More specifically, the value approach of ESG issues focuses on analyzing risks and opportunities through an expanded lens; and the values is based on understanding the importance of issues falling underneath the ESG label based on varying perspectives of stakeholders, which include board members, investors, employees, clients and customers, community organizations, and regulators among others.

The politicization of ESG has worsened this dynamic. Under these conditions, the debate around wokeness is frame as an either/or choice, meaning the value lens is either right and the values approach is wrong or vice versa. But what if the answer is both?

ESG is about financial value and organizational values

Central to making this case is the definition of materiality. In financial terms, what is material is seen narrowly through the lens of investors and lenders. More specifically, a material fact is 鈥渁 substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote,鈥� or 鈥渁 substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 鈥榯otal mix鈥� of information made available,鈥� according to the . In the U.S. context, the perspective of the reasonable investor is key.

Yet, institutional investors continue to have an acute interest in ESG, and firms and funds with interest in ESG are 鈥渁damant that issues such as climate change and human capital management are , issues.鈥�

Laurence D. Fink, the CEO of BlackRock 鈥� the world’s largest asset manager聽with more than $9 trillion assets under management 鈥� is known for through 鈥渦rg[ing] corporate leaders to assess the societal impact of their businesses, embrace diversity and consider how climate change could affect long-term growth.鈥� In addition, broadly speaking, the Securities and Exchange Commission and the International Sustainability Standards Board 鈥渂oth based on the potential effect on the company鈥檚 enterprise value, according to a PwC report.

Making the case for the financial materiality of ESG

The value lens examines issues under the ESG moniker as financially material. The values lens analyzes a broader range of issues based on a broad set of stakeholders beyond what is typically found on financial statements, such as assets, liabilities, equity, sources of revenue, and expenses. Many aspects of ESG show up on the balance sheet as intangible assets, which are defined as non-monetary assets that cannot be seen or touched, such as goodwill, brand equity, intellectual properties, licensing, customer lists, and research & development.

Customers lists and brand equity (defined as 鈥渢he commercial value that聽derives聽from consumer perception of the brand name of a particular product or service, rather than from the product or service itself鈥�) as intangible assets involve two key stakeholder groups 鈥� consumers and customers, respectively. As intangible assets on the balance sheet, it is easy to understand their financial materiality.

Perhaps the most questioned areas of ESG in the determination of financial materiality are the factors related to 鈥�S鈥� or social sphere, which includes areas of human capital management such as employee engagement, diversity, equity & inclusion (DEI), and organizational culture. The main reason for the debate is that these items don鈥檛 directly show up on financial statements, though they are key influencers in organizational performance and financial returns.

Indeed, human capital is a critical operational mechanism for a company鈥檚 operations. Goodwill 鈥� an accounting term defining the value of the business that exceeds its assets minus the liabilities and represents the non-physical assets, such as the value created by a solid customer base, brand recognition, or excellence of management 鈥� is one of the areas within financial statements in which human capital will create outcomes.

In addition, positive outcomes from the human capital elements of the 鈥�S鈥� are correlated to positive financial measures, further emphasizing the financial materiality of human capital. That said, the body of research is correlation-focused rather than causation-focused. Positive human capital results are not 100% the direct cause of positive financial measures.

Regardless, it is hard to argue with the strong body of research that shows how positive employee trends lead to strong financial performance. More specifically, the following human capital factors of ESG are financially material:

• • • Employee engagement, satisfaction & experience 鈥� Companies with an engaged workforce are 21% more profitable, according to Gallup’s State of the American Workplace study. In addition, organizations that score in the top 25% on employee experience report nearly 3-times the return on assets and double return on sales, according to . Finally, according to , 鈥淓SG leaders have higher employee satisfaction, and聽companies with the most satisfied employees grow faster and are more profitable.鈥�
    • Organizational culture 鈥� Companies have seen a fourfold increase in revenue growth. In addition, organizations with inclusive cultures are twice as likely to meet or exceed financial targets, three-times more likely to be high performing, and eight-times more likely to achieve better business outcomes, according to a report from .
    • Employee well-being 鈥� Stock values for a portfolio of companies that received appreciated by 235% compared with S&P 500 Index increase of 159% over a six-year simulation period.
    • DEI 鈥� Companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns , and those companies in the top quartile for gender diversity are 15% more likely to have financial returns above their respective national industry medians.

The aforementioned body of data proves major elements of the “S” are financially material. Therefore, the social aspect of ESG has value and values relevance. Moving forward, it will be necessary to ignore the politicized headlines around ESG and get back to doing the work of business. Indeed, when the term ESG is no longer needed, it will mean that ESG is normalized into business and is now just that, business.

Yet, an often-overlooked fact is that there are number of issues at law firms that fall under the ESG umbrella that are critical elements of any ESG strategy. They include pro bono commitments, volunteerism, DEI, recycling, data privacy, and cybersecurity.

Moreover, the support and pushback for a more socially responsible business environment is growing, and law firms are finding themselves struggling to know how to respond to key issues that are becoming important to clients. This is unlikely to change any time soon unless law firms make a concerted effort to address this problem.

To help in creating and executing an ESG strategy, a materiality assessment of key issues is one tool that鈥檚 often skipped over. The idea of reviewing stakeholders’ views to determine what’s critical about ESG and what should be prioritized 鈥� as well as being able to assess purpose, value, expectations, and priorities 鈥� is an important exercise for any organization to undertake.

Role of client demand

Like DEI a few years ago, a key driver of law firm change around a particular item is the demand by clients. Indeed, buyers of legal services are an important stakeholder in law firms鈥� ESG strategies; and corporate law departments setting an expectation for firms to have an ESG strategy is an important step to advance progress.

Law firms that go through a formal materiality exercise at the request of one client can also scale beyond that, which could play well to firms鈥� marketing and business development efforts with potential clients. Indeed, several law firms in the United Kingdom, whose ESG strategies tend to be more mature when compared to their U.S. peers, report that ESG is a great engagement tool with clients. Similarly, law firms in the U.S. have shared that collaboration with clients on DEI initiatives 鈥� one of many important ESG issues 鈥� strengthens client relationships.

For clients, the materiality assessment鈥檚 standard framework and benchmark system enables them to analyze across their panel law firms and determine where each firm is on the maturity scale as to their ESG strategies. This process also facilitates the identification of similarities across panel firms and can reveal factors 鈥� such as valuable data 鈥� that could help the law department to communicate its critical role in the company鈥檚 own ESG strategy.

In addition, any widespread push by corporate law departments of their panel firms toward more comprehensive ESG initiatives would greatly help the maturity of law firms鈥� ESG strategies across the board. And because our research has shown that, among U.S. law firms, completing a formal assessment of material issues with stakeholders is still a relatively uncommon, even one or two major multinational companies mandating that their law firms use a standard process to prioritize material issues would advance collective the overall legal industry鈥檚 maturity of ESG strategies a great deal.

Of course, one important consideration for corporate clients in working with each of their law firms to ascertain what goals make sense based on their priority issues 鈥� which in turn, stems from feedback from the unique set of each law firm鈥檚 stakeholders 鈥� is that every law firm will have different priority issues because their stakeholders vary. Indeed, a law firm with a large portfolio of business with the semi-conductor industry may find their material issues to be quite different from a law firm that specializes in labor and employment issues.

Potential for legal ops to have a role

One drawback to corporate law departments making this a priority is the amount of effort it takes. Having a solid legal ops function within the department, however, could provide a team to lead the execution, tracking, and evaluation of the department鈥檚 initiative to have its panel firms implement a standardized process for prioritizing material ESG issues. Of course, success in this area will depend on the extent to which legal ops has a role in managing outside counsel.

鈥淚f you figure that most departments are bifurcated between the operation side and the practice side, this initiative will fall under more the operation side. By default, legal ops would be the ones helping to administer some of this,鈥� states Bill Josten, Manager of Strategic Enterprise in Thought Leadership for the 成人VR视频 Institute. In fact, legal ops already is closing the gap in helping general counsel communicate back to the company about the department鈥檚 priorities and about how it is improving and seeking to drive the broader business forward.

Some critics may argue that the impact of generative artificial intelligence (AI) is a more critical item than prioritizing a consistent, standardized approach to the creation and execution of outside counsel鈥檚 ESG strategy. And while there is no doubt that generative AI will transform the legal industry in ways that we cannot foresee, ESG is about looking through an expanded lens of risk and opportunity, which generative AI may just be a subset of that larger lens.

Indeed, generative AI falls under the governance part of ESG 鈥� along with cybersecurity, data privacy, and ethics 鈥� and as such, generative AI should be seen as a potentially key material issue. Therefore, by prioritizing generative AI, general counsel and by extension their panel law firms are increasing the focus on ESG.

For more on how your law firm can conduct a materiality assessment, check out our starter kit here.

At the same time, both tax & accounting and legal services providers have a ways to go in executing their own internal ESG strategies, even as client demand for this information through the procurement process is exploding. Indeed, I constantly have to remind firms that their own house has to be in order, because one of the first questions a prospective client is going to ask is, 鈥淲hat are you doing for ESG within your own firm, if you are here to advise me?鈥�

The good news is that tax & accounting and law firms already have experience to lean on as they create a holistic ESG strategy. Indeed, clients have been asking for firms鈥� demographic data around diversity, equity & inclusion (DEI) for at least the last five years. In fact, DEI information is a major portion of the social or S part of ESG; and the expertise among accountants and CPAs involves many areas of the governance or G, it鈥檚 easy to see how the creation of a comprehensive ESG strategy is not as daunting as it seems.

Areas of priority to create a holistic ESG strategy

The two most urgent areas of focus for both law firms and tax & accounting firms in this area are: i) formalizing a material assessment, and ii) calculating greenhouse gas emissions (also referred to as carbon emissions) when they are assessing their gaps in client service offerings and consolidating existing activities around ESG issues into a complete strategy.

Identifying material issues 鈥� A materiality assessment exercise involves collecting feedback on material issues across all a firm鈥檚 stakeholders 鈥� including future, current, and past partners; associates and business services staff; clients; charitable organizations; and suppliers. Going through this process helps the firm identify the issues of greatest importance that should be prioritized for the firm鈥檚 own ESG strategy.

Carbon emissions calculations 鈥� Often, the biggest area of priority for tax & accounting and legal services providers is the environmental or E part of the equation. More specifically, calculating carbon emissions is the most urgent task, and it does involve some effort. The graphic below shows the typical sources of carbon emissions for tax & accounting and law firms.

Challenges may slow positioning

The process of creating and executing an ESG strategy does not come without its challenges, of course. One of the main challenges that I see often as part of the governance part is the partnership business model. Partnerships in general are very lax when it comes to governance because often, partnership relationships get in the way of the creation and execution of proper procedures and policies.

Another barrier to progress is that the necessity to create an internal strategy may not seem urgent to internal leaders because in the grand scheme of things, the carbon footprint of accounting and legal firms is small when compared to other industries, such as transportation companies and manufacturing.

To get around this perception, I often highlight that the expectations of clients 鈥� especially those who use the greenhouse gas protocol, which is the go-to methodology for companies in calculating greenhouse gas emissions 鈥� is that all businesses should seek to reduce their fair share of carbon. For example, an accounting firm and a manufacturing company are expected to reduce their carbon footprints by 90% in order to get to net zero, no matter their baseline 鈥� 90% is still 90%.

Challenges around varying preferences of generations among employees and the political environment in the United States are two additional barriers to progress that firms currently are facing. Younger workers may see ESG and reducing a firm鈥檚 carbon footprint as a huge business opportunity and a great goal to pursue as part of the firm鈥檚 larger commitment to healthy communities and habitats. The older worker cohort, by comparison, may lack the same enthusiasm.

Regarding the political environment, all firms should be cautious in the language that is used to pursue or explain ESG goals, making sure the goals are perceived as a framework to consider business risk and opportunity 鈥� not positioned as an ideology. A year ago, this was not a major concern.

On the horizon

The momentum for ESG will only accelerate despite the current headwinds. Indeed, client expectations about firms鈥� ESG strategies are currently much more strident in the United Kingdom and European Union because of pending disclosure requirements. For example, a client has to report on the carbon footprints of its suppliers, which is referred to as Scope 3, to meet regulatory requirements in certain jurisdictions.

While the U.S. Securities and Exchange Commission鈥檚 proposed rules to require companies to collect and report their suppliers鈥� carbon information are not yet finalized, disclosure of Scope 3 carbon emissions is already a mainstream expectation of many stakeholders. Indeed, the U.S. rules are almost irrelevant for virtually all global companies because such disclosure is already required in the E.U. and the U.K. For example, law firms tax & accounting firms that advise or provide services to multinational clients will be required to calculate and share their own carbon footprint as a supplier to these major public companies.

The accounting and legal professions are in a unique position to do something positive about the challenges we are facing in society 鈥� everything from the climate problem to governance issues to data collection, data security, and more. These are the professionals who have the skills, the talent, the expertise, and the connections to address these problems; but they have to walk their talk. And that means focusing on creating and executing their own internal ESG strategy with just as much enthusiasm as they put into going after the tremendous business opportunities of ESG advisory work.

In the context of sustainability and business models, the materiality matrix, which is the key outcome from a materiality assessment, has emerged as a critical tool for assessing and measuring the impact of sustainability-oriented business models on various stakeholder groups. Originating from the financial accounting and legal spheres, the concept of materiality focuses on identifying what is relevant and important.

Interviews and surveys are fantastic tools for collecting data and understanding stakeholders’ views on the importance, potential impact, and market expectations of each issue as part of a stakeholder feedback process 鈥� and it鈥檚 an important recurring step in creating and executing an ESG strategy. By juxtaposing sustainability aspects from both the company’s and stakeholders’ perspectives, the materiality matrix aims to match and align both viewpoints, facilitating a more comprehensive understanding of the sustainability impact of business models and strategies.

The output of this exercise, however, is where some concerns often arise. How should firm leaders approach analysis on elements that all appear equally valid? How do they avoid tensions between societal and business interests? Fearing the results of the analysis and potentially alienating internal or external stakeholders has unfortunately meant that some law firms choose to not explore the issue at all.

Every law firm experiences tensions between topics that are material, according to one perspective but not the other. To navigate these potential issues, firms should approach tensions between organizational goals as a topic that should be explored rather than eliminated. This approach can help firms identify potential win-win scenarios and areas where trade-offs need to be made between organizational performance and societal impact.

This is the lens through which analyzing these ESG topics should be approached: Rather than focusing on tensions, firms would instead create clarity with and for whom firms are creating value. A materiality matrix visualizes easy wins in the top, right-hand quadrant (see the matrix above) where organizational and stakeholder or societal interests are aligned. This does not mean the other quadrants are irrelevant. The point of the analysis is not to discard topics that fall into other quadrants but to contextualize where these topics are situated at this moment in time.

By examining the other quadrants, firm leaders can see which topics are important to stakeholders; and while not rated as highly in terms of organizational goals, these topics might still be easy to pick up or can be addressed down the line. In this sense, firms can approach the analysis with the intention to produce information to determine how they will address all identified issues, with the quadrants indicating timelines and resources needed for addressing these issues rather than assigning them a generic low- or high-priority label.

During analysis, firm leaders are by no means restricted to creating just one materiality matrix. They can compare the priorities of different stakeholder groups 鈥� such as clients; different internal groups, such as associates and partners; as well as competitors 鈥� against organizational priorities to get a clearer picture of each group鈥檚 view. This way firms can ensure that each group is given equal attention in the analysis rather than having the view of smaller groups lost in the larger matrix.

Creating more than one matrix also ensures that firms can continually keep track of those groups for which firms are creating value and for those that firms will looking to work with in relation to any actions taken on this analysis. This also helps keep the matrix simple and uncluttered.

Further, transparency and disclosure play significant roles in the analysis of any ESG issue that is considered most important after consultation with stakeholders. By openly sharing the results of their materiality assessment, law firms can foster honest conversations with stakeholders about the challenges they face and potential solutions. This transparency can help prevent accusations of selective disclosure while promoting a genuine commitment to sustainable development. By being transparent about these tensions, law firms can engage in collaborative conversations with stakeholders about their struggles and potential solutions.

By embracing the complexity and tensions inherent in ESG analysis and facing these head-on, firms can gain valuable insights into their sustainability challenges. A well-executed ESG materiality assessment can help firms prioritize substantive action on sustainable development, ultimately contributing to long-term financial performance and societal prosperity.

You can download a starter kit for law firms on conducting an ESG materiality assessment by filling out the form below:

There are two types of assessments 鈥� financial, and one that analyzes broader issues. The financial assessment looks exclusively at the ESG risks that could impact the organization鈥檚 financial value. The broader look, often called a 鈥渄ouble materiality鈥� assessment, examines ESG issues from both a financial impact and how the company鈥檚 activities could also influence the environment and society at large.

For law firms, the steps for creating an ESG strategy are the same, with just a few minor differences in the stakeholders, such as partners, professional staff, associates, clients, critical suppliers, and communities in which the firm has a major presence.

Here are five critical steps to create an ESG materiality assessment:

1. First, create a steering committee

The first step in determining material ESG issues is to put a cross-functional team of executives together to be accountable for the delivery of the ESG strategy鈥檚 creation and execution. Many times, organizations hire a person to lead this effort or appoint an existing internal leader.

For example, the United Kingdom-based law firm Burges Salmon hired as its head of Corporate Responsibility. Under her leadership, the firm gathered perspectives from internal subject matter experts, which typically include heads of HR, community and pro bono, facilities, environmental management, diversity and inclusion, risk management, influential partners, and at least one member of the C-suite.

2. Identify specific stakeholders

Firms then need to identify stakeholders in order to determine their perspective on the most critical issues, practices, and policies. These insights may emerge as part of broader ESG-related concerns, along with opportunities for strategic planning and reporting exercises. For law firms, these stakeholders typically include partners, associates, members of the business and professional staff, clients, critical suppliers, as well as engagement with local communities.

3. Compile a list of material issues

Then working with these stakeholders, firms should conduct a 鈥渉orizon-scanning鈥� investigation to pinpoint a list of material issues. And at this point, it is a good idea to conduct a benchmarking exercise with peers and consult a global or cross-issue framework, such as 鈥檚 modular approach to standards or the 鈥檚 materiality finder and map.

鈥淚 did a benchmarking exercise to look at the legal sector and how key clients were approaching ESG and what issues they had within their responsible business agendas,鈥� Green-Mann explains.

There is no magic number of issues, of course, but maintaining a balance between a number that is manageable and comprehensive is key, given the size of the firm, the number of employees dedicated to its ESG efforts, and other business priorities.

4. Meet with individual stakeholders

To consult with stakeholders, a combination of surveys, sessions with interest groups, and one-on-interviews are part of a comprehensive approach to gaining feedback. For example:

• • • Burgess Salmon leveraged interest groups of employees to stay abreast of the issues that employees cared about and then enlisted their help in executing their firm鈥檚 sustainability strategy.
    • Another law firm, Chapman and Cutler, compiled a group of intergenerational partners and employees to participate in its steering committee.

A best practice during the stakeholder engagement portion of the materiality assessment is to see how the firm鈥檚 larger purpose might be integrated into its sustainability. Weaving together a firm鈥檚 purpose and sustainability strategy help many organizations effectively communicate to internal and external stakeholders.

5. Analyze material issues & create strategy

The final step in doing a thorough materiality assessment is to analyze the results gathered from the multifaceted approach in consulting with stakeholders and then create a plan to execute. The insights from the previous steps help to build an organization鈥檚 sustainability strategy and shape it for the future. And a key part of that strategy鈥檚 execution is ongoing communication with stakeholders about the strategy itself and its progress.

Some law firms may find it helpful to align their strategy with a larger framework, such as the those from the or the , in order to help stakeholders digest progress more easily. Both Chapman and Cutler and Burges Salmon, for example, chose to align their strategies to the U.N.鈥檚 framework.

As a law firm鈥檚 business changes and grows, its sustainability strategy and perspectives of its stakeholders are likely to evolve as well. For this reason, firms should revisit their materiality assessments regularly. Indeed, it is an iterative process.

In addition to the time and effort that goes into doing the assessment, effectively communicating strategy and progress against key priorities also must remain a top priority. Many law firms use multiple channels to communicate updates, including publishing an annual ESG or social impact report, incorporating important elements into regular communications to employees, highlighting updates in executive management keynotes and townhalls, and promoting audio and video interviews of executive committee members or partners on social media.

As part of that, identifying current and potential employee concerns with the firm鈥檚 transparency around certain public issues is increasingly important from a branding context. More than likely, mistakes and lessons will occur, but the most critical element of transparency is acknowledging a mistake, outlining what is learned, and committing to doing better.