Managing ESG risks is becoming a hornet’s nest for legal departments, a sometimes overwhelming task that is forcing general counsel to decide where to devote their manpower.
As the range of environmental, social and governance risks expand, 99% of the 1,000 general counsel and chief legal officers surveyed in a new study by EY Law and Harvard University expect a sharp increase in the volume of work.
Legal chiefs are fretting on many fronts, fearing ESG issues will cause a loss of customers due to reputational damage, lawsuits by third parties and an increase in regulatory enforcement actions.
“This landscape is complicated by often ambiguous guidance from regulators, stakeholder pressure and competing goals within the business itself,” the study notes.
Paradoxically, all the new responsibilities are likely to increase the importance of company legal chiefs, as CEOs and other business unit leaders turn to them for guidance on the range of ESG issues.
“Clients trust their GCs to help them work through their options and make decisions that consider both short- and long-term impacts, as well as internal and external stakeholders,” Susan Hackett, CEO of Legal Executive Leadership, said in an interview with Law.com.
The survey included a broad range of startling findings, including that only 15% of general counsel believe their business leaders appreciate the extent of ESG risks.
In the study, Damon Hart, chief legal officer of Liberty Mutual, says, “The role of the law department in ESG issues is evolving at an incredibly rapid pace. We are constantly re-evaluating how involved we need to be and how we partner with different parts of the business.
Ninety-six percent of the general counsel surveyed say that their legal departments require additional expertise to manage ESG issues.
While some law departments are preparing to play a leading role across ESG concerns, others say they will partner with other functions of the business, either as an equal or as an ad hoc adviser.
The risks are so extensive that legal departments will need to zero in on the highest risks. At the top of the list, according to the survey, is losing customers because of reputational damage.
“We expect to see a shift here, with law departments putting greater focus on managing reputational risks going forward, creating a better balance with regulatory and investment challenges,” Boris Scholtka, Ernst & Young Law GmbH Energy Law Leader, notes in the report.
According to the report, in-house lawyers’ deep knowledge of the law and regulations, including the nuances of how specific regulators operate, gives them a unique ability to help drive ESG decision-making, particularly when clear regulatory guidance is lacking.
“There won’t be any rulebook with clear and easy ways for companies to execute a robust, successful ESG strategy or respond to emerging ESG pitfalls, since these topics defy clear-cut definitions or solutions,” Hackett said.