The reputational impacts of ESG are growing. That’s why many law firms are now planning strategies to measure and report on their ESG initiatives.
When firms strategically measure ESG benefits, in financial and non-financial terms, they position themselves for future success. “As they say, ‘What gets measured gets managed.’ That's an opportunity,” said Grant Thornton ESG & Sustainability Services Managing Director John Friedman. “But I would also flip that to say, ‘What gets measured poorly, gets managed poorly.' That's a risk.”
There are four important benefits that law firms can measure and manage.
4 benefits of ESG
ESG is often thought of as an issue for industries like energy, manufacturing or transportation. However, professional services firms can measure and achieve four types of benefits:
Improved ability to recruit and retain employees
A recent Thompson Reuters report on the legal sector indicated that associate turnover hit a record high last year, with firms losing almost 25% of their associates compared to 18.7% in 2019, leading to an expensive and competitive war for talent. Associates said a firm’s culture, including flexible working arrangements, were bigger decision drivers than compensation. Younger professionals, in particular, are looking for firms that align with their values.
Better alignment with clients who also invest in ESG
“Clients that are ESG leaders are going to evaluate their law firm partners with the same expectations.”
Today’s clients don’t always choose partners based on skills, capacity or price alone. “Clients that are ESG leaders are going to evaluate their law firm partners with the same expectations, in terms of their performance around ESG,” said Grant Thornton ESG & Sustainability Services Director Ashley Armstrong.
Firms with strong ESG profiles can be more attractive for clients seeking ESG guidance. You can expect to see clients asking for an ESG report. If you are competing for this work, you want to have your own house in order.
Potential to improve the bottom line
Organizations do well by doing good, and ESG initiatives can deliver direct bottom-line results.
For example, reducing the miles flown per year can be part of an effort to cut costs, but it also has an environmental benefit of cutting emissions associated with air travel, and a social benefit of supporting work–life balance. No matter which is the primary lever, the other benefits will be realized, too.
Above the Law recently reported that replacing even one associate can cost a firm hundreds of thousands of dollars. “Employee turnover is costly,” said Armstrong. “Establishing a culture that aligns with employee values can save you considerable costs.”
There is also a potential for tax benefits. “One great example is a company that was able to take advantage of IRS incentives for making in-kind donations to a specific class of charitable organizations, rather than donating money or supporting multiple organizations,” Friedman said. “Not only did this change in donations provide a reduction in their tax burden, but they realized other benefits, too — the administrative effort became much simpler, the reputational benefit rose and employee engagement grew.”
More transparency for regulators, clients, employees and other stakeholders
ESG messaging is an important element in internal and external communications. “Many firms are already doing really good work in ESG areas,” Armstrong said. “They just haven’t been viewing it from the ESG perspective or communicating a strong ESG message. When ESG-related efforts are underway, get credit for that good work.” Your ESG message is becoming even more important for regulators, clients, employees and other stakeholders.
One caveat is that it is important to avoid “greenwashing” — exaggerating ESG results or even creating the perception that you are misrepresenting ESG results in any way. Regulators, clients and employees will notice. Recently, U.S. senators warned corporate law firms that they plan to “scrutinize the institutionalized antitrust violations being committed in the name of ESG.”
“Law firms are naturally careful about disclosing information … ESG has been pushing the envelope of what you should and could disclose. So, there’s a duality there.”
In spite of these benefits, there are often barriers to embracing ESG. “Law firms are naturally careful about disclosing information,” Friedman said. “There’s a tendency to say only what is absolutely necessary. Answer the question that’s asked. ESG has been largely voluntary, and ESG has been pushing the envelope of what you should and could disclose. So, there’s a duality there.”
“In ESG and sustainability reports, companies often get praised for admitting their mistakes. Law firms are concerned about the liability, responsibility and accountability for those mistakes,” Friedman said.
Plus, many firms lack the internal structure and processes to gather and analyze ESG information. “Because ESG touches on issues from employee development and retention to greenhouse gas emissions, it can be difficult to set up a centralized function to manage across the firm,” Armstrong said.
Finally, there is not one universal ESG reporting standard. While the trends in stakeholder demands indicate the continuing importance of ESG, there is some uncertainty about how to best measure, manage and report on ESG.
3 steps to measurable ESG
To turn your ESG goals into clear and measurable actions, you can take three tangible steps.
1. Conduct a materiality assessment to prioritize ESG topics
A materiality assessment identifies the topics that are most significant to the firm and its stakeholders, through comprehensive review, interviews, aggregation and analysis. “Then, you can set priorities based on the results and feedback from stakeholders, and develop a strategy focused on the topics that matter most,” said Armstrong. “This also informs how to focus your communications when you report on results.”
“When organizations have a good handle on their key issues, a materiality assessment provides a foundation for qualitative and quantitative analysis and reporting that is based on current research and data,” said Friedman.
2. Benchmark against your peers to set goals
The next step is to benchmark your current ESG performance against industry peers and high performers. Firms can also align themselves with ESG frameworks. For example, if climate change topics are a priority, a firm can benchmark its current performance against the Science-Based Targets Initiative that focuses on the GHG emission reductions necessary to meet the global target to contain climate change to less than 1.5 degrees Celsius. Benchmarking results can help refine your focus on select, achievable goals. “You may find you are a leader. You won’t know until you measure,” said Friedman.
Through conducting a materiality assessment and benchmarking analysis, a firm has a data-backed view of what is most important to it and what it does well — a strong foundation for a measurable ESG approach.
3. Employ scenario planning for the long term
Scenario planning can broaden management’s view of what might happen in the future. Considering likely and unlikely scenarios helps managers develop diverse action plans so that they are ready to respond. Using these alternatives, management can develop a comprehensive plan that recognizes the risks and rewards each scenario presents.
With concerns on the rise about everything from climate change to social justice, effective ESG is designed to shine a light on how businesses are addressing these broader societal concerns, and law firms can play their part. With a measurable approach, based on internal and external research and analysis, firms can advance their ESG initiatives and measure their impacts on the way to achieving their goals.
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