ISSUE 49: The Role of General Counsels in the ESG World

General counsels are faced with new set of challenges that call for broader awareness and supporting expertise:

–  Shareholder activism challenging the reliability of your carbon neutrality goals.

–  Customers questioning your response to allegations for human rights abuses in your supply chain.

–  Employee demands for demonstrating equitable pay and promotions across gender and race.

Environmental, Social and Governance (ESG) has become an increasingly important priority for businesses, as their stakeholders apply more pressure on issues like racial injustice, human rights and climate change. In each case, these challenges are more sensitive than many of the challenges faced by GCs in years past, and they are increasingly material in terms of potential litigation and impact.

As a result, general Counsels (GCs) often find themselves supporting ESG related initiatives as a result of their involvement in the executive-level and boardroom discussions. They offer an interesting perspective because they deal with the legal considerations of ESG, including risk-mitigation and balancing them with operational issues. Among the emerging ESG challenges GCs face, perhaps the most difficult is that of disclosure. Indeed, today’s ESG landscape calls for great transparency from companies and full disclosure of their ESG related matters. This of course exposes companies to increased reputational, and legal risks. It can also lead to unwanted ratings from different public ESG rating firms and additional scrutiny from stakeholders.

One of the key gaps that we see in working with general counsels on ESG challenges  is the lack of sufficient expertise within the company on environmental and social issues. While GCs tend to have deep knowledge of the corporate social responsibility objectives and regulatory compliance aspects of their companies , most have not  had the advantage of working in the field with the community relations or operations teams. They represent the “G” of ESG, but are also tasked with advising the C-suite on “E” and “S” related topics.

The Rock Center for Corporate Governance at Stanford recently published a study[1] on the regulatory and reputational risks associated with ESG. Among others, they dug into the question of disclosure and assessed how much information companies should disclose about their ESG initiatives. More generally, the study found that:

–  72 percent of general counsel recognized that investing in ESG does improve financial performance.

–  While GCs seem to support ESG-related initiatives, they expressed notable concern about the impacts of disclosing this data to the public.

–   About half of the surveyed GCs (50%) worried that environmental disclosure could increase their legal or regulatory exposure

–  42% worried that this also applied to diversity disclosure

–  When it comes to social-related disclosure, only about 27% were concerned that social impact disclosure increases legal and regulatory risk.

We see here a direct correlation with the fact that in most countries, including in the United States, there are ,many more regulatory and permitting requirements for environmental related matters than there are for social risks and impacts

As shareholder and other stakeholder expectations for ESG performance continue to grow, GC’s will need the tools and ready access to expertise on social and environmental performance to match their awareness of governance challenges.

Acorn International delivers the expertise, solutions and assurance that global businesses need to thrive in high-risk environments amidst community opposition, environmental liabilities and shareholder activism.  We work with attorneys every day, and we serve as trusted ESG experts – with on-the-ground teams in >70 countries – for some of the world’s largest energy, mining and finance companies.

[1] Callahan, Michael and Larcker, David F. and Tayan, Brian, The General Counsel View of ESG Risk (September 14, 2021). Rock Center for Corporate Governance at Stanford University Working Paper, Available at SSRN: https://ssrn.com/abstract=3923913