Morrison Foerster, a leading global law firm, today announced the results of its second “GCs and ESG” survey in partnership with Corporate Counsel. The results show that ESG considerations have quickly evolved into a top corporate priority over the past year as companies are increasingly balancing ESG regulatory and internal mandates with a focus on both enhancing positive impact for the benefit of shareholders and stakeholders and mitigating negative ESG externalities. As priorities have shifted, so, too, has ESG leadership, with seventy-two percent of respondents this year reporting that either the CEO, Chief Compliance Officer or another C-Suite leader is spearheading ESG strategy, whereas it was only ten percent last year. The top ESG efforts have also shifted somewhat from last year’s focus on “G” (governance) to “E” (environment) this year. This shift is likely due to both more mature governance frameworks and increasing regulatory mandates from leading government agencies across the globe.
“Now in its second year, our report shows that there is room for more ESG innovation beyond compliance as CEOs and C-suite executives lead ESG strategies from the top down,” said Susan Mac Cormac, global chair of Morrison Foerster’s ESG practice. “Looking forward, the SEC’s anticipated announcement of climate disclosure rules in October has been over-shadowed to a large extent by the EU’s disclosure requirements which will impact most U.S. organizations sooner rather than later. There is also an opportunity for startups and private companies as they look to grow and go public, to lay the ESG groundwork to hone their business strategy, build greater value, strengthen compliance and prepare for what is coming next in our rapidly changing world.”
Survey Highlights
- ESG’s compliance has come into sharper focus as regulation of corporate action and disclosure, especially as it relates to climate, increases globally and C-suite executives, board members, and in-house legal teams adapt.
- 2023 may well be a bellwether, as companies, boards, and C-suite leaders increasingly focus on ESG’s “E” (environmental) and “S” (social), expending fewer resources on “G” (governance) than the prior year.
- Chief compliance officers have quickly overtaken the role of leading ESG compliance from in-house counsel. In 2023, 55% report ESG compliance is led by chief compliance officers, compared to 54% of respondents reporting that ESG compliance was led by legal departments in 2022.
- Companies’ approaches to ensure ESG alignment have evolved, likely due to the impending SEC climate disclosure rules. Notable alterations include increases in environmental regulatory compliance budgets (49% in 2023 compared to 41% in 2022), adoption of climate risk approaches (27% in 2023 compared to 3% in 2022), and reporting to federal regulators (30% in 2023 compared to 3% in 2022).
- ESG motivating factors also shifted in 2023. Organizations increasingly tie their strategies to managing risk and regulatory compliance, which saw the largest increase from 8% in 2022 to 56% in 2023. Despite year-over-year decreases, brand reputation and market competitiveness remain significant motivating factors overall. Public companies reported market competitiveness as their highest ESG motivator (66%).
- The use of short-term executive compensation incentives based on ESG performance is favored over long-term ones (49% vs 20%). The ESG KPIs tied to executive compensation that are the most heavily tracked by companies are Diversity, Equity, and Inclusion (DEI) (33%) and board oversight of environmental and sustainability issues (30%).
ESG Strategy Leadership Shift
In this year’s survey, 72% of respondents report that the C-suite and chief compliance officers (56% and 16% respectively) is the core unit leading ESG strategy in comparison to last year, when 77% of respondents reported that legal departments and GCs took the lead. Nonetheless, 61% of respondents reported their legal departments have higher-than-average involvement in leading ESG strategy. The drastic increase in ESG strategy leadership by CEOs and CFOs may be a reaction to the SEC signaling its desire to see greater board involvement in ESG.
ESG Compliance Leadership Shift
Mirroring their involvement leading ESG strategy, chief compliance officers and C-suite leaders (55% and 16%, respectively) also have overtaken ESG compliance leadership this year, compared with legal departments and GCs taking that role a year earlier (combined 63%). Still, when asked to rate how involved their legal departments are in leading ESG compliance, two-thirds (66%) of respondents did offer an above-average rating.
Anti-ESG Impact
Anti-ESG sentiment gained momentum in 2023 and seems to have affected companies differently. Almost half (47%) of respondents report that they have neither experienced nor been impacted by anti-ESG backlash, while another 47% report they have responded by focusing on specific, granular areas of concern, such as climate, human rights, or DEI. Smaller companies report less impact of anti-ESG backlash while larger companies say they are strongly focused on granular areas of concern in response to anti-ESG sentiment.
Fifteen percent of respondents also report that they are no longer using the term ESG or have changed terminology in response to anti-ESG sentiment. Larger and publicly held companies were more likely than smaller and privately held companies to not use the term ESG.
Public vs. Private Companies
Despite anti-ESG backlash, both public and private companies continued to move forward with processes and procedures to address environmental, social, and human capital (including DEI) concerns. However, there were several notable differences in their approaches. More public companies report altering internal operations compared to private companies (20% vs 2%). With new and pending legislation on the horizon, this may be attributed to an anti-ESG movement and legislation being enacted. Respondents were also asked to rate their confidence that their organizations have comprehensive ESG programs in place. Not surprisingly, larger, often public companies are most comfortable with their programs.
While public companies face additional external scrutiny and activist investor pressure, public company respondents signaled that aligning with ESG objectives is still good for business. Public companies were much more likely to rate maintaining market competitiveness as the biggest motivating factor to adopt environmental goals (66% vs 18% for private companies). Public companies also reported greater pressure from shareholders (31% vs 14% for private companies, the respondents’ average being 20%).
To download the full survey results, visit our ESG + GCs resource website, which includes additional insights by the Morrison Foerster ESG team. The 2022 report is available here.
Methodology
As part of its annual ESG benchmark survey, Corporate Counsel, in partnership with Morrison Foerster, surveyed legal department leaders with titles including general counsel, chief legal officer, or vice president of legal to study the extent to which ESG policy and compliance development, implementation, and reporting falls to corporate legal departments. Responses were collected by invitation online and via telephone interviews. The survey was open from April 5 to 23, 2023. It was completed by 86 respondents, with more than half representing legal departments with at least 20 lawyers.
About Morrison Foerster
Morrison Foerster is a leading global law firm. We are proud to be a pioneer of legal innovation related to Environmental, Social, and Governance (ESG). Our ESG innovation began with pro bono clients addressing environmental sustainability and developing innovative structures to solve social challenges, and today we’ve expanded our ESG legal services to represent some of the largest investors, funds, and companies focused on ESG and sustainability. As a leader in sustainability and social change for over 20 years, Morrison Foerster offers unmatched industry-leading experience to assist with ESG, sustainability, and social impact matters. Our global ESG Steering Committee, which includes more than 30 partners from across the firm, allows us to provide a holistic ESG approach for our clients. The global team includes corporate, finance, tax, regulatory, compliance, litigation, investigations, patent, and licensing lawyers who provide unrivaled experience counseling and advising on ESG matters in the public and private sectors. While many of our peers are focused on simply helping companies comply with relevant existing regulatory requirements in this space, we are known for our thoughtful and, in many cases, groundbreaking approach to helping companies look beyond compliance to risks and opportunities, helping companies see around corners and be prepared for what is coming, and helping companies structure deals and operations to efficiently integrate ESG considerations in their businesses and maximize impact. In 2022, Morrison Foerster was recognized with the Environment & Sustainability: Innovation Award at the Chambers Diversity & Inclusion Awards. As the sole recipient of this award, this recognition reflects our position as the preeminent ESG firm in the United States. Additionally, Morrison Foerster was recognized as one of the top 10 firms on The American Lawyer’s A-List for 2021 and 2022, highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture. For more information, visit mofo.com.
