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ESG is increasingly important, not only in terms of the professional services provided for clients, but for attracting clients, hiring and retaining talent, and for a firm’s reputation and brand. These factors, combined with increasing regulatory pressures, mean that ESG will appear on the Enterprise Risk Management (ERM) registers of most firms in some form or another.

Law firms are therefore presented with significant opportunities, particularly in climate risk, where they will be asked to help clients identify, avoid, and manage physical, liability, and transition risks linked to climate change. These requests will present their own challenges, including the multiplicity of jurisdictions in which climate liability cases can be brought, as well as the need for novel technological solutions, such as parametric insurance products and innovative litigation strategies. 

Legal risks for law firms are diverse, including differing layers of statutory obligations deriving from various domestic and international laws and regulations (many of which are not overtly ESG-focused) and professional regulatory obligations. They also include risks relating to advising clients on ESG-related issues, or allegations that ESG issues have not been sufficiently considered in acting for clients, in non-ESG related retainers.

Similar considerations apply to the clients of law firms. Potential ESG-related exposures are many and varied, ranging from allegations of greenwashing, inadequate disclosures, product liability, nuisance, and fraud claims, to human rights arguments, failings in workplace culture, robustness in examining supply chains for ESG-related issues, and allegations of compliance failures. There is growing recognition that ESG factors represent substantial potential risks for companies, leading to the expectation that professional services firms will safeguard against those risks.

Law firms and the companies they advise are subject to a raft of general requirements that encompass ESG issues, [2] with several statutory provisions having extra-territorial effect.

Even where there are no existing explicit ESG-related professional regulations in place, a focus on ESG by regulators may impact how current provisions and regulatory frameworks should be addressed when viewed through an ESG lens. In the UK, for example, the Solicitors Regulatory Authority (SRA) Principles are broad. Principle 6 requires solicitors to act “in a way that encourages equality, diversity and inclusion.” The regulatory direction of travel appears to be pointing only one way. The SRA states that over the three-year period of its current strategy it will “publish policy statements setting out [its] position on access to justice, and on matters relating to [ESG], including [its] view of the key regulatory issues and obligations for those that [it] regulate�ڲ���”.

This echoes the American Bar Association (ABA) resolution [3] adopted in August 2019, the Climate Crisis Statement [4] published by the International Bar Association in May 2020, and the sentiments of the United States Special Presidential Envoy for Climate, John Kerry, in his 5 August 2021 address to the ABA in which he said: “In short, you are all climate lawyers now, whether you want to be or not… there's a place for lawyers to help hold back the tide and create new pathways.” [5]

ESG issues are also one of five presidential priorities for the International Bar Association (IBA) in 2023-24. The “S” and the “G” raise regulatory compliance issues for law firms, including cyber risk and data security, having procedures in place to avoid a toxic workplace culture, and ensuring a comprehensive approach to supervision that considers wellbeing and the risks of employees concealing mistakes. In the UK, this focus has seen the SRA increasingly blurring the distinction between the public and private lives of those it regulates.

Law firms may also face regulatory exposures over the nature of their instructions, the focus on SLAPPs (Strategic Lawsuits against Public Participation) litigation and parliamentary scrutiny of the use of NDAs being two examples from the UK, both of which, arguably, raise social and governance issues.

Law firms should therefore keep a close watch on the regulatory framework relating to ESG. In 2019, the software company Deltek released results of a survey [6] that showed companies across the professional services industry were already struggling to remain compliant, given the increasingly complex and changing regulatory landscapes.

There are several areas of practice where there is potential for lawyers to face ESG-related risks, including the following list which is not exhaustive:

Corporate due diligence and banking: Climate transition and transactional risks, including environmental due diligence in corporate transactions and advice around capital-raising activities such as IPOs, require lawyers to be alert to developing environmental risks. Banking lawyers may also see greater responsibilities arising in finance transactions around climate and socially conscious investments – for example, considering the EU taxonomy for sustainable investments [7] – where failings may raise the prospect of prospectus liability.

These risks may apply equally to the other elements of ESG – such as the relevance of an acquisition target’s supply chain and governance. 

Corporate disclosure advisory work: Lawyers advising corporate clients on compliance with regulations relating to corporate disclosures of climate or ESG-related risks will need to ensure their advice is current and sufficiently comprehensive. While there is a movement towards an international cohesive set of standards, there continues to be an evolving set of requirements applying to companies. This is an area where law firms, particularly those offering compliance tools, need to stay on top of the latest developments.

Real estate risks: This could include consideration of climate transition and physical risks in reports on title in real estate transactions. For example, lawyers may face exposures if they do not advise their purchaser or lender client about physical risks (e.g., flooding, or coastal erosion) or transition risks (such as increased difficulty in obtaining insurance cover for certain properties) as the risk of climate-related events increases and commercial searches which forecast the impact of such events become increasingly available.

Advising on liability exposures: Lawyers advising clients on managing liability risks should be aware of the range of legal grounds and systems under which a claim might be brought. For example, as climate is a global issue, it may be open to claimants to “forum shop”, by pursuing a claim in the most favorable jurisdiction.

“More broadly, just as lawyers should make clear where an area, which is relevant but not central to the instruction (such as tax or competition), is beyond their field of expertise, they should also be aware of this in the context of ESG-related issues and try to manage client expectations from the outset,” explains Assef.

Misleading statements: Law firms need to be aware of making misleading statements about their approach to climate change targets or other ESG metrics such as ethics, Diversity & Inclusion (D&I) metrics or supply chains, otherwise known as ‘greenwashing’. This can be damaging reputationally and in some cases can lead to litigation. A November 2022 report [8] on 100 global law firms concluded that even preeminent firms continue to refer to ESG-related achievements and initiatives that, on closer inspection, seem to be largely unsubstantiated. Law firms may also be exposed if their clients are accused of greenwashing.

ESG pushback: In the US, law firms are not immune to the climate change/ESG pushback that has arisen in several states, led by some federal and state government officials. 51 global and American law firms received a letter in November 2022 from a number of US Senators warning that law firms advising clients on ESG initiatives should ensure they advise them of the risks of investigation for breach of antitrust rules [9]. The letter refers to collective efforts to restrict the supply of coal, oil, and gas as an example of collusive activity that it says could breach rules directed towards preventing anti-competitive behavior.

Reputational and brand risk: Law firms may conclude that acting for certain clients conflicts with their values and carries reputational and brand risk. For example, in recent years Harvard and Yale Law School students have staged protests and deny-listed firms said to disproportionately support clients and agendas that make climate change worse. Extinction Rebellion, an international environmental movement, has targeted firms in the UK for their work for fossil-fuel companies.

Termination of relationships: Firms must take care when terminating relationships or engagements at short notice due to ethical or reputational considerations, or they risk being on the receiving end of a civil claim. A claim was brought in summer 2022 against an accountancy firm in the UK, alleging it had engaged in racial discrimination by declining to work with the company on the basis of Russian ownership, even though not subject to sanctions. The claim seeks a declaration (rather than damages) that the firm’s actions were in breach of the UK’s Equality Act 2010.

Duty of care: A very real and growing consideration for legal advisers is the question of whether the duty of care lawyers owe to their clients in tort extends to advising those clients on the climate change consequences of their matter/proposed course of action (in the absence of express agreement by the lawyers to advise on climate change issues). Some commentators have said the ordinary and skillful lawyer should be aware of climate change issues and laws and advise accordingly, but we are not aware of case law that supports this. 

Where the climate change implications of a transaction are legal or regulatory, advising on them is much more likely to fall within the duty of care (unless the lawyer had, say, a specific/discrete mandate) but less so where those implications are commercial or reputational only. Nevertheless, the distinction between legal and commercial advice can often be blurred, and the question of whether this duty to advise arises is likely to be highly fact sensitive. In some jurisdictions such as Canada, the content of the duty of care and the standards to be expected of a competent lawyer shift over time and as climate change and other ESG risks are better understood, advising on them will more likely become part of the general duty of care owed by lawyers to their clients.

It will be good practice to carefully set out the scope of the engagement in each case and consider whether climate change or other ESG-related risks may be material to the advice. However, it may be difficult to exclude consideration of ESG-related risks from the instruction entirely.

There are steps firms can take to manage the risks and seize the opportunities that the growing importance of ESG to both firms’ internal processes and the work they do for clients present. These include:

• Developing a clear understanding of the risks and opportunities ESG-related issues present to the firm and its clients.
• Maintaining robust enterprise risk and client intake processes that take account of the evolving ESG agenda and ensure proper risk governance including in relation to sanctions, money laundering, and cyber and data risks.
• Focus on embedding a positive workplace culture and a supervisory framework that considers mental wellbeing of employees and the establishment of an environment that promotes early admission of mistakes without fear.
• A recognition of the importance of a firm’s ESG credentials in the attraction and retention of talent and in reputation management and a focus on ensuring principles which take account of ESG issues are included in the firm’s processes relating to HR, procurement and supply chain and sustainability.
• Ensuring processes minimize the risk of claims arising from lack of proper definition of the scope of client engagements, for example through use of standard engagement letters and related guidance on scoping engagements which may include an ESG element as well as clear guidance in relation to advising beyond the lawyers’ area of expertise.
• Training and supervision which focuses on ESG-related risks to ensure that issue spotting and “scope of engagement creep” are minimized and lawyers’ knowledge keeps pace with evolving requirements and issues. 

Insurers will need to adapt their underwriting practices to an evolving ESG regulatory environment and ESG-related practice.

Assessment of the exposures of law firms to whom errors and omissions (E&O) and management liability cover is provided will involve an examination of the industries for whom the law firm acts, the services offered and their approach to ERM. Also relevant to insurers’ assessment will be negative media coverage and the impact of poor ESG practices on brand and reputation. Insurers will also be concerned with law firms’ engagement processes, including the approach the firm has taken to carve out ESG legal risks from the retainer and be alert to the potential for service promises that could fall short of client expectation.

“The rapid evolution in ESG-related requirements and standards is something that both entities and their professional advisors will need to grapple with,” says Assef. “Opportunities stemming from these challenges have the potential to transform the legal profession as we know it today – proactive risk management advice, knowledge of numerous legal frameworks together with out of-the-box thinking will be a sought-after quality every lawyer will need to develop and hone.”