On the Headlines: "Green is the New Gold: How ESG Reshapes UK Commercial Law Firm Strategies
Environmental, Social, and Governance (ESG) is a framework used to evaluate the sustainability and ethical impact of companies or investments. ESG includes examining a company's practices in areas such as their impact on the environment, treatment of employees and community involvement, and corporate governance. ESG initiatives have become increasingly important in the legal profession.
Law firms and corporate legal departments are being challenged by the unprecedented growth of ESG initiatives. According to the 2022 Wolters Kluwer Future Ready Lawyer Survey, 50% of law firms across Europe and the US have created an ESG practice area in the past three years, while 27% of firms have had an ESG practice for more than three years, and 18% are planning to create an ESG practice within the next three years.
ESG as a Macro-Economic Trend and its Impact on Law Firms
ESG is a macroeconomic trend that is transforming the business landscape. ESG assets are on track to exceed $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management, according to Bloomberg Intelligence’s (BI) latest ESG 2021 Midyear Outlook report, presenting a massive opportunity for law firms.
Law firms are experiencing significant growth in ESG demand from clients. 45% of firms report demand for ESG guidance from corporate clients has increased over the past year, and 59% expect client demand for ESG guidance will increase over the next three years according to the same survey. To meet this demand, Law firms are creating ESG practice areas, investing in thought leadership, and training and educating the next generation of ESG lawyers.
This is because Companies are under pressure from investors and stakeholders to demonstrate their commitment to ESG initiatives. Law firms can help companies navigate the complex regulatory landscape and develop ESG policies and procedures.
The UK government has introduced new regulations to address ESG factors. For example, the UK government has introduced mandatory climate-related financial disclosures for publicly traded companies, banks, and insurers. The UK government has also introduced new regulations to address social and governance factors. Such as those to address modern slavery and human trafficking.
Some of the main ESG regulations in the UK include the UK Corporate Governance Code 2018, the Companies Act 2006, the Climate Change Act 2008, the UK Stewardship Code 2020, and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008
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Green Bonds
Green bonds have become an increasingly important area of practice for law firms as companies seek to raise capital for ESG initiatives. As the demand for green bonds continues to grow with average growth of about 90% per year from 2016 to 2021, law firms are expanding their practices to include green bonds and even creating dedicated teams to focus on this area.
Firstly, a corporate bond refers to a form of financing where a company borrows money from investors. It entails the issuance of a debt instrument that grants investors the right to receive regular interest payments and the return of their principal investment upon maturity.
Similarly, Green bonds are a type of debt instrument in which an issuer has identified certain environmental, social, or governance criteria for the use of proceeds. Green bonds have become an increasingly important area of practice for law firms as companies seek to raise capital for ESG initiatives. Green bonds are fixed-income securities that are used to fund environmentally friendly projects
Law firms have expanded their practices to include green bonds, and some firms have even created dedicated teams to focus on this area. Firms can help clients navigate the complex regulatory landscape and develop green bond offerings. For example, Bryan Cave Leighton Paisner (BCLP)In 2017 advised on the first green bond by a listed company, which was issued by CDL to refinance an existing green loan on an asset that had undergone various energy and water improvements, and launched a green bond practice in 2021 to help clients navigate the complex regulatory landscape and develop green bond offerings. Clifford Chance has also expanded its climate change practice to include green bonds, advising clients on the legal and regulatory aspects of green bond offerings. As the demand for green bonds continues to grow, law firms will play an essential role in helping companies raise capital for ESG initiatives.
Which practice areas at commercial law firms are likely to be involved?
Commercial law firms in the UK have started advising on green bonds and made changes to their practice areas due to investment banks and lenders adapting to ESG initiatives to provide green bonds. Here are some ways in which law firms are adapting:
- Banking and Finance: Law firms can advise clients on ESG-related financing structures, such as green bonds and sustainability-linked loans. Sustainability-linked loans are financial arrangements where interest rates are tied to the borrower's sustainability performance goals, encouraging environmental and social responsibility.
Advising on Green Bonds: Law firms are advising clients on the legal aspects of green bonds, including the structuring, issuance, and regulation of these bonds. They are also advising on the use of proceeds from green bonds and ensuring compliance with ESG requirements.
Green Funds: Law firms are advising on the development of green funds, which are portfolios of equities and/or bonds that focus on ESG issues. They are providing legal advice on the structuring, regulation, and management of these funds.
- Corporate and M&A: Law firms can advise clients on ESG-related due diligence, risk assessments, and compliance issues in the context of mergers, acquisitions, and other corporate transactions.
Tailored ESG Programs: Law firms are advising clients on the development of tailored ESG programs and policies for corporates and M&A transactions. This involves providing legal advice on ESG risks and opportunities, as well as ensuring compliance with ESG regulations.
- Capital Markets: Law firms can advise clients on ESG-related disclosure requirements and best practices for public offerings and other securities offerings.
- Litigation and Dispute Resolution: Law firms can advise clients on potential ESG-related disputes, such as claims related to environmental damage or human rights violations.
- Employment: Law firms can advise clients on ESG-related employment issues, such as diversity and inclusion policies and employee engagement on these initiatives.
- ESG and Sustainability Practice Areas: Law firms are creating ESG and sustainability practice areas to meet the growing demand for legal advice on these issues. These practice areas provide advice on a range of ESG issues, including green bonds, sustainable finance, and ESG reporting.
Law firms that are spearheading the 'green change' and ESG agendas are being recognized for their work and have earned Band 1 rankings in both the UK and Global-wide rankings by Chambers in ESG Risk. This includes firms that have made firmwide commitments and initiatives to promote sustainability and ESG issues.
Clifford Chance has set net zero goals and specific climate objectives under its Responsible Business Report 2021 and hired the first-ever global ‘head of wellbeing’ tasked with creating and leading thier first global wellbeing strategy. The strategy will cover points of interaction at every stage between employees and the firm, including recruitment, training and promotions to meet their internal ESG targets.
While on the client side of ESG targets, Latham & Watkins recently advised Microsoft on potential investments from its recently created Climate Innovation Fund, which will invest $1 billion over the next four years in new technologies and innovative sustainability solutions.
SWOT Analysis for ESG at Law Firms:
Strengths:
- ESG presents a massive opportunity for law firms, with global assets predicted to be worth over $50 trillion by 2025.
- Law firms can help companies navigate the complex regulatory landscape and develop ESG policies and procedures.
- Law firms are creating ESG practice areas, investing in thought leadership, and training and educating the next generation of ESG lawyers.
- Incorporating ESG goals into their operations can help law firms attract and retain talent, as well as improve their reputation and brand image.
Weaknesses:
- With this rapidly evolving market law firms must develop their own ESG policies and procedures and ensure they meet these ESG objectives. Law firms that do not have a strong ESG strategy may be at risk of reputational damage if they are seen as not taking ESG issues seriously. This could harm their relationships with clients and make it more difficult to attract new business
- As ESG becomes more important to clients, law firms that do not have a strong ESG strategy may lose business to firms that do. This could lead to increased competition among law firms
- ESG considerations can raise compliance issues for law firms. For example, if a law firm advises a client on an ESG-related matter, it may need to ensure that the client’s actions are in compliance with relevant regulations
Opportunities:
- The UK government has introduced new regulations to address ESG factors, such as mandatory climate-related financial disclosures for publicly traded companies, banks, and insurers, and regulations to address modern slavery and human trafficking.
- There may be opportunities for law firms to collaborate with other stakeholders, such as investors and regulators, to develop ESG standards and best practices. This collaboration includes providing legal guidance on ESG disclosure requirements, shaping impact investment frameworks, and actively participating in industry working groups.
Threats:
- According to the 2022 Wolters Kluwer Future Ready Lawyer Survey, significant growth in ESG demand is outpacing legal professionals’ preparedness to respond. Only 39% of lawyers say their department is very prepared to meet their company’s ESG responsibilities, and only 20% of law firms believe they are very prepared to meet their clients’ ESG needs There may be a risk of "greenwashing," where companies make false or exaggerated claims about their ESG practices, which can lead to reputational damage for both the company and the law firm advising them in providing guidance on sustainability matters.
- To mitigate this risk, robust due diligence processes, transparent reporting standards, and independent verification mechanisms are crucial to ensure the authenticity and credibility of a company's sustainability claims and to protect the reputation of both the borrower and their advisors.
Conclusion
Overall, commercial law firms in the UK are adapting to the growing demand for legal advice on ESG issues, including green bonds. They are creating ESG and sustainability practice areas, advising on the development of green funds, and providing legal advice on the structuring, issuance, and regulation of green bonds.
The expansion of ESG as a macroeconomic factor and changing regulations present both opportunities and challenges for commercial law firms, and several practice areas are likely to be involved in providing legal advice and guidance on ESG-related issues.
#Markets #Macroeconomic Factors #Environment - ESG for the future #ESG impact on companies
By Rishit Singh, London Headlines