Facing the truth

Law firms, as people-focused businesses, have a small carbon footprint compared to global manufacturing or energy companies. And most domestic practices will also fall outside the scope of the European Union’s new Corporate Sustainability Reporting Directive (CSRD), which does not apply to UK corporates. Yet effective environmental, social and governance (ESG) reporting is vital for future-proofing, as regulation is not the only driver forcing change.

Clients, stakeholders and the people firms compete to hire have shown they are prepared to do deep due diligence on a law firm’s sustainability stance and move along if they do not like what they find. Pressure to ‘do the right thing’ is building. It is telling that instead of being HR’s responsibility, or that of an interested partner, forward-thinking firms are engaging in-house ESG experts to oversee the changes required for optimum ESG reporting.

Mapping a firm’s environmental footprint is the first meaningful action. Diversity, equity and inclusion (DEI) policies are also an important part of the ESG reporting picture. Progress towards sustainability goals should acknowledge the challenges presented by compliance with Scope 3 emissions, and that net zero claims should be made with extreme caution. Overreaching statements run the risk of greenwashing, which may have monetary consequences, as the Competition and Markets Authority (CMA) becomes more activist and class actions from consumers gather pace. Taken now, steps towards ESG reporting will prepare law firms for inevitable changes – both regulatory and cultural.

Abhay Srivastava joined Weightmans as head of ESG in February 2022, with a brief to integrate fundamental ESG principles into the firm’s operating model and business strategy. New to the legal market, Srivastava’s record includes steering ESG strategies in the manufacturing and healthtech sectors.

‘The legal sector is behind the curve on ESG reporting compared to other sectors,’ Srivastava says. ‘But law firms want to catch up and learn the lessons from other industries. When ESG reporting is taken seriously by leadership, law firms are actually more agile than large matrixed organisations and it is easier to make progress.’

Srivastava is part of a new wave of ESG specialists employed by law firms to improve their ESG reporting. Roxanne Ratcliff, who has a background in advising global brands including Michelin, British Land and Saint-Gobain on responsible business strategy, joined Burges Salmon in 2019 to lead the firm’s responsible business agenda and share her (non-legal) sustainability experience with clients. Lawyer and ESG/human rights expert Nicole Bigby, meanwhile, joined Fieldfisher in early 2024 to advise its clients on responsible and sustainable business conduct and impact. She also steers the firm’s internal ESG strategy as its ESG director.

Turning point

These appointments mark a shift in attitudes towards ESG reporting by UK-headquartered firms. Formerly the domain of HR or an interested partner, ESG has become such a complex and business-critical issue that it makes sense to recruit industry experts. As well as bringing a fresh perspective from industry sectors with more experience, such as manufacturing, financial services and IT, these appointees can guide law firms through the bewildering maze of ESG reporting guidance and frameworks. There is plenty to learn from other sectors, particularly people-focused service industries such as advertising or architecture.

ESG specialists also understand the importance of data – how to capture, analyse and utilise findings to map progress and decide on strategic improvements. This is not something at the top of every law firm’s skill set. ‘Creating dashboards that provide visibility of the data on matters such as, for example, which office is printing the most overall across the firm… is a really important factor in changing behaviours,’ says Srivastava.

ESG specialists are also used to knowledge-sharing, passing good practice on to other law firms. While many do not undertake client legal advisory work, leaving that to ESG-focused legal teams, they often help to build client relationships by sharing tips on ESG reporting. So who better to give a snapshot on the fundamental points that a law firm should cover when engaging with ESG reporting for the first time?

First steps

A materiality assessment is a strategic business tool used to assess environmental impact. Mapping a firm’s business operations will help identify the sources and extent of greenhouse gas (GHG) emissions – the first step to improving sustainability, mitigating risk and identifying opportunities.

‘For a start, look at your energy consumption,’ advises Bigby. ‘Most office space is leased, so you will need to engage with the landlord of the premises and discuss what can be done to make them more energy efficient. Look at your supply chain and find ways to open up conversations with major suppliers to achieve carbon reduction. Business travel should also be a focus – weighing up the pros and cons of if it is necessary in each instance.’

The Greenhouse Gas Protocol (ghgprotocol.org) sets out what should be reported: Scope 1 emissions are those that a business creates directly, such as running boilers and vehicles. Scope 2 includes all indirect emissions, such as electricity and energy bought for heating or cooling buildings. Scope 3 includes all the emissions the business is indirectly responsible for up and down its supply chain. Scope 3 is the most complex, and the metric that will affect law firms the most. A firm’s size, type of operations, and the impact of its procurement and supply chain are all important factors. The larger the firm, the more complex the supply chain and the more onerous the reporting obligations are likely to be.

DEI falls under the social pillar of ESG and is crucial. As law firms are focused on people, DEI is a crucial part of ESG reporting. The Solicitors Regulation Authority’s requirement that all regulated law firms report diversity data (including gender, ethnicity, disability and social mobility) every two years provides these firms with a head start in DEI reporting.

The Government Equalities Office requires enterprises in England, Scotland and Wales with over 250 employees to report gender pay gaps. Visibility of this kind of data provides an important snapshot of where a firm sits in relation to its diversity objectives.

While there is no mandatory requirement to report on ethnicity pay gaps, this is a valuable benchmark. A growing number of law firms calculate and publish this data.

Angela Monaghan, head of purpose and impact development at Bates Wells, says: ‘For many law firms the breadth of DEI makes it a challenging area to report on, requiring extensive work with partners and the leadership team to find solutions.’

Bates Wells, which was the first UK law firm to achieve B Corp status (see Gazette, 16 April), publishes its own ethnicity pay gaps and files an annual report on its social and environmental impact.

Help at hand

With the growth of ESG reporting, sustainability consulting services have boomed. These are useful resources for firms with complex supply chains. For smaller firms looking to gain insights, B Lab’s online Impact Assessment tool provides a good first step and is free.

‘The B Impact Assessment is an open access tool that provides a great range of options for assessing the social and environmental impact of your practice,’ says Monaghan. ‘It will pick up weak points and provide the information you need to start to consider which frameworks will help you to create an ESG gold standard.’

In considering environmental impacts it is important to draw red lines, she says, acknowledging what is very difficult to change, while flagging up the easy wins.

There is a huge variety of ESG reporting frameworks to choose from. The UN Global Compact (unglobalcompact.org), which sets out 10 core principles for corporate sustainability, is a sound start. The Global Reporting Initiative (GRI) and International Sustainability Standards Board (ISSB) are popular choices for supplementing the Global Compact framework with more complex data. Clients affected by the CSRD increasingly want their legal advisers to benchmark themselves against its requirements, even when not in scope, to achieve optimum alignment throughout their supply chain.

Most frameworks require a commitment to achieve net-zero GHG emissions by a certain date. Science-based targets are the gold standard, which means committing to reductions that meet the Paris Agreement goal to keep global warming below 1.5°C. The Science Based Targets Initiative (SBTI) provides a framework for validation depending on size, operating models and resources. Over 5,500 organisations worldwide are signed up to the SBTI, including 1,000 in the UK.

Advised emissions

‘Advised emissions’ is a relatively new term which refers to the emissions created by client work. As a recent protest at Linklaters’ London offices showed, it is getting harder for law firms to distinguish their efforts to ‘green’ their own businesses from those of their clients.

Signatories to Legal Charter 1.5, which include Bates Wells, DWF and Clyde & Co, have committed to creating more climate-aware practices, and are collaborating to develop a methodology for measuring advised emissions. The charter is a set of principles developed by a group of large commercial law firms ‘to make the best contribution to reduce greenhouse gas emissions at the speed and scale necessary to restrict global temperature increases to no more than 1.5°C’.

Advised emissions are distinct from Scope emissions, but awareness of their extent can start conversations with clients on how both parties can transition to more sustainable ways of doing business. Many clients experience pressure from customers, regulators and employees to do more due diligence on their own supply chains, so law firms should expect to face questions on their attitudes towards acting for clients that generate high levels of emissions or have dubious human rights records. Indeed, they are already facing difficult questions (see box, above).

Louise Harman, partner, and purpose and impact co-lead at Bates Wells, says: ‘Advised emissions constitute a law firm’s biggest emissions. We are seeing a push for change in the legal sector through initiatives such as the Legal Charter 1.5.’

Harman continues: ‘Part of it is being transparent about our approach and values. For example, Bates Wells has publicly pledged to work with more impact-driven clients and decline to act where instructions are incompatible with our commitment to sustainable and responsible legal practice. The idea is that if not just one but multiple law firms refuse to act for a high-polluting client, this might start to shift thinking and drive behavioural change.’

Focusing on detailed impacts, such as advised emissions, does not just help to save the planet but it is also sound business sense. Insurers are paying attention to the climate emergency and the risks that it poses to business. Recent Law Society guidance on climate change (tinyurl.com/yey944zm) drew attention to the changing nature of professional indemnity insurance, highlighting that in the future, to obtain the best cover law firms may need to indicate the extent of their competency on climate legal risks.

Retention and recruitment

The climate emergency has instilled many with a sense of urgent personal responsibility. For many new entrants to the legal profession, evaluating the quality of a firm’s sustainability commitments is essential when deciding where to work.

‘I’m in awe of how sophisticated and informed new recruits are, and the level of due diligence they undertake on climate change,’ says Bigby. ‘They are keen to engage with the organisation, align with their sustainability goals and make an impact in their day-to-day jobs.’

The presence of more climate-conscious individuals in law firms presents a great opportunity to leverage cultural change and push through firm-wide ESG initiatives. And it is not just the younger generation that get involved. New or lateral-hire partners are expected to engage in ESG matters from the start, taking up the mantle as advocates for sustainable change.

It is best practice for a proactive contribution to a firm’s sustainability efforts to be acknowledged in annual performance reviews and rewarded.

Employment law also is relevant. The Employment Appeal Tribunal has given guidance that a commitment to tackling climate change could be a recognised philosophical belief, and therefore a protected characteristic under the Equality Act 2010.

‘Law firms should take care to ensure that all staff, including their lawyers, are not treated less favourably because of this belief,’ says Daniel Wise from employment firm Osborne & Wise. ‘A review of relevant policies, combined with partner training, will clarify how these issues should be managed for work distribution and team management.’

Greenwashing

Due to the complexity of calculating Scope 3 emissions, businesses have become cautious about claims regarding net zero. Care must be taken when communicating steps taken towards net-zero goals, with an emphasis on what has yet to be achieved and successes. Legislation was passed this year to give the CMA greater powers to move against businesses that make misleading claims, including fines of up to 10% of annual turnover, though these powers are not yet in force. Law firms also risk breaching SRA rules if they make false or misleading claims.

The term ‘sustainable’ can also be loaded. The Law Society’s guidance on climate change says ‘sustainable’ is widely taken to mean ‘meeting the needs of the present without compromising the ability of future generations to meet their own needs’. It adds that any claims of ‘providing sustainable legal services’ will need to stand up to external, objective scrutiny.

Governance

'Although ESG is complex, the main point is to aim for focus and concrete action. Put people first'

Nicole Bigby, Fieldfisher

When embarking on ESG reporting, law firms have the edge in one respect: governance. They will be used to complying with the SRA’s regime and should have processes in place regarding anti-money laundering measures, whistleblowing policies and risk management.

‘Although ESG is complex, the main point is to aim for focus and concrete action,’ Bigby concludes. ‘Put people first. Look at travel and the way you operate your premises, and start engaging with your supply chain. Develop lawyers so they are sustainability- and climate-conscious and increasingly competent. And involve all partners, staff and stakeholders in building a sound ESG base – concentrating on what is important.’

 

Katharine Freeland is a freelance journalist

 

• This is the second of two articles on ESG reporting. The first, on clients, was published on 14 June 2024