ESG risk management a growing market for savvy legal firms

Law firms are stepping up efforts to cater for increasing concern about environmental, social and governance risk.

Environmental, social and governance risk management has evolved in recent years as companies are put on notice that higher standards are expected.

Business is increasingly on notice that environmental, social, and governance risks and breaches will not go unnoticed by regulators and the public, as the tally of court actions in the space mounts.

ESG has increasingly been a focus in the business landscape as companies rush to meet emissions reduction targets or demonstrate a lift in standards and accountability in business practices in the face of public criticism.

The environment looms largest of all as a key agenda item for corporations in the coming years.

Law firms are competing for a healthy slice of the action. Responses from the 50 firms in The Australian Legal Partnership Survey showed many were experiencing a surge in demand for ESG advice and responding by contributing more resources to it.

A case has been filed against energy giant Santos by the Australasian Centre for Corporate Responsibility, as a consumer protection action as well as under corporations law.

The centre has alleged Santos engaged in misleading or deceptive conduct in its claims to investors that it would produce clean energy and that it had a clear pathway to reach net zero emissions.

In another case, filed against the Commonwealth Bank in September last year by shareholder Guy Abrahams, the Federal Court of Australia ordered access be given to documents detailing the bank’s decision to finance oil and gas projects.

However, limits on ESG actions have also been evident after the High Court quashed a full Federal Court decision that found the Commonwealth Minister for the Environment owed a duty of care to Australian children in granting environmental approvals for fossil fuel projects.

In a recent report, top tier firm King & Wood Mallesons noted mandatory climate reporting was on the horizon and that big business should prepare for greater interactions between finance and climate teams around disclosures and the financial impacts of climate change.

Australia’s regulators have been increasingly upping the tempo on drumbeat warnings to corporations around climate reporting. The Reserve Bank of Australia, the Australian Securities & Investments Commission, the Australian Prudential Regulation Authority and the Australian Competition & Consumer Commission have all sounded warnings that they will closely scrutinise ESG in the coming years.

Even the market operator, the Australian Securities Exchange, has warned companies to check sustainability claims being touted to the market, warning against “greenwashing”, which is said to exist when companies overstate purported emissions cuts or environmental programs in a bid to boost their public image.

KWM litigation partner Edwina Kwan said the spate of court claims showed the heightened corporate ESG risks.

“Companies and corporates are focusing more broadly on ESG but the E of late has grown in prominence due to these climate litigation cases,” Ms Kwan said.

KWM was advising company directors to review disclosures that would have previously been kept in-house.

“We are advising clients on their disclosures to the market. We’re acting for clients in climate-related matters,” she said.

ESG is a global concern: a 2022 EY Law and Harvard Law School study of 1000 company lawyers from 12 industries and 20 countries showed only 15 per cent thought their bosses fully appreciated the risks relating to environmental issues; for social issues such as diversity, it was 39 per cent.

Corrs Chambers Westgarth has published a guide for in-house counsel. Corrs’ head of responsible business and ESG, Phoebe Wynn-Pope, said the firm created the guide after assembling its ESG teams in a bid to streamline its activities.

The firm’s ESG team, now almost 70-strong, sits across five working groups and is drawn from 12 different practice areas. Dr Wynn-Pope said businesses seeking to lift environmental sustainability needed to ensure it was done so in a “just” way.

“The environment is of more prominence and concern but to address environmental concerns without taking into consideration the human rights concerns is increasing organisational vulnerability to being seen as not being fully transparent and accountable,” she said.

Herbert Smith Freehills’ ESG, sustainability and responsible business practice Australian lead Tim Stutt is increasingly focused on governance risks. “Part of the reason that we developed ESG as an area of practice is we realised when we talked to clients, they considered ESG to be one continuous area of practice,” he said.

“While the ESG acronym does cover a lot of ground, actually some of the issues you need to think about together.”

HSF was looking to engage with its clients to be increasingly vigilant about ESG risks, so that they “put in place processes that will stand them in good stead”.

“I’ve been pleasantly surprised that working in the ESG … space it’s very rare to encounter companies doing anything other than trying to improve what they are doing and achieve best practice,” he said.

While the environment may be the biggest cause for concern, other areas are looming for corporates and their lawyers. Ms Kwan said KWM’s growing book of clients in its ESG practice were also seeking advice about modern slavery reporting and Corrs was working with clients on human rights and modern slavery reporting.

Corrs’ Dr Wynn-Pope said businesses with exposure to China, or those dealing in Papua New Guinea’s mining sector, were concerned.

“We’ve been doing some work with some non-government organisations and colleagues to try to look at how our clients can really address some of these issues,” she said. “As the world is opening up again those sorts of options will be really interesting to be exploring a bit more.”