Podcast transcript : How the law department can unlock your ESG strategy

Susannah Streeter

Hello and welcome to the EY Tax and Law in Focus podcast. I'm your host Susannah Streeter. In this episode, we're focusing on how companies can further their sustainability efforts and how the law department is often key to unlocking solutions. Few challenges we're facing today will have the same long-lasting impact as the climate crisis, and consumers have clearly formed their opinions on what should be done. Research by EY shows that two-thirds of the public believe CEOs should lead on ESG change rather than governments. 42% of consumers say they'll stop buying from companies that act in a socially or environmentally inappropriate manner. And more than three-quarters of investors are conducting structured ESG evaluations of target companies. We've had multibillion-dollar promises from business leaders about environmental targets and progress on social and governance issues. Successive COP summits have made similar green commitments, not least pledging to invest up to $6 trillion annually in renewable energy until 2030. Delivering on these promises can't come a moment too soon, given that already the landscape is shifting fast. New laws are being brought in quickly, which necessitate regulatory compliance, and which often go way beyond current voluntary commitments; anticipating and addressing rapidly evolving regulatory requirements, social issues, and business practices while maintaining a laser-like focus on core business goals will require more and more input from General Counsel and their teams. According to EY research, it seems law departments may be more attuned to the potential for reputational damage and losing customers than companies' leadership teams are, but they often don't have the necessary talent and budget to handle increasing workloads linked to ESG. In this podcast, I'll be joined by eminent law leaders to discuss the full impact of these challenges across environmental and social issues and find out how law departments should adjust and deal with this increasingly complex environment. But before I introduce them, please remember conversations during this podcast should not be relied upon as accounting, legal, investment, or other professional advice. Listeners must, of course, consult their own advisors.

But now, please welcome law partner Kasia Klaczynska Lewis, who's an international thought leader on the EU Green Deal, and Kasia also manages cross-border projects related to decarbonization and sustainability. Kasia, welcome to the podcast. Where are you today?

Kasia Klaczynska Lewis

A very warm welcome from Warsaw today. I split my time between Warsaw and California in the US, but today I'm in Warsaw.

Streeter

Lovely to have you on the podcast Kasia. Also, please welcome to the podcast Paula Hogéus, who is a Nordics law leader and who leads EY's global labor and employment law team. She advises on complex international labor and employment matters. Paula, where are you?

Paula Hogéus

Hello, Susannah. Thanks for having me. And good to see you, Kasia. I am located in Stockholm.

Streeter 

Lovely. Well, it's great to have you on the podcast and get you two together. First of all, Kasia. Can you tell me what does the EY general counsel sustainability study show in terms of just who should take responsibility for ESG issues in companies? I mean, this is such a broad topic, isn't it?

Lewis 

Well, exactly. And I think this is exactly what our study is underpinning, that sustainability is such a broad topic, ranging from decarbonization through circular economy, through social issues, to corporate governance. So, this study really captures all of the different dimensions of sustainability, which also creates complexities when it comes to the corporate ownership of those topics. And in our study, we asked the representatives of the law departments about the ownership of topics like environmental sustainability, employee well-being and safety, diversity, equity and inclusion, ESG communication, ESG scoring, addressing concerns of ESG-conscious investors and supply chain ESG aspects. And then we asked them, among the corporate functions like law and HR and CEO or board, finance, marketing/PR and operations, who owns sustainability topics under these labels. There was also one other possible response which was collective responsibility. And as you may guess, actually, this was the most commonly selected option under each of these items. In one case, 80% of the respondents said that environmental sustainability is a collective responsibility. When it comes to specifically law departments, it was mentioned it did play a role in leading this topic within an organization, specifically addressing the ESG concerns of investors. This was pinpointed as one of the areas where law departments might play a particular role.

Streeter 

So, Paula, let me bring you in and focus on the social aspect because an increasing number of companies really do seem eager to go beyond minimum legal requirements and be seen as good citizens, especially when it comes to these social issues. What do you think is driving this focus?

Hogéus  

Thank you, Susannah. And yes, this is definitely something we're seeing more of. Partially, we can see that it's due to increased legal regulations, not only on an international level but also locally driven. But in addition to this comes a general spotlight on social issues. And there is an awareness in the world and particularly an awareness among consumers and employees. This is something that many corporations are now eager to mirror. Consumers will no longer be satisfied with just the minimum legal requirements. And so, one can say this is kind of pushing corporations into staying at the very forefront of the ESG agenda. So it becomes really important now to ensure that these aren't just empty words. Going forward, we will likely see more calls to action and also discussions on accountability.

Streeter 

It's interesting you talk there about empty words. Kasia, on that point, I understand you attended the COP 27 climate conference in Egypt. And one of the big turning points, it seemed, was the commitment to set up a financial support structure for countries worst affected by climate change by the time of COP 28 in the UAE. So, do you see really more concrete progress rather than these empty words?

Lewis 

Yes, it was really interesting. And I was really glad and honestly honored to be in Sharm when after years of indecision, countries struck this historic deal to establish a fund that will channel financing for loss and damage, particularly to nations that are most vulnerable to physical impacts of climate change, like really weird weather patterns, and wildfires, etc. So even though, as you're saying, Susannah, the details around setting that fund up were pushed back to COP 28. And COP 27 only brought about this declaration. So, as you were saying, just words, but I think it is a really important starting point because a declaration, a commitment, was very much needed so that the decision-makers could go ahead and now actually start working around the details of how this fund, which we can imagine will be extremely complex.

Streeter 

Absolutely. And thinking of COP 28. Looking ahead to it, what actions should law departments consider in advance of the event?

Lewis 

It's really interesting how the nature of COP itself evolved. So, it was perhaps maybe over the last two, three years where it's really changed its dynamics from this just intergovernmental discussion that no one was really, outside of this world, no one was really paying attention to. Now, this is a central focal event, climate event, of the year that attracts a lot of businesses, members of the civil society, and representatives of various indigenous people. And so, the corporate law departments should also be aware of the pledges that their CEOs, who frequent COPs nowadays, make these sessions because then it will be up to the law departments to actually operationalize these commitments through, for instance, enforcing sustainability clauses in the contracts they conclude with their suppliers, etc. So definitely, COP has business that we haven't seen before.

Streeter

And so, do you think, in a way, there's less of a worry about companies resting on their laurels in terms of the voluntary ESG commitments they've made but instead perhaps pledging commitments they actually might find hard to deliver in practice?

Lewis 

Well, time will show, obviously these commitments are very ambitious, a lot of them, and now we have to also remember that when we talk about commitments, we usually refer to climate aspirations and goals that are perhaps a little bit easier to track, than commitments around, let's say social issues that are maybe more qualitative than quantitative. And I think this is interesting how even COP reflects it because this year, I mean, last year, actually 2022 in Sharm during COP, we had 11 days, and even though COP is about climate agreement, only one of those days was actually decarbonization day. All of the other days were on other topics. Also, around social issues, like one day was dedicated to youth and future generations, there was a gender day, there was a civil society day. So that's a really interesting shift.

Streeter 

Well, that brings me to Paula once more. Interesting, as Kasia says that COP is now focusing on the S in ESG. What role will GCs play do you think in the evolution of diversity, equality, and inclusion? And just what are the risks of companies standing still?

Hogéus  

So first, I'm really interested to hear from Kasia that even in terms of COP 28, now the social aspects of ESG are being addressed and highlighted even. When I speak around the S in ESG, the social issues relating to equal treatment and harassment at the workplace, I sometimes dare to say that it wasn't actually until 2017, with the start of the #Metoo movement, that corporations started to take this more seriously. Perhaps I should not be that drastic. And it's not actually entirely fair of me to make such a sweeping statement, but we really couldn't see a general change in attitude from this point. And this continues to have a ripple effect to this day, I'd say. It became so obvious also to the public that things had gone completely wrong. And companies could see that there were risks with not being compliant with the laws. And not just temporary reputational risks, but actually long-term financial and economic risks. And since 2017, the conversation has obviously continued and it has evolved, we can see that this is not only something that is being talked about, but real action is taken. And I am convinced the GCs do play an important role here, with everything from ensuring that proper investigations are conducted and proper actions are taken in case of policy breaches, and obviously working closely with the talent team here. So, to summarize on this, Susannah, not keeping up with diversity, equality and inclusion can have real consequences. Corporations should not consider this as a soft law anymore. And I also think we will see even more demands from consumers and employees going forward. So, this is definitely something that GCs and companies as a whole need to contend with.

Streeter 

So clearly, there has been a change inside organizations. But what steps can GCs take to help address employee exploitation risk from corporate supply chains because, of course, that may require an awful lot more oversight and could be extremely complex?

Hogéus  

Yes, this is very important and definitely a hot topic right now. And we can see that so-called human rights due diligence are high on the agenda. Sometimes we also refer to this as corporate sustainability, due diligence. And there are increased calls for organizations to monitor their supply chains in order to identify risks for exploitation with regard to human rights, child labor, and unfair working conditions in general. Both the United Nations and the OECD have adopted guiding principles, some on business and human rights, as well as human rights due diligence. And just last year, actually, the EU adopted the proposal for a directive on this type of due diligence, and individual countries have also implemented local regulations to this very same effect. So clearly, there is a global interest in ESG topics and corporate social responsibility, particularly for multinational corporations operating in jurisdictions, which may be considered high risk from a human rights perspective. And then back to the question on what the GCs can do, and one of the most important first steps is to make sure that there is some sort of control system in place, we can call it the supply chain or ESG control system. But this is a continual process that is ongoing, and it is important than not to see this as a one-time check. So, a suggested starting point is beginning with contractor due diligence prior to even hiring a contractor by beginning with a clear vetting process. A company can get control of the contractor population and also very early in their process. And this very same control system should also be used for monitoring existing contractors and subcontractors, of course. So the exact controls that need to be carried out will vary from project to project. But we usually see that corporations will carry out controls of contractors and subcontractors on some kind of sample basis. So, you would then start with putting out the possible risk factors that we have identified beforehand.

Streeter 

And what role should GCs play in those situations where perhaps the public's expectations may exceed the organization's legal and regulatory obligations? For example, as you mentioned, with human rights due diligence.

Hogéus  

I believe this is something that goes back to corporations' core values. So by asking questions, like, you know, “which are our core values? And how do we want to contribute to our society” with this GCs will be able to reflect on how the organization's values can be implemented practically, in the business and throughout the value chains. And GCs would need to stay very well aligned with the full management team on these issues. And in one way, you know, you can say it goes hand in hand with first just mapping regulatory requirements, since GCs will need to know what's the minimum legal obligations in order to exceed them and going back to which position a corporation wants to take in order to be that good citizen. Of course, now one could keep an ear to the ground, so what are the demands placed on us as an organization by our clients and customers? But I would rather see productivity with the leadership team to drive the ESG in the market. So in my view, if you're proactive on this matter, this will then rightfully be awarded by the public later on.

Streeter 

Kasia, what's your take on this? Do you think that GCs seem more prepared to take a stand on environmental and social issues with boards?

Lewis 

Definitely. What stems out of our study is that there is a willingness to be more involved in sustainability discussions, and 74% of our respondents, representatives of the law departments, declared that they are planning to increase their collaboration with the business, actually extensively. They're also saying that sustainability issues are requiring their departments to increase collaboration with other functions and become more involved in daily decision-making. So there is this clear willingness on the side of the law departments. On the other hand, this is contrasted with a surprisingly low number when it comes to the response to the question of whether the leadership in GCs' view appreciates the risks around environmental issues, because only 13% of those GCs believe that there is an appreciation of such risks. So, GCs are reporting that changing public attitudes are reshaping their organization's risk profile, but their leadership does not fully appreciate the implications. So I think there was a lot of bridge that has to be covered, or gap that has to be covered in communication and translating how GCs, from their legal capacity, see and appreciate those risks to how business recognizes them.

Streeter 

Paula, let me bring you in. What's your take on this? It does seem clear that the legal department needs to have a bigger role in shaping progress. What do you think's holding that back in many companies?

Hogéus  

These are complex and multi-faceted issues with several stakeholders. Sometimes it can be difficult to determine for a certain issue who should take ownership. It is also clear that there is already a great and heavy workload as it is without adding the sustainability responsibility to it. And this is very clear from our General Counsel study. So one needs to be a little bit humble here, and organizations may actually need to revisit the size of their general counsel's office and also the general workload from the very beginning by the GCs.

Streeter 

Kasia, I want to focus on one particular legal regulation now because we know you've been outlining how legal regulations have become a real catalyst for sustainability goals. But would you say that companies fully understand the potential impact of the EU Green Deal in particular, or are they still playing a big game of catch-up?

Lewis 

They still are playing a game of catch-up. But this is quite understandable, in my opinion. So, the EU Green Deal is the largest EU legislative reform ever undertaken. And I think it's probably the largest legislative reform happening at once, you know, anywhere in the world or any time in history. So, definitely, there is a lot to navigate. And this whole sustainability, transformation or transition, it's very much policy driven, as sustainability is moving away from a more corporate social responsibility dimension into very concrete legislated obligations. So the EU Green Deal is basically an umbrella under which specific proposals are being put forward. Right now, if we were to print out, which we're obviously not doing being conscious of deforestation issues, if we were to print out all of the EU Green Deal policies together with impact assessments and accompanying documents, it will be something around 60,000 pages, and the EU is not done yet. So obviously, it's a massive amount of new regulation coming corporates' way. And even if they have full visibility of all of the individual proposals, then they have to interpret them and clarify any ambiguity. So really, a really big challenge from this sustainability, regulatory perspective that will, to a large extent, fall on the shoulders of the law departments.

Streeter 

So where do you start then, and I'm not talking about firing up the printers, as you said, it wouldn't be environmentally friendly. But how do you start and take a step on this process, because as you say, it is so complex?

Lewis 

I would say you would have to start at understanding the main factors of impact, because the thing is that the EU Green Deal will not impact every organization in the same way. So, starting to understand the major building blocks of the EU Green Deal that will apply to your organization. And again, I think in this GCs should have a leading role because they can actually translate the law and policy into a business dimension. And then once you have this mapped out, then start going into the details of the particular regulation and what exactly is required from your company, and then start building a plan to bring you to compliance and help you achieve preparedness. So just to give you an example, how this might work. So, for instance, one of the most notorious proposals under the EU Green Deal is around the carbon border adjustment mechanism, so called CBAM. So with that a lot of companies, a lot of our clients are really concerned about this new trade instrument that will actually impose carbon pricing on goods being imported into the EU. But really, when you look into this regulation, it will turn out that at the beginning, only a few sectors will be impacted, there'll be a phase-in of this instrument. So instead of wasting time and trying to, you know, understand all of the complexities of CBAM, first try to determine if it will be even applicable to your company, and in what timeframe. So really prioritize the things that are headed your way very quickly, otherwise, you will just get lost in the maze of this regulatory reform.

Streeter 

So that's really interesting your perspective there Kasia on the EU's new Carbon Border Adjustment Mechanism. But Paula, let me bring you in now and talk about legislation pertaining to rights and obligations for employers and employees. Do you think that companies are on track to comply with legislation in areas such as equal pay, discrimination, and health and safety? Or are they facing real challenges to overcome?

Hogéus  

Well, this will differ from organization to organization. So, there is not really a uniform approach, but I do experience that these issues are being taken way more seriously now compared to years back and particularly actually, in the light of the COVID 19 pandemic, where health and safety issues were really at the very forefront for the majority of corporations. And since then, a lot of good work has been done by many organizations both to map and to comply with the legal regulations within the health and safety area. But then also when it comes to equal pay and discrimination. But of course, you know, certain companies are still facing challenges, and it's important not to treat these issues as a one-off or trendy buzzword, but rather as work that is long-term and ongoing. And this is where some corporations need to do some catch-up.

Streeter 

Would you say Kasia, when we're talking about this catch-up, whether law departments really feel prepared from a talent perspective to handle these increasingly complex and evolving ESG issues?

Lewis 

So first of all, going back to our study again, 99% of general counsels we interviewed expect an increased workload when it comes to sustainability topics, especially over the next three years. So, 99%, was probably one of the highest figures in the overall study. So there is 100% confidence that the workload will increase. And now, when it comes to delivering sustainability work for the internal buyer for the corporation. The challenge here is that, again, coming back to our opening point, that sustainability is such a broad topic. The problem here is to find the right kind of talent, the right people to work on these issues. So, I can bet you've never met in your life, an attorney who introduces themselves as a sustainability lawyer. Really, there isn't anything like that. The law schools are not offering concentration on sustainability as such as a separate legal discipline. So, when even our clients are asking us for recommendations for someone who could join their internal legal team and who would be a sustainability lawyer, I'm asking them, but who exactly are you looking for? Because like we said at the beginning, sustainability can also mean integration of sustainability into corporate governance, which would be a lawyer more well versed in the corporate topics, it can be an environmental lawyer, climate change, energy, a myriad of different, I would say, facets of who such a sustainability lawyer might be. So really, I would say, it's about hiring people who are open minded, and who are willing to actually work across different topics, who are really and truly multidisciplinary.

Streeter 

Yeah, really interesting how, you know, this role is evolving, and there are so many facets to it aren't there? But Paula, do you think that the focus on ESG is actually helping with recruitment and retention of talent? Do you think, say, younger lawyers really want to get stuck into this?

Hogéus  

No, I really think so. And also referring to Kasia, perhaps, you know, the sustainability lawyers are really the title of the future, and they will be multiples of them as well. Because these are questions that are highly relevant in the times we are living in. And it is natural to seek a sense of belonging, and that the work one is doing is also important. So this applies broadly, of course, but I think this is especially important actually in creating value for the lawyers that are part of the GC functions.

Streeter 

Say for example, you know, there's somebody listening right now who wants to take a step or make much more progress on this journey. Can you give one nugget of advice, both of you, that would really help companies to ensure the law department is at the front and center of the big sustainability push. Paula?

Hogéus  

My takeaway would be to keep track not only of the minimum legal requirements, but also the corporation's core values. So how can these be connected? And how can legal requirements assist in implementing the core values of the corporation and vice versa? So, in my view, this is an important first step, actually, in making sure that the law departments are front and center.

Streeter 

Kasia what's your big takeaway?

Lewis 

I would say that law departments that are planning to take an increasing responsibility when it comes to sustainability, they should be prepared to handle and deal with a lot of ambiguity and complexity. Law is complex. But I think when it comes to sustainability, we particularly have this lack of clear boundaries, lack of legal clarity, to a very big extent, and ambiguity. And I think we as lawyers, we are not well equipped to deal with ambiguity, because we're always used to being backed up by precedents and what scholarship is saying on a given issue and jurisprudence, we always have these comforting sort of external judgments that we can rely on. And when it comes to sustainability, we're very often on our own, we just have a piece of this new legislation that is sitting on our desk, and no one has said anything on it and the implications for business are just enormous. And we have to issue this judgment, render this judgment, completely on our own. And I think this is this almost psychological dimension of working on sustainability topics that maybe is not talked about a lot. But I think it should be because it does create this additional pressure on the lawyers who are working on these topics. And they should also be cognizant of it and don't feel like they are somehow lacking because this is completely normal when it comes to such a broad topic.

Streeter 

Well fantastic. And I know, we've all been sitting very comfortably during this podcast, but a great takeaway there, get out of your comfort zone. Thank you to both of you for such a fascinating discussion, some really useful insights there on just how businesses should prepare for the incoming wave of legal ESG developments. Thank you Kasia. Thank you, Paula.

Hogéus  

Thank you so much.

Lewis 

Thank you.

Streeter 

For more information, you can visit ey.com. And a quick note from the legal team. The views of third parties set out in this podcast aren't necessarily the views of the global EY organization, nor its member firms. Moreover, they should be seen in the context of the time in which they were made. I'm Susannah Streeter and I hope you'll join me again for the next edition of Tax Law in Focus brought to you by EY, building a better working world.