EY: Growing sustainability risks put pressure on law departments

  • EY Law and Harvard Law School study finds General Counsel feel business leaders don’t fully appreciate sustainability risks
  • Law departments most concerned about reputational risks of sustainability, but still focus more on compliance
  • Managing risks where there is a lack of clear guidance from regulators identified as biggest challenge

Law departments around the world are facing a rising tide of risks relating to sustainability, but they do not feel that business leadership fully understands the implications, and they require additional resources to manage them effectively, according to a new study from EY Law and the Harvard Law School Center on the Legal Profession.

The 2022 General Counsel Sustainability Studyexplores these issues through a survey of 1,000 General Counsel and chief legal officers from 20 countries around the world, along with more than a dozen in-depth interviews with leading General Counsel.   

The findings reveal that only 15% of General Counsel respondents believe that their business leaders truly appreciate the risks to their organizations relating to environmental issues, including climate change and carbon emissions; and just 39% feel that leaders appreciate the risks relating to social issues, including diversity, wellbeing and employee safety. In addition, the study shows that 22% of General Counsel respondents believe that the environmental goals of the organizations that they work for are well defined.

Reputational risks a rising priority; focus still on compliance

A further issue highlighted by the study is that General Counsel appear to be focused on compliance and litigation issues relating to sustainability, even though they believe that the biggest risks relate to reputation and brand. This is partly due to the fact that 77% of General Counsel respondents feel more pressure from investors and regulators than from any other parties.

When asked about the most acute risks faced by their organizations, General Counsel pointed to worries about losing customers or brand damage resulting from poor labor or environmental practices (77%); and were much less concerned about barriers to investment (60%) or compliance with new regulations (59%).

Challenged by ambiguity

The study also examined the various challenges law departments are facing. By far the biggest challenge on the minds of respondents is managing risks where they lack clear guidance from regulators. Ninety-two percent of law departments who took part in the study said that they face challenges creating policies to tackle social issues, where there are no specific regulations; and 90% made the same point in relation to environmental issues.

Rising workloads, limited resources

As the range of environmental, social and governance (ESG) risks expands, and as businesses broaden their focus to deal with these, almost all General Counsel respondents (99%) expect a sharp increase in volumes of work, but they also harbor concerns about how to manage this anticipated rise. Ninety-six percent say that their legal departments require additional expertise to manage sustainability issues; and 94% state that they do not have the funds they need to manage their organization’s sustainability issues.

The study examines how law departments plan to manage these rising workloads. It shows that 20% intend to follow an “insourcing” approach, which focuses on hiring new people or re-allocating existing talent. A further 46% intend to pursue an “insource and optimize” strategy, which combines hiring and re-allocating with improved technology; and 34% are looking at “mixed sourcing,” which blends internal resources with support from alternative legal service providers.  

Kate Barton, EY Global Vice Chair – Tax, says:

“Sustainability is one of the defining issues of our time. Organizations around the world are facing mounting pressure on many fronts, such as changing consumer attitudes, more aggressive regulatory authorities, shifting investor priorities and emboldened employees. Organizations seem to be aware they need to change, and many law departments are at the vanguard of business’ efforts to become more sustainable. They are facing undeniable challenges, not the least is the of lack of skilled resources needed.”

Cornelius Grossmann, EY Global Law Leader, says:

“Sustainability is a no longer a ‘nice-to-have’ for businesses. General Counsel understand that reputational risks are critical, and that customers and employees expect organizations to play an active role in addressing environmental and social issues.

“This changing landscape means that law departments must expand their focus on sustainability and play a much more active role in managing the many complex environmental and social issues that their organizations are contenting with. Many organizations have already blazed this trail, and we expect others to follow as sustainability cements its position at the top of the boardroom agenda.”

Collaboration on the rise

There are nevertheless clear signs that organizations are taking steps to strengthen their ability to handle ESG risks, and one key measure is the extent to which law departments are working with other business areas. The study reveals that 61% of law departments plan to increase collaboration with other parts of the business, including finance, HR and operations, over the next three years. 

David B. Wilkins, Lester Kissel Professor of Law, Vice Dean for Global Initiatives on the Legal Profession, and Faculty Director of the Center on the Legal Profession, Harvard Law School, says: “Law departments are extremely well placed to be powerful leading voices on sustainability and related ESG issues in the organizations that they serve. They have a mix of skills that’s hard to find in any other department, including an insight into the regulatory mindset, and experience applying the lessons of the past to the present and the future.

“What’s more, they are already deeply involved in the many business issues impacted by sustainability – from supply chains and transactions to data privacy and litigation – and they are well connected to the various business areas that need to be involved in decision making on these issues. And they are trained to think about the broader public questions that ESG issues inevitably present, and upon which the company’s long-term reputation and social license to operate ultimately depends. It’s clear from the study that many legal departments plan to increase collaboration on sustainability issues, and in doing this they will help to drive better decisions across their businesses, in particular where regulatory guidance is lacking.”  

To learn more about the 2022 General Counsel Sustainability Study, visit ey.com/law.

Source: Press Release/Newsroom