circular economy. Indeed, 78% of the world’s energy is consumed in cities, particularly in the Global South; and those firm that can strengthened relationships with those clients can make a more positive impact.

The planet, the human race, food systems, and habitats are on the verge of irreversible harm. Whether or not we, as humans, and the instigators of most of the harm meet the moment is yet to be seen. In the meantime, the legal community and especially law firms around the world have the ability and opportunity to lead from a position of strength, now more so than ever in the last 50 years.

In these situations, it is easy to be intimidated and feel pressure to assimilate our point of view to the larger more homogeneous group. If we do, however, we are missing a real opportunity. Instead, we should embrace that opportunity and share our unique perspective with the larger group.

The impact of a diverse team

Consider the purpose of being on a team. Some leaders are drawn to pulling together individuals that think, look, and act like other successful individuals. Their intention is to repeat prior success by selecting team members with similar attributes, or foster harmony by having a team of people who may all act alike. However, the purpose of a team is to bring together people with different strengths, so the team is stronger by functioning together rather than by operating as individuals. If everyone on the team is a good strategist but no one is skilled at execution, the team will struggle to deliver what they promised.

As the discussion of diversity, equity, and inclusion (DE&I) continues to mature, there is a greater realization around the impact that diversity has on teams and organizations. For example, McKinsey & Company has been studying the impact on diversity within organizations over several years. Its 2019 findings showed that companies that incorporated gender diversity on their executive teams had a 25% greater chance of above-average profits — a 10-percentage-point increase from its 2014 findings. And when executive teams included ethnic diversity, they had a 36% greater chance of outperforming other organizations.

These results are achieved when organizations make an effort to increase their diversity, and when those being included speak up and the leaders listen. It takes time for diversity to spread through companies, and the data shows it is happening at a slow rate. This means when we are given opportunities in which we are the only team member that is a woman, a person of color, younger, or who identifies as LBGTQIA+, we have the obligation to bring our strengths and insights into the conversation.

The confidence to speak up

February was Black History and Women’s History months, and those months we were reminded of stories of those who forged new paths. Whether they were the first black or woman that broke through barriers, their background and values generated ideas in them that no one else had. They didn’t give up on their convictions because no one else could see it or because they looked different. They worked to get a seat at the table, or made their own seat, so they could make a difference.

A recent example is Phyllis Newhouse, founder and CEO of Xtreme Solutions. In 2002, she became the first black woman CEO of a cybersecurity company, and about seven years later she was the first black woman CEO of NYSE-listed SPAC [Special Purpose Acquisition Company]. She describes her career path as being the “Only” black woman in the room, and she learned how to “play the game” by observing and engaging mentors. Newhouse has shared her experiences, saying “…if you understand the game, even as an Only, you get to play it — but it requires courage, strategy, confidence, and understanding.”

Part of building the individual confidence necessarily comes from awareness of your strengths, what makes you distinct, and how you can add value. For those who are still working on identifying these attributes, the Marcus Buckingham Company developed an assessment called StandOut Strengths. In an interview, Buckingham described StandOut as “…a way for us to see one another — and not through the lens of gender, race, intellectual accomplishment, or level in the company. Rather, we can see each other through one’s positive natural pattern, which you can call their strengths.”

As we all work together to create greater diversity and inclusion and equity, in our organizations, it’s important to be good shepherds of when we are the Only, as Newhouse described.

Realize the team will perform better when diverse backgrounds, perspectives, and values are shared during discussion and planning, and this in turn will make the organization richer — figuratively and literally — when diverse voices are heard.

To give a glimpse into how some banks are coping with the challenges, we spoke with Bindu Dhaliwal, vice president of ESG at the Canadian Imperial Bank of Commerce (CIBC). Dhaliwal started at the bank in 2021, leading the Enterprise ESG team that was responsible for the delivery of the bank’s ESG strategy.

Dhaliwal reports to the bank’s Chief Legal Officer, which is one of the three typical corporate leaders to which the head of ESG at most companies reports. In running the ESG strategy for the bank, she leads a large strategic initiative across four broad buckets of activity — strategy development & delivery, governance, disclosure, and policies.

Building & executing strategy simultaneously

Upon joining CIBC, Dhaliwal and her team concurrently had to take stock of the ongoing activities around ESG within the bank while further building a cohesive strategy and determining what opportunities to pursue based on rapidly evolving stakeholder demands. To be both efficient and successful, the team had to prioritize efforts in key areas, something that it continues to do so today.

Building on the materiality assessment — An essential step in building and executing an ESG strategy is a materiality assessment to identify, prioritize, and validate ESG topics of importance to the bank and its stakeholders. CIBC had recently completed a materiality assessment just before Dhaliwal joined in 2021, and she and her team are continuing the process of stakeholder engagement. For example:

• • • Dhaliwal regularly interacts with investors and institutional groups as part of her role (because ESG is one of the hottest topics for shareholder proposals), to see how material issues from their perspective might have evolved. “We engage with investors directly on a regular basis to hear about their priorities and answer any questions they have about our approach,” she says.
    • She also holds ongoing, proactive engagement with diverse stakeholder groups to continue to expand the bank’s ESG strategy in order to reflect the priorities of shareholders, clients, team members, suppliers, government, regulators, and communities.

Collaboration with internal teams — To build the strategy while executing at the same time, the Enterprise ESG team collaborates across multiple internal corporate functions, such as:

• • • CIBC’s ESG team maintains good working relationships with the bank’s internal risk team, which is a key partner in assessing emerging risks and regulatory changes.
    • CIBC’s Senior Executive ESG Council, chaired by the Executive Vice-President and Chief Legal Officer, comprises Executive and Senior Vice Presidents from across the bank to champion the enterprise-wide ESG strategy.

Evaluation of ESG frameworks — Another aspect of executing an ESG strategy involves staying abreast of external ESG frameworks and how they are changing. The biggest driver of this challenge, according to Dhaliwal, is the constant evolution in standards, which include those outlined in the Global Reporting Initiative, the European Union’s Corporate Sustainability Reporting Directive, the International Sustainability Standards Board (ISSB), and the Sustainability Accounting Standards Board, as well as the ongoing convergence and alignment of standards among some of these organizations. “It’s an interesting time with the ISSB standards coming into place and maintain[ing] the pulse of what U.S. and Canadian regulators are thinking,” she adds.

Coping with big challenges

Creating and executing an ESG strategy is complex and entails big, multifaceted challenges around ESG. As the regulatory requirements evolve, there is an increasing need to train employees broadly on ESG, such as what net zero means. Currently, the ESG team at CIBC is conducting a broad education initiative across the bank on ESG concepts and what ESG means to the bank.

Data governance is another focus area, of course. Dhaliwal details the importance of specifying the holistic processes, the ESG process owners, data owners, and their specific roles and responsibilities through the data journey across internal functions. More specifically, this entails:

• • • documenting each of the bank’s ESG commitments;
    • determining the processes needed to achieve those commitments;
    • identifying what data is needed, as well as the owners of the data and the IT data systems involved; and
    • outlining the roles of risk, compliance, and finance teams in disclosure reviews.

Unfortunately, these challenges are unlikely to dissipate any time soon, and the cost of compliance with ESG regulation is likely to grow for companies. Not surprisingly, it is easy to see from Dhaliwal’s description of the complexity in creating and executing an ESG strategy how the investment in both time, effort, and technology is becoming a real necessity.