Support ESG in small companies: Issue strategies for in-house counsel

Sterling Miller

One of the hottest topics in the world of in-house counsel today is that of environmental, social, and governance factors (ESG). ESG has become a catch-all phrase covering topics ranging from diversity to climate change to social causes to the composition of the board of directors. Such a wide range of issues presents both opportunities and challenges for in-house lawyers as ESG issues often land at the doorstep of the legal department.  

At large companies, this is generally not a problem since there are many resources available to assist with such efforts. However, at smaller companies with limited resources and small legal departments, it can be particularly challenging. If that is where you find yourself, here are some strategies for supporting ESG efforts in a small company.

What’s driving ESG efforts?

At most companies — large or small — the pressure to get behind ESG efforts comes from multiple sources. Investors are often in the lead but are followed closely by lenders, vendors, employees, customers, regulators customers, the board of directors, employees, and the communities where companies operate. All have an interest in ESG issues, usually in support of such efforts — but not always.  

As we have seen recently, some politicians are taking punitive actions when they see companies acting in a manner that runs counter to their own beliefs or prized legislation. If you are in-house counsel at a small company, all these pressure points can make your work life just that much harder.

What questions should in-house counsel be asking?

Just because there is pressure to get engaged on ESG issues does not mean all companies want to engage. While for many it is part of who they want to be, for some companies it is an unwelcome distraction. Consequently, in-house counsel must ask a series of questions to determine what, if anything, they need to do to be supportive of the company’s position:

  • What does the company want to do about ESG issues?
  • Which ESG issues are priorities — and why?
  • What outside forces are pressuring the company regarding ESG issues?
  • Who owns the ESG process?
  • Who owns the data needed to support ESG issues?
  • What does the company want or need to report — or disclose — regarding ESG issues?
  • Who owns the vetting process to ensure data and reporting are accurate?

Why is legal involved in ESG issues?

Whenever companies are faced with issues that have no clear owner — or involve cross-company players and complicated management tasks — they almost inevitably turn to the legal department for leadership. Most recently, we saw this with how companies responded to the COVID pandemic. For most businesses, managing the company’s response fell primarily on the shoulders of the legal department, whether that was a team or a solo general counsel. Why?  

Because lawyers are good at managing such tasks — at taking limited information and making good calls about the best path forward, at communicating what needs to be done, and ensuring that it gets done.  It’s basically what we trained for and smart companies want to take advantage of having such a valuable asset available.

What should I be doing next?

In addition to asking the core questions set out above, in-house counsel at a small company can add tremendous value when it comes to ESG issues by taking a 360-degree view and identifying opportunities and threats. Opportunities come in the form of the benefits ESG efforts bring to most companies, including better financial results, an enhanced reputation, happier employees, and fewer problems with regulators and legal issues generally.  

Threats can come from the problems that arise when the company fails to comply with legal obligations falling under the ESG umbrella — for example, compliance issues, governance issues, and employment law issues. Likewise, many small companies are dominated by a founder and if the founder is someone who wants to take on ESG issues in a very public way, that can be a lightning rod for supporters and detractors, the latter of whom may want to take out their issues by boycotting the company, trashing it on social media, lawsuits, or worse.

To cut through the clutter, in-house counsel should focus on:

  • Legal and regulatory obligations. These include laws, contractual obligations, sanction laws, and so forth falling under the ESG rubric.
  • Governance issues. These include the concerns of the board of directors and activist investors, as well as any specific legal obligations tied to ESG issues. For example, board composition, executive compensation, etc.
  • Business conduct policies. This captures the company’s ethics policy, code of conduct, compliance training like FCPA and sexual harassment, diversity and inclusion, and, of course, the “tone at the top.”
  • Community expectations. This is where being a good corporate citizen comes into play: how the business wants to be seen in the community, employee engagement, charitable endeavors, crisis management planning, and activism by both management and individual or groups of employees, which can be diametrically opposed in many instances.

Focusing on these core issues will help in-house counsel prioritize the right ESG issues with the limited resources at hand. Lastly, in-house counsel must realize they cannot do all of this alone — especially if they are a legal department of one.

There are many stakeholders when it comes to ESG and the legal department can help herd the cats, including human resources, corporate communication, investor relations, finance, and other groups with an interest in ESG issues.

While at first blush it seems like everyone would want to get behind ESG efforts, the reality is far more complicated. In-house counsel, especially those who “volunteered” to run ESG projects, should start by figuring out the lay of the land internally and educating themselves on the ESG issues that matter most to the business.

Next, realize that you are not alone and there is a need to pull others into the process.  If resources are limited — and aren’t they always? — then take the time to properly prioritize the most important ESG projects and focus on those first.  

Lastly, consider who needs to know about what the company is doing regarding ESG, be it internal or external stakeholders. The “who cares?” aspect may be the most important piece of the puzzle. If you have access to Practical Law, you have access to a wealth of ESG-specific resources to help you do all the above quickly and effectively.

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