The role of the chief legal officer in addressing ESG issues

ESG issues inside the corporate legal department

A recent Deloitte survey found that after quality, the second-highest reason for brand loyalty is ethical or sustainable business practices. In fact, in 2020, 90% of the S&P 500 published some form of ESG disclosure, a significant increase from a mere 20% in 2011.

Recent research also shows a correlation between ESG ranked stocks and financial performance.

When done well, ESG strategies may do much more than positively influence a corporation’s financial performance. Strong execution on ESG priorities may also positively impact recruiting and retention and allow for greater innovation and brand differentiation.

For a number of reasons, in a relatively short period of time, ESG issues have risen to a position of prominence within the enterprise.

There’s a new sheriff in town—and public companies that issue corporate responsibility statements are officially on notice.

In a March 4, 2021 press release1 the US Securities and Exchange Commission (SEC) announced it had formed a task force on environmental, social, and governance issues. The mission? To identify public companies and investment funds that mislead the public about their climate risks or environmental, social, and governance (ESG) strategies. Some of that disclosure may come from tips and referrals through the SEC’s whistleblower hotline. Other investigations may stem from sophisticated data analytics capabilities that are at the SEC’s disposal.

What role does the chief legal officer (CLO) play in ESG efforts?

Whether ESG reports to the CLO or not, CLOs have an opportunity to take on a leadership role in this area. As the established conscience of the company, with a deep understanding of risk and exceptional communication skills, the CLO is well-positioned to guide the enterprise as ESG efforts evolve.

The CLO role under ESG may be broken into three key components:

• Effectively communicate the risk and opportunities of the ESG strategy
• Develop ESG reporting and disclosure mechanisms
• Influence the regulatory environment

ESG integration maturity model

Integrated
Value-enhancing
Through established governance, risk management, strategic allocation of resources, data management processes, controls, reporting, and assurance

Enhanced
Performance-driven
To enhance internal controls, ESG data collection, and performance management

Responsive
Compliance-driven
To respond to ESG requirements and changing expectations

Source: Deloitte, #DeloitteESGnow: Enhancing Trust in ESG Disclosures, September 22, 2020.

Effectively communicate the risk and opportunities of the ESG strategy

The development of the company’s ESG purpose and mission should be an effort shared among executive stakeholders and include clear objectives and governance mechanisms that support those objectives. Leaders across all functions should be encouraged to integrate ESG considerations into their functional strategies, work to align ESG priorities with business strategies, and include ESG objectives in strategic planning and resource allocation.

Much like the CLO’s work in compliance generally, the leadership opportunity here lies in the effective communication of the ESG framework to all stakeholders and the development of a strong and enforceable ESG compliance program across the enterprise.

To see what questions CLOs should consider when communicating the risks and opportunities of the ESG strategy, download the full report.

Develop ESG reporting and disclosure mechanisms

Because of the evolving importance of ESG disclosures to investors, it is likely that the audit committee of the board will be a key player in the development of reporting and disclosure protocols, and the CLO should stay in good communication with the audit committee. Research indicates, however, that there is currently wide variability in how ESG is supervised from a board perspective.

In order to develop a strong reporting and disclosure mechanism, a leading-edge ESG program should be data-based, metrics-driven, and aligned to the mission of the organization. But reporting on ESG goes beyond data and metrics, and the CLO can lead in the development of a compelling and consistent narrative that tells the company’s ESG story.

To see what questions CLOs should consider when developing ESG reporting and disclosure mechanisms, download the full report.

Influence the regulatory environment

Notwithstanding the growing call for more reliable disclosures, regulatory actors are not uniformly aligned in their response. CLOs, however, have an opportunity to share their experiences with regulators and work to positively influence the development of the ESG regulatory structure.

Explore more on sustainability and ESG strategies

This article references data and insights from other Deloitte articles. Explore these other reports and guides to take a deeper look:

• Creating value through sustainability
• Harness the Power of ESG Transparency
• ESG and corporate purpose in a disrupted world
• Defining the role of the audit committee in overseeing ESG
• Seek and you may find: How CFOs can manage sustainability risks and find long-term value in unexpected places
• #DeloitteESGnow: Enhancing Trust in ESG Disclosures