by Philip Chang
Modern investors use myriad non-financial metrics to assess the economic sustainability of potential companies to invest in. One of the most relevant viability standards is Environmental, Social, and Governance (“ESG”). The “environment” factor in ESG refers to a company’s efforts to conserve the natural world. From a corporation’s perspective, this concerns a company’s policies and structure regarding waste management, air or water pollution resulting from its operations, and the use of renewable energy sources. The “social” factor indicates a company’s stance on various societal issues that arise in “the relations between a company and people or institutions outside of it.” Socially conscious companies are mindful of the implications of their products or the politics of their supply chain. Additionally, such companies focus on employee relations, diversity in the workplace, and aiding local communities. Lastly,” governance” points to criteria used to examine how a corporation organizes itself. Primary governance concerns are tax strategy, board diversity, executive remuneration, and structure.
Bloomberg, S&P Dow Jones Indices, and JUST Capital are the most popular third-party research firms calculating ESG scores. Many top companies have rolled out ESG initiatives as investors realize the added financial benefit of investing in companies with high ESG scores. Fundamentally, there are at least two reasons ESG concerns matter for companies in the modern landscape: (1) ESG-consciousness illustrates a willingness to adapt to changing socioeconomic and environmental conditions; and (2) ESG investing strategies have proven to yield higher returns as “ESG assets held by individual investors increased by 50% from 2018 to 2020, to $4.6 trillion from $3 trillion” The positive link between ESG initiatives and financial performance is attributed to consumers having more confidence in ESG-conscious corporations. Altogether, investors look to ESG factors as a holistic picture of the prospective values of corporations. Thus, many corporations have pivoted their business strategy to meet such demands and publish formal ESG disclosures.
Why ESG Matters for Big Law Firms
ESG standards are not only a criterion used to ascertain the sustainability of the non-financial impacts of investments but also have a material impact on the return profile and long-term risk of investment portfolios. Many prominent Big Law firms, including Gibson Dunn & Crutcher, Hunton Andrews Kurth, and Seyfarth Shaw, have recently formed dedicated ESG practices to help corporations navigate the demands of navigating disclosure requirements. Investors demand ESG-concerted efforts in corporate strategy in the same way they prefer firms meeting other ancillary factors, such as operating with diverse teams. ESG demands have become more common because investors view ESG-conscious companies as more equipped to handle the changing landscape, resulting in more confidence in them as investments.
In 2021, over 60 large international corporations, including KPMG, Mastercard, and Bank of America, announced that through partnerships with the World Economic Forum, they would adopt ESG frameworks and disclosures. Big Law firms could also benefit from doing so and mirroring their clients’ concerns, which would signal to potential corporate clients that a firm is in line with sustainable practices. Research consistently shows corporations that spearhead ESG efforts see tangible returns in profitability by understanding shareholders’ concerns. A firm that publishes a formal, easily accessible ESG disclosure statement on its website would seem more in tune with its clients’ needs and illustrate how the firm prides itself on forward-thinking and inclusivity. However, this does not suggest that the Big Law business model needs revamping. Instead, firms can reorganize the information that they already have available into a published ESG statement.
Big Law firms already have many of the fundamental standards of ESG concerns on their websites. Simply organizing the materials into a formal ESG statement would potentially benefit them in attracting clients. First, this article will focus on two ESG statements from companies that have consistently scored highly on ESG metrics. Second, the article will close with an examination and recommendation on how Big Law firms might use existing resources to draft a similar ESG disclosure, which will attract potential clients and hold them accountable to the ideals they assert.
An Analysis of Two Major Company’s ESG Reports
Major corporations publish formal ESG reports outlining the methodology used to meet relevant concerns. Apple is one such company with a digestible ESG disclosure. Their 2021 ESG report exemplifies both what an established disclosure looks like and how Big Law firms might benefit from championing ESG initiatives themselves. From an organizational standpoinApple’se’s ESG disclosure is categorized into three factors and includes metrics on how focusing on improving those factors drives progress at the company.
Apple’s 2021 ESG Report
Apple begins the “environmental” section of its disclosure by stating that the company is “on an ambitious journey to one day make [its] products using only recycled or renewable materials,” and it is carbon neutral in its day-to-day operations, including business travel and employee commutes. In the “social” section, Apple states that they are committed to inclusion in both their working environment and in their products. Specifically, they mention that they have a firm commitment to inclusion and diversity in the workplace. Apple points to programs that demonstrate a tangible commitment to local communities of color and their investment in programs to benefit them. Also, Apple’s report weaves in that from a product standpoint, their technology is designed to serve as tools for a wide range of users ranging from students, parents, and educators. In short, they highlight how they hold their suppliers and manufacturers to strict human rights and safety standards.
The transparent disclosure illuminates how its corporate governance structure is “designed to foster principled actions, informed and effective decision-making, and appropriate monitoring of compliance and performance” to ensure shareholders’ long-term goals are considered. The disclosure explores board oversight and the various committees that the company has, ranging from tax, privacy and data security to legal and regulatory compliance. Moreover, the report features a dedicated section on board diversity, emphasizing that four of eight board members are from underrepresented communities. The last section of their governance report examines its current ethics and compliance policies. All of this illustrates a commitment to strong corporate policies from the top-down.
NVIDIA’s 2021 ESG Report
Investor’s Business Daily ranks NVIDIA, an electronics and semiconductor manufacturer, as the number one ESG stock to invest in. NVIDIA, like Apple, publishes a corporate social responsibility report each year that outlines its ESG initiatives. Its 2021 report begins with a statement on climate change that serves as the precursor to environmentally-conscious practices. For one, NVIDIA discloses data on its electricity consumption at its global data centers and offices and reveals efforts to source 65% of its global electricity use from renewable energy by the end of 2025. Moreover, the report mentions efforts to reduce its carbon footprint in transport and logistics, which manifests itself in requiring suppliers to report participation in environmental initiatives.
NVIDIA provides a governance snapshot that shows that 38% of its board is gender, racially, or ethnically diverse. It also reveals public disclosure of the director nomination process, proxy access, and approach to board diversity. By starting with a universal overview of the board, NVIDIA provides transparency to investors and consumers that their company reflects a diverse consumer base. Its ESG report also calls attention to efforts to promote and maintain ethical conduct in their business dealings—it provides a link to the corporate code of conduct where the core values establish the foundational principles for all NVIDIA employees.
The social factor of ESG for NVIDIA is accomplished through a report that outlines: responsibility in supply chain management, manufacturing, employee health and wellness, and community engagement. Like Apple, NVIDIA explains its commitment to upholding human rights workers’ rights throughout its supply chain. Additionally, NVIDIA comprehensively explains its community engagement efforts through its Inspire 365 Initiative, the company’s efforts to raise funds for those in need, as well as community outreach and interaction with disadvantaged communities. The NVIDIA Foundation is at the forefront of its corporate social responsibility efforts. This foundation section of the report discusses the company’s philanthropic efforts through community partnerships and how its programs have supported more than 5000 non-profit organizations.
What a Big Law Firm’s ESG Statement Should Include
Big Law firms can join the pioneering of ESG initiatives. Many Big Law firm websites have similarly drafted sections on their community outreach and diversity efforts; this information could be reorganized into an ESG disclosure. Holistically, drafting a formal ESG report demonstrates to corporate clients that Big Law firms mirror their efforts. Thus, drafting an ESG report could help Big Law firms generate new and retain current business. Because many firms have the groundwork for ESG disclosures in place through sections on pro-bono and diversity initiatives, they do not need to rework their current business model. Drafting a formal ESG statement would require little effort but provide a competitive advantage in attracting clients and holding firms accountable to the ideals that drive them. Below is an analysis of how Big Law firms may analyze their current initiatives and draft an ESG statement.
First, a Big Law firm’s “environmental” section should highlight the digitization of files and conservative electricity consumption efforts in their offices. Emphasizing environmentally friendly business practices would model the approaches that technology giants like Apple and NVIDIA have taken to reduce their carbon footprint. Because law firms themselves are not in the manufacturing space, most of their electricity consumption comes from their office spaces themselves, so establishing a formal report on electricity consumption and compiling that data would meet the “environmental” aspect. A firm might also highlight efforts to lessen business-related travel and instead opt for more environmentally friendly practices such as encouraging the continuance of once pandemic-mandatory teleworking. Also, in cases where business-related travel is necessary, they could highlight efforts to utilize lower emission airlines and select non-stop flights: these practices demonstrate a firm’s commitment and awareness to corporate environmental responsibility concerns. In sum, firms’ “environmental” section should call attention to their efforts to embrace digitization, conserve energy, and invest in energy efficiency at their offices.
The social factor is simple for many large firms to roll out into an ESG statement. There is a multitude of ways that firms’ current initiatives could be rephrased to fit the “social aspect” of ESG: (1) diversity initiatives; 2) pro bono work; (3) community engagement and stance on social issues. A glance at Cravath, Swaine & and Moore LLP’s website, for example, reveals that pro bono work is a critical component of their practice, and they provide the same standard of representation whether “the client is a low-income single mother or a coalition of U.S. Congress members.” Other Big Law firm websites reveal a facsimile of similar statements regarding stances on pro bono matters that should be incorporated into a formal ESG report. Furthermore, firms that have established diversity scholarship programs for minority law students and involvement with NALP should highlight these programs in their disclosures. For example, many firms can model their social approach after Reed Smith. In particular, that firm promotes diversity by publishing data on diversity and inclusion and has a specific Diversity, Equity, and Inclusion team, all of which should be highlighted in an ESG report. Lastly, firms should incorporate their current community involvement initiatives in their ESG statement. This might include a brief paragraph on how the firm provides pro bono services to local communities and its engagement with them.
Incorporating a “governance” snapshot in an ESG disclosure would be a straightforward task for many Big Law firms. At its core, governance structures refer to the makeup of boards of directors or, in this case, partners or shareholders, executive compensation, and functions and responsibilities of various committees. A firm’s ESG statement could include a brief section on how management focuses on varying interests in decision-making that benefit clients’ needs or interests. Another high-profile governance issue is that shareholders and state law in places like California demand corporations to have greater representation of women on boards and in their executive ranks, and equal compensation. For example, firms could address this issue by highlighting initiatives empowering female and minority attorneys.
Moreover, firms can include demographic information on their attorneys, which many companies require before hiring the firm. Disclosing information about a firm’s various committees will demonstrate a stance on increasing diversity and affinity groups within the legal field, ultimately displaying efforts to transition to a more inclusive environment. For example, Cravath has information on how their current presiding partner, managing partner of the litigation department, and head of tax are all women. Similarly, Gibson Dunn, another Big Law firm, recently announced a female chairman in 2021. Adding that information to an ESG disclosure would be analogous to how Apple, NVIDIA, and many other companies have highlighted diversity in executive positions. Lastly, firms can disclose their operational policies and how they drive innovation and inclusion within their structure—that might look like recruiting and student outreach initiatives to hire students from a vast range of backgrounds.
What a Formal ESG Statement Would Look Like for Big Law Firms
As previously discussed, many Big Law firms already have the fundamental elements of an ESG disclosure on their website and simply need to organize it into a structured disclosure. Therefore, this section will propose a framework for Big Law firms to follow in organizing an ESG statement while also analyzing the benefits and potential pitfalls of disclosure in attracting clients.
The first section of a Big firm’s ESG disclosure should be its environmental impact statement. Many firms do not have readily available environmental impact disclosures on their websites. Thus, firms should assess and disclose their: (1) electrical consumption; (2) in-office efforts to promote efficient energy use; and (3) business-related measures to reduce carbon footprint. Fundamentally, the organization of an environmental section would demonstrate to current and prospective clients that firms are committed to combating climate change, aligning with a widespread concern for many businesses. Research indicates that as many as 20% of companies have “set target dates to drop their carbon emissions to zero.” Therefore, a firm that also discloses its efforts and self-realization of its carbon footprint may appear more aligned with the interests of shareholders and consumers, which ultimately bodes well for attracting corporate clients to a firm.
The “social” section of an ESG disclosure is conducive to a firm’s business for at least two fundamental reasons: (1) to display their efforts to support local communities; and (2) to highlight initiatives to strive for diversity within the legal profession. First, many Big Law firms have pro bono requirements for associates as part of their billable hour requirements; centrally, these efforts allow associates to help their local communities and should be the cornerstone firm’s social statement in an ESG disclosure. Moreover, many firms have increasingly acknowledged the importance of diversity in the workplace. In essence, a firm highlighting its diversity initiatives—whether through various in-firm affinity groups or focused hiring, will reflect the composition and concerns of many corporations. As aforementioned, many Big Law firms have the basic information necessary to draft”the “social” section of an ESG statement in place; consider how many firms have dedicated diversity and pro bono sections on their websites. Inevitably, disclosing information on diversity efforts and pro bono initiatives can showcase a firm’s commitment to current priorities.
The inclusion of governance disclosures by law firms fosters clarity to clients regarding a firm’s structure, compensation guidelines, and hiring and onboarding practices. A firm might include information about its summer programs and initiatives for hiring and retaining talent. Although there might be some hesitancy to disclose information on hiring practices, transparency would be beneficial in many ways. For one, illuminating a firm’s efforts to improve diversity in the legal field would show how a particular firm combats an industry-wide issue, a lack of diversity. Also, disclosing information on the composition firm’s executives, partners, and associates can demonstrate diversity efforts. Hence, actively calling attention to this information adds substance firm’s progress on the diversity front by showcasing the breadth of race, ethnicity, gender, and other identities encompassed within.
Ultimately, including information regarding corporate social responsibility to promote diversity can help a firm attract more clients. Additionally, firms can include information about their governance to demonstrate quality in management to clients.
ESG disclosures are an increasingly relevant aspect of corporate responsibility that is beneficial to a corporation’s needs for capital, supply chain, and positive public sentiment. Investors look to ESG metrics to assess profitability and volatility. Similarly, through formal ESG disclosures, Big Law firms could: (1) demonstrate to potential clients that a firm is conscious of client concerns; (2) attract a broader client base by serving their needs; and (3) hold themselves accountable to act upon the ideals that they claim. Thus, Big Law firms should likewise prepare and publish ESG statements using readily available information in addition to that already found on their websites to realize benefits similar to those of corporations.
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Ibid. at 14.
 Ibid. at 21.
 Ibid. at 5.
 Ibid. at 54.
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 Ibid. at 53.
 Ibid. at 17.
 Ibid. at 18.
 Ibid. at 47.
 Ibid. at 10.
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