ESG And Private Equity – Towards A New Role For Lawyers? – M&A/Private Equity

Since the outbreak of the COVID-19 pandemic, much has been said
on the importance of environmental, social and governance
(ESG) in the private equity industry
(PE). Recently, the concept gathered momentum
through the coming into force of the EU Taxonomy¹ on 01
January 2022 and the EU Sustainable Financial Disclosure Regulation
in 2022. As a result of these rules, disclosures under the Task
Force on Climate-Related Financial Disclosures became
mandatory.

SUSTAINABILITY IN PRIVATE EQUITY

A direct corollary of their implementation is that PE firms must
now report both on sustainability risks and the impact at product
and entity level. In effect, fund managers now stand challenged to
promote transparency and combat the phenomenon of
‘greenwashing’.

In this regard, it has been said that “[PE] funds are
finding that ESG issues that weren’t necessarily a factor
commercially a few years ago are now front and center. And COVID-19
has only accelerated the pace of change² “. As a
matter of fact, a survey undertaken by Bain and Company³ with
over 12,000 US and EU consumers revealed that 44% are very
confident that “sustainability will be even more important
in the wake of the pandemic.“

The figures on the growing importance of ESG are compelling and
self-explanatory. Thus, a report prepared by the US SIF
Foundation⁴ disclosed that for 2020, investors held USD
17.1 trillion in assets chosen according to ESG principles and, up
from USD 12 trillion just two years earlier. As to ESG-specific
mutual funds, in 2021, the Exchange Traded Funds reached a record
USD 400 billion in Assets Under Management, representing an
increase of up to 33% from the year before; these are expected to
continue to grow rapidly in the forthcoming years⁵ .

Another report⁶ issued after a meeting of the
Practical Law In-house Consultation Board disclosed that the
“ESG is a key priority for the [Financial Conduct Authority]
and the [UK] government also launched a green finance strategy
which was supportive of integrating ESG factors into financial
decision making⁸ .”

Yet, amidst these major changes, not much has been said on the
impact of ESG on the role of PE lawyers.

What then is the changing role of PE lawyers amidst these
changes? This article examines the meaning and scope of the concept
of ESG, reviews industry responses and the results of surveys on
its anticipated impact on PE lawyers and comes to the concluding
thought that this remains a largely subjective matter given the
complexity of the ESG concept. A caveat to this article is that the
issue of greenwashing has been kept outside its scope but will be
dealt with in another article.

DEFINING ENVIRONMENTAL, SOCIAL GOVERNANCE (ESG)

The concept of ESG has remained undefined despite a consensus in
the PE industry that we are dealing with a concept which is
“broad and amorphous, notoriously hard to
define⁹” and “more complicated than GDPR
implementation and Brexit [because] it touches every business area,
and the transformation is not always a direct response to
legislative change …/… [i]nstead there is a complex patchwork
of soft and hard law and …/… many elements of the
transformation are discretionary¹⁰“.

At best, ESG has been described as “ESG isn’t about
doing good for good’s sake; it’s about recognising what
customers really want and turning that into a strategy that creates
tangible value¹¹. Consequently, “ESG criteria have
now become returns in supporting more efficient governance and
management practices and in reducing long-term
risks.¹²“

However, what is undisputed is the importance which it has
gained in the PE industry. Thus, it has been commented that
“ESG considerations – especially the environmental
ones – are now a matter of credibility for funds and asset
managers ESG criteria have now become returns in supporting more
efficient governance and management practices and in reducing
long-term risks.” A direct consequence of this is that
“environmental matters are becoming a major concern for
regulators which is translated in stricter regulation. It means
more transparency requirements regarding environmental impact for
companies and more liability related to the subsidiaries’
behaviour’.

Put within the PE perspective, Bain & Company¹³
have expressed the view that the focus of PE firms has shifted from
the traditional governance risks into a “growing awareness
that environmental, social and governance issues are highly
interrelated and that the biggest benefits over time accrue to
companies that balance efforts between all three” as
opposed to the traditional focus on governance risks.

It is their firm belief that the catalyst for this change of
focus are investors because globally Limited Partnerships are
demanding based on the 2020 Edelman Trust Barometer Special
Report¹⁴ entitled “Institutional
Investors”. According to the report, 88% of Limited
Partnerships globally have recourse to ESG performance indicators
in making investment decisions, out of which 87% stated that they
invest in companies which have reduced their near-term return on
capital in order that these can be reallocated to ESG
initiatives.¹⁵

LAWYERS’ ESG CHALLENGE & THE UK PERSPECTIVE

Lawyers’ New Role

There is no settled view on the changing role of PE lawyers
because of ESG considerations. As Bain & Company have opined,
“even the leading law firms are still figuring out where
to play and how to win. One thing is already clear though –
making it work takes the same level of commitment and ambition
firms devote to developing any new differentiated
capability.”

Nevertheless, the starting point would be the outcome of a
meeting of the Practical Law In-house Consultation Board to
the effect that the challenge of PE lawyers’ amidst ESG is
“making the indigestible, digestible¹⁶. In
particular, the meeting identified the following as the challenge
ahead for PE lawyers:

1. understanding the complexity of new legislations ranging from
   environmental law to company law and finance simultaneously with
   gathering data on existing structures and assist with the
   development of the appropriate compliance approach;




2. understanding each component of ESG notwithstanding the absence
   of a formal definition and developing an ESG action plan that will
   enable them meet with disclosure obligations;




3. developing standard contractual clauses to re-define their
   client relationship to guard lawyers/law firms against specific
   risks whilst simultaneously enabling lawyers/law firms
   “focus on the relevance of ESG and the desire to drive
   this through¹⁷“;




4. collecting and reviewing data to adequately report on ESG
   metrics with a view to enhancing transparency and accountability in
   line with regulations; and




5. developing ESG measures that are over and above the minimum
   regulatory compliance and adopt these as their own such that both
   in strategy and business they are “not just ‘doing
   business’ but doing business in the right way.” For
   instance, set up an ESG committee, designate a person who will
   specifically overview ESG compliance such that the direction of
   travel of the fund or organization will be reviewed “through
   an ESG lens ¹⁸“

The changing role of PE lawyers amidst ESG was addressed during
the Bristol Law Society interactive webinar on
“An Introduction to ESG”¹⁹ . The
overwhelming view was that lawyers “play an important role
as part of a multi-disciplinary group ²⁰“
considering their skills “of diligence, analytical
methodology, evidence-based assessment and advocacy
²¹“ which are instrumental to understand,
evaluate risks and advise on the strategy to be adopted to
implement ESG against the backdrop of regulations developed to
ensure transparency and combat the ‘greenwashing’
phenomenon as regards ESG.

Linklaters have expressed the view that lawyers will be
transformed into investment bankers because of concerns that
“other types of financial services firms [are] falling
prey to some of the problems that have affected
banks²²“ as a result of which it is
their belief that bank-style regulations have been extended to new
spheres amongst which private equity.

As to DLA Piper²³, their view is that “legal
teams are no longer just reacting to ESG issues, but proactively
becoming involved in integrating material ESG risks and
opportunities in business organizations, their operational policies
and go-to-market strategies.”

In their view, the challenge of PE lawyers now centres around
devising development strategies built around the following
themes:

• sustainability strategy and integration into
  decision-making: lawyers will be responsible for laying
  down the strategic direction of travel of ESG and must ensure that
  sustainability forms an integral part of corporate governance;




• horizon-scanning: lawyers must be able to
  foresee ESG opportunities and risks that will impact the fund or
  company as these are at the core of sustainability. They are
  expected to identify the risks, including greenwashing and be aware
  of the evolution of regulations in order that these are
  incorporated into corporate management of the fund or company and
  that they put into place the necessary policies and protocols that
  will bring these into fruition.




• transparency and disclosure: lawyers have an
  obligation to (i) advise on and ensure that (i) reporting on
  sustainability (a) is transparent and identifies material issues
  (ii) sustainability is being implemented and the strategy to manage
  issues and (ii) ensure that transparency meets with the minimum
  reporting requirements and (iii) go above and beyond the minimum
  reporting requirements.




• policies and procedures: the ESG policies and
  procedures which lawyers draft must not only be robust but they
  must also be put into practice to ensure that they meet with
  investors’ expectations and “shape the culture and
  corporate decision-making process of [funds] and
  companies²⁴.




• grievance procedures: lawyers have an
  obligation to set up a grievance procedure which is adequate and
  the corresponding mechanism that ensures that concerns are raised
  and addressed as these form an integral part of the complex due
  diligence and risk management which lawyers are now expected to
  handle in the wake of the risks of litigation on ESG matters and
  the accompanying reputational risks and potential damage which
  these entail. In brief, the motto is to foresee and suggest ways to
  mediate in order to avoid actual litigation.




• managing indirect impacts: lawyers are
  expected to be directly engaged in due diligence relating to ESG
  matters as well as human rights issues and provide guidance on how
  to manage wider ESG risks and how these are likely to affect the
  fund or company; and




• in a time of crisis: lawyers are expected to
  address actual ESG crises which are likely to have a bearing on the
  financial position and reputation of the fund or company for
  instance when checks by regulators return a finding of not meeting
  with the minimum standards and there is a threat of
  litigation.

The pressures on lawyers is clearly highlighted in by
PWC²⁵ who have asserted in their Global PE Responsible
Investment Survey that 37% of their “respondents …/…
have turned down an investment opportunity because of ESG
concerns²⁶“ and that less than PE firms have
in place plans for emerging technologies and data ethics.
Furthermore, Thomson Reuters²⁷ has summarised the
challenge awaiting lawyers with the implementation of ESG itself in
relation to three themes namely (i) ESG ratings and ESG data are
not regulated thereby triggering lack of transparency (which the
FSA has identified as crucial), conflicting data and loss of
confidence from investors (ii) the formidable costs associated with
data collection, preparing ESG reports, assessing performance,
producing files and creating what they have termed as ‘new
sustainability-based products²⁸‘ and (iii) the
absence of a definition of the ESG concept and considering the
complexity of ESG components themselves. Robert van
Breeman²⁹ has expressed the view that there is no one
size fits all formula for lawyers’ internal
‘reconstruction’ for ESG. However, some pointers have been
suggested and are worthy of note namely “(i) market
positioning (ii) size (iii) types of clients, matters and
sectors/industries (iv) financial structure and (v) governance
model³⁰.”

The World Economic Forum³¹ has expressed the view
that what it calls the data challenge is much wider than meeting
with reporting requirements and that “the foundations of a
strong ESG program are built on data ³²…/… [because]
an organisation that is able to fully integrate ESG into corporate
strategy, with a symbiotic relationship between day-to-day business
and ESG goals, will find itself in a much stronger position than
its peers”. It in fact advocates that reporting is actually a
subset of data because it is data which makes decision making
possible as it is “data which is integral to how an
organisation collaborates, tracks and reports on ESG
³³.”

CONCLUSION

The concluding thought is that there is no single identifiable
biggest challenge awaiting PE lawyers, especially in the realm of
implementation of ESG with funds:

1. first because of the lack of an agreed and authoritative
   definition of ESG;




2. secondly because of the absence of an ‘ESG Scorecard’
   setting out an agreed set of criteria to assess whether an
   institution is ESG compliant and deal with the twin issue of
   ‘greenwashing’;




3. thirdly, the question of data to be used for assessing ESG
   compliance. In the sphere of Private Equity, Apperio³⁴
   have expressed the view that “data security is a case in
   point because the issue can be classified in several ways…/…
   today it has clear implications across the [ESG] categories –
   especially around employee and customer privacy
   ³⁵“




4. fourth, data privacy management because business is
   increasingly being done digitally since the COVID-19 pandemic and
   if we consider existing data protection laws and the twin issue of
   cybersecurity which calls for protection against ransomware attacks
   and hacking³⁶; and




5. finally, the governance level challenge, both at the level of
   clients and lawyers/law firms themselves because their new roles
   with ESG means that they too must review their internal processes,
   implement their own ESG strategy, recruit the right talent and/or
   train their personnel and revamp their environmental policies
   metrics in order that they remain competitive but also to be ESG
   compliant themselves. As Robert van Breeman has put it, lawyers new
   role amidst ESG is two-fold namely (i) “guide their
   clients through the ESG transformation³⁷” and (ii)
   “as independent actors in their own right
   ³⁸‘.

In brief, lawyers/law firms need to reinvent themselves to meet
the challenges of ESG as ESG is here to stay³⁹. In my
view, this actually represents an opportunity⁴⁰ for
growth. As Robert van Beemen and Sophie Chammard have explained,
“as the regulatory rules of the game continue to evolve
towards sustainability, lawyers have become instrumental in
facilitating their clients; journey. Initially law firms were
required to engage in ESG due to client needs. They are now
climbing the ladder of the different stages of CSR.
⁴¹“

Footnotes

1;EUROPEAN COMMISSION, “EU TAXONOMY FOR SUSTAINABLE
ACTIVITIES” (HTTPS://EC.EUROPA.EU/INFO/BUSINESS-ECONOMY-EURO-/BANKING-AND-FINANCE/SUSTAINABLE-FINANCE/EUROTAXONOMY-SUSTAINABLE-ACTIVITIES-EN

2 HTTPS://WWW.BAIN.COM/INSIGHTS/ESG-INVESTING-GLOBAL-PRIVATE-EQUITY-REPORT-2021

3 AXEL SEEMANN, DALE HARDCASTLE, DEIKE DIERS, JACQUELINE
HAN, BAIN & COMPANY “REPORT: THE EXPANDING CASE FOR ESG IN
PRIVATE EQUITY” (HTTPS:// WWW.BAIN.COM/INSIGHTS/ESG-INVESTING-GLOBAL-PRIVATE-EQUITY-REPORT)

4 HTTPS://WWW.USSIF.ORG/

5 HTTPS://WWW.INVESTOPEDIA.COM/TERMS

6 LYNSEY POULTON, THOMSON REUTERS “HOW LEGAL
DEPARTMENTS ARE RESPONDING TO ESG CHALLENGES” (HTTP://IN-HOUSEBLOG-PRACTICALLAW.COM/ESG)

7 CLIMATE CHANGE AND SUSTAINABLE FINANCE (HTTPS://WWW.FCA.ORG.UK/FIRMS/CLIMATE-CHANGE-SUSTIANABLE-FINANCE)

8 SEBASTIAN BARLING & OMAR SALEM, LINKLATERS
“PRIVATE EQUITY FIRMS ARE FACING THE PROSPECT OF BANK-STYLE
REGULATION” HTTPS://WWW.LINKLATERS.COM/EN/INSIGHTS/PUBLICATIONS/2020/MARCH)

9 HTTPS://WWW.BAIN.COM/INSIGHTS/ESG-INVESTING-GLOBAL-PRIVATE-EQUITY-REPORT-2021

10 ALEX WOOLGAR & SIDDHARTHA MANKAD “THE
LAWYER’S ROLE IN ESG TRANSFORMATION”, 01 NOVEMBER 2022 (HTTPS://LEGALBRIEFS.DELOITTE.COM/POST/)

11 HTTPS://WWW.BAIN.COM/INSIGHTS/ESG-INVESTING-GLOBAL-PRIVATE-EQUITY-REPORT-2021

12 NATHAN BLATZ “SG AND PRIVATE EQUITY IN 2022″
LAWYER MONTHLY 30 JUNE 2022 (HTTPS://WWW.LAWYER-MONTHLY.COM/2022/06/ESG-AND-PRIVATE-EQUITY-IN-2022/)

13 AXEL SEEMANN, DALE HARDCASTLE, DEIKE DIERS, JACQUELINE
HAN, BAIN & COMPANY “REPORT: THE EXPANDING CASE FOR ESG IN
PRIVATE EQUITY” (HTTPS:// WWW.BAIN.COM/INSIGHTS/ESG-INVESTING-GLOBAL-PRIVATE-EQUITY-REPORT)

14 NATHAN BLATZ,HTTPS://WWW.EDELMAN.COM/TRUST/2021-TRUST-BAROMETER/INVESTOR-TRUST

15 HTTPS://WWW.BAIN.COM/INSIGHTS/ESG-INVESTING-GLOBAL-PRIVATE-EQUITY-REPORT-2021

16 LYNSEY POULTON, THOMSON REUTERS “HOW LEGAL
DEPARTMENTS ARE RESPONDING TO ESG CHALLENGES” (HTTP://IN-HOUSEBLOG-PRACTICALLAW.COM/ESG)

17 LYNSEY POULTON, THOMSON REUTERS “HOW LEGAL
DEPARTMENTS ARE RESPONDING TO ESG CHALLENGES” (HTTP://IN-HOUSEBLOG-PRACTICALLAW.COM/ESG)

18 LYNSEY POULTON, THOMSON REUTERS “HOW LEGAL
DEPARTMENTS ARE RESPONDING TO ESG CHALLENGES” (HTTP://IN-HOUSEBLOG-PRACTICALLAW.COM/ESG)

19 THE LAWYERS ROLE IN ESG (HTTPS://WWW.LEXOLOGY.COM)

20 THE LAWYERS ROLE IN ESG (HTTPS://WWW.LEXOLOGY.COM)

21 THE LAWYERS ROLE IN ESG (HTTPS://WWW.LEXOLOGY.COM)

22 SEBASTIAN BARLING: “PRIVATE EQUITY FIRMS ARE
FACING THE PROSPECT OF BANK-STYLE REGULATION” (HTTPS://WWW.LINKLATERS.COM/EN/INSIGHTS/PUBLICATIONS/2020/MARCH)

23 NATASHA LUTHER-JONES, JEAN-PIERRE DOUGLAS-HENRY,
STEVEN GRAY, DLA PIPER: “HOW GENERAL COUNSEL AND LAWYERS MUST
HELP DELIVER SUSTAINABILITY AND ESG OUTCOMES” (03 DECEMBER
2020) (HTTPS://WWW.DLAPIPER.COM/EN-GB-INSIGHTS/PUBLICATIONS/2020)

24 NATASHA LUTHER-JONES, JEAN-PIERRE DOUGLAS-HENRY,
STEVEN GRAY, DLA PIPER: “HOW GENERAL COUNSEL AND LAWYERS MUST
HELP DELIVER SUSTAINABILITY AND ESG OUTCOMES” (03 DECEMBER
2020) (HTTPS://WWW.DLAPIPER.COM/EN-GB-INSIGHTS/PUBLICATIONS/2020)

25 PWC “HOW PRIVATE EQUITY FUNDS CAN ACHIEVE THEIR
ESG GOALS” (HTTPS://WWW.PWC.COM/US/EN/INDUSTRIES/FINANCIAL
INDUSTRIES/LIBRARY/ACHIEVING-ESG-GOALS-HTML/)

26 PWC “HOW PRIVATE EQUITY FUNDS CAN ACHIEVE THEIR
ESG GOALS” (HTTPS://WWW.PWC.COM/US/EN/INDUSTRIES/FINANCIAL
INDUSTRIES/LIBRARY/ACHIEVING-ESG-GOALS-HTML/)

27 TIME FOR CHANGE – INSIGHTS INTO ESG LEGAL
INSIGHTS EUROPE 12 OCTOBER 2021 (HTTPS://BLOGS.THOMSONREUTERS.COM/LEGAL-UK/2021

28 TIME FOR CHANGE – INSIGHTS INTO ESG LEGAL
INSIGHTS EUROPE 12 OCTOBER 2021 (HTTPS://BLOGS.THOMSONREUTERS.COM/LEGAL-UK/2021

29 ROBERT VAN BREEMAN “BUILDING THE SUSTAINABLE LAW
FIRM: DEVELOPING AND IMPLEMENTING AN ESG STRATEGY”, GLOBE LAW
AND BUSINESS LTD, 2022 AT P.15

30 ROBERT VAN BREEMAN “BUILDING THE SUSTAINABLE LAW
FIRM: DEVELOPING AND IMPLEMENTING AN ESG STRATEGY”, GLOBE LAW
AND BUSINESS LTD, 2022 AT P.75

31″THE NO. 1 ESG CHALLENGE ORGANISATIONS FACE:
DATA”, 28 OCTOBER 2021 (HTTPS://WWW.WEFORUM.ORG/AGENDA/2021/10/NO-1-ESG-CHALLENGE-DATA-ENVIRONMENTAL-SOCIAL-GOVERNANCE)

32 “THE NO. 1 ESG CHALLENGE ORGANISATIONS FACE:
DATA”, 28 OCTOBER 2021 (HTTPS://WWW.WEFORUM.ORG/AGENDA/2021/10/NO-1-ESG-CHALLENGE-DATA-ENVIRONMENTAL-SOCIAL-GOVERNANCE)

33 “THE NO. 1 ESG CHALLENGE ORGANISATIONS FACE:
DATA”, 28 OCTOBER 2021 (HTTPS://WWW.WEFORUM.ORG/AGENDA/2021/10/NO-1-ESG-CHALLENGE-DATA-ENVIRONMENTAL-SOCIAL-GOVERNANCE)

34 SEVEN LEGAL CONSIDERATIONS FOR ENVIRONMENTAL, SOCIAL
AND GOVERNANCE (ESG) IN PRIVATE CAPITAL: AN IN-HOUSE GUIDE FOR
CONTEMPLATING THE LEGAL DEPARTMENT’S ROLE AS ESG EVOLVES FROM
AN ISSUE IN PRIVATE INVESTMENT TO A CENTRAL FOCUS OF THE BUSINESS
(EBOOK HTTPS://INFO.APPERIO.COM/RS/793-ZDU-141/IMAGES/7-LEGAL-CONSIDERATIONS-ESG-PRIVATE-CAPITAL.PDF
)

35 SEVEN LEGAL CONSIDERATIONS FOR ENVIRONMENTAL, SOCIAL
AND GOVERNANCE (ESG) IN PRIVATE CAPITAL: AN IN-HOUSE GUIDE FOR
CONTEMPLATING THE LEGAL DEPARTMENT’S ROLE AS ESG EVOLVES FROM
AN ISSUE IN PRIVATE INVESTMENT TO A CENTRAL FOCUS OF THE BUSINESS
AT P. 5 (EBOOK HTTPS://INFO.APPERIO.COM/RS/793-ZDU-141/IMAGES/7-LEGAL-CONSIDERATIONS-ESG-PRIVATE-CAPITAL.PDF
)

37 PWC “HOW PRIVATE EQUITY FUNDS CAN ACHIEVE THEIR
ESG GOALS” (HTTPS://WWW.PWC.COM/US/EN/INDUSTRIES/FINANCIAL
INDUSTRIES/LIBRARY/ACHIEVING-ESG-GOALS-HTML/)

38 ROBERT VAN BREEMAN “BUILDING THE SUSTAINABLE LAW
FIRM: DEVELOPING AND IMPLEMENTING AN ESG STRATEGY”, GLOBE LAW
AND BUSINESS LTD, 2022 AT P.15

39 ROBERT VAN BREEMAN “BUILDING THE SUSTAINABLE LAW
FIRM: DEVELOPING AND IMPLEMENTING AN ESG STRATEGY”, GLOBE LAW
AND BUSINESS LTD, 2022 AT P.15

39 THE LAWYERS ROLE IN ESG (HTTPS://WWW.LEXOLOGY.COM), THOMSON REUTERS
“TIME FOR CHANGE – INSIGHTS INTO ESG LEGAL INSIGHTS
EUROPE” 12 OCTOBER 2021 (HTTPS://BLOGS.THOMSONREUTERS.COM/LEGAL-UK/2021

40 ALEX WOOLGAR & SIDDHARTHA MANKAD “THE
LAWYER’S ROLE IN ESG TRANSFORMATION”, 01 NOVEMBER 2022 (HTTPS://LEGALBRIEFS.DELOITTE.COM/POST/)

41 ROBERT VAN BREEMAN “BUILDING THE SUSTAINABLE LAW
FIRM: DEVELOPING AND IMPLEMENTING AN ESG STRATEGY”, GLOBE LAW
AND BUSINESS LTD, 2022 AT P.87