In his soon to be published article, ‘ESG Colourwashing: Combating Modern-day Corporate Hypocrisy’, which Timo co-authored in conjunction with his colleague and former student Klemen Kreča, he describes how consumers and investors are increasingly demanding the introduction of sustainable practices and, in turn, even though they may not be “born-believers” as regards the creation of sustainable value, corporations are introducing Environmental, Social and Governance (ESG) factors into corporate decision-making. As ESG has become the new benchmark of corporate sustainability, this has meant, unfortunately, that corporate hypocrisy is rife. Some companies may try to avoid ESG implementation costs by simply sugar-coating the status quo or wilfully creating false impressions about their underlying business models and their actual efforts to integrate sustainable practices.

Anna Bauböck (AB): How can implementing ESG criteria create value for companies, and is it beneficial for all industries and business models?

Timo Spitzer (TS): The implementation of ESG criteria, ie economic, social and governance policies, creates both direct as well as indirect benefits for the company. Direct benefits include a boost in employee morale (improvement in both efficiency and productivity), attraction of better talent, enhanced returns, decreased costs (mostly due to better energy consumption) and easier access to government funding.

Furthermore, due to changing consumer and investor preferences, the implementation of ESG criteria can also lead to indirect benefits such as, among others, increased consumer loyalty, higher revenue, better equity and debt financing opportunities as well as reduced market volatility.

Nevertheless, not all industries and business models are alike. Certain industries such as coal mining are simply inherently unsustainable, while other industries may see only small benefits compared to the still considerable costs of implementing ESG criteria into day-to-day business operations.

AB: Why is the appearance of ESG compliance potentially more lucrative for companies than actually implementing ESG principles?

TS: The implementation of ESG principles comes with significant costs. For most companies, such costs may already be outweighed by the direct benefits, and even further enhanced by the indirect benefits, such as gaining favour from sustainability orientated investors and consumers. However, this may also create a moral hazard when for some companies, the direct benefits of ESG implementation may not outweigh the costs of implementation, or at least not right away. For such companies it may be more beneficial to simply create false impressions about having incorporated ESG metrics into the business model, thereby still gaining indirect benefits, whilst not having to bear any of the associated costs. This is called “ESG colourwashing”, when companies claim to promote sustainability goals, eg social progress, equality, environmental awareness, and diversity, while in reality they are merely sugar-coating the status quo in order to win over consumers and investors who want to support ESG principles.

AB: Why are ESG disclosure rules not enough to prevent companies from colourwashing their ESG credentials?

TS: Disclosure obligations are based on the idea that under full market transparency consumers and investors will be able to ensure companies are ESG compliant. However, ESG colourwashing is not a case of informational asymmetry, where better informed market players could easily penalise non-conforming companies, but rather a case of intentional deceitful action. Companies are wilfully trying to misrepresent their business model to obtain financial gain from consumers and investors.

It is naïve to think that a company that is actively trying to deceive consumers will be stopped just because it has to disclose information. Disclosure laws cannot prescribe for all scenarios, and companies will still be able to find ways to circumvent such laws. Moreover, disclosure obligations are hindered by various drawbacks: i) only certain market participants are bound by disclosure obligations; ii) obligations are triggered only in limited situations; iii) disclosure is often accompanied by enormous bureaucratic burdens; iv) the actual reporting requirements may be shrouded in uncertainty; v) companies often need to hire expert consulting firms, which further drives up their costs; and vi) disclosure standards are not universal means, creating an uneven playing field in a globalised market.

AB: What are some of the problems with existing regulatory actions and enforcement systems?

TS: The European Union is currently leading the charge in combatting ESG colourwashing, and not only through mandatory disclosure obligations. The existing consumer protection legislation and even ex ante labelling mechanisms provide for a system well equipped to combat ESG colourwashing, at least in theory. The issue the EU is facing is not a lack of relevant disclosure regulation, but even more so weak enforcement and poor coordination and harmonisation among its Member States.

The Unfair Commercial Practices Directive (UCPD) and the Comparative Advertising Directive (CAD) form the foundation of the EU’s consumer protection legislation. The UCPD is a fall-back for instances where more specific laws do not exist. It applies to implicit green claims (images, colours, types of package or even smells or sounds used for promoting products and suggesting environmental characteristics), as well as other sustainability claims. Even retail investment services are subjected to the UCPD, insofar as they are not more specifically regulated by the Distance Marketing of Consumer Financial Services Directive and of course the very comprehensive Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR).

Nevertheless, in practice the existing system faces a severe lack of harmonisation and coordination. The ex-post enforcement mechanisms under the UCPD are sluggish, poorly organised and unrecognised on an EU-wide level, and it often lacks the required technical expertise.

That being said, with appropriate amendments to these laws, most of the aforementioned issues could be mitigated. Harmonising or, better yet, unifying enforcement measures on an EU level could ensure effective ex-post control. Complementary efforts could also be considered, eg supplementing the UCPD with such mechanisms as coordinated pre-approval systems of green claims and an accreditation system of green labels. These measures could help establish appropriate ex-ante control and technical/scientific expertise.

AB: In your opinion, what are some possible solutions to prevent ESG colourwashing and penalise companies and persons who indulge in it?

TS: One possibility is to improve or expand on the existing regulation with a lesser focus on disclosure obligations and an increased focus on consumer protection laws, competition laws, general fraud doctrines, ex ante screening mechanisms and even private enforcement actions under securities laws.

Alternatively, we could alter the premise entirely and pursue a top-down approach. The CEO must set the corporate standard by creating a culture of corporate sustainability, whilst the in-house counsel must ensure both legality and legitimacy of the business model, acting as part of the moral compass.

AB: You suggest that a company-based top-down approach could be beneficial or even more effective than external regulatory measures. Could you please tell us more?

TS: There is no such thing as a perfect regulatory system which prevents any and all problems from arising. Moreover, any law or regulation is most effective when the subjects adopt it as their own. That is to say, they abide by it not because they have to, but because they genuinely want to. Colourwashing is inherently linked to the question of integrity, or, to be frank, the lack thereof of those who practice it.

A culture of sustainability, ie can best be shaped by the Chief Executive Officer (CEO) acting as corporate role model for employees. To facilitate this, companies could and should, with governmental support, adopt corporate codices to underline the importance of sustainability-led governance and set the overall values of the company. In this respect all relevant stakeholders should be taken into account, as well as the overarching societal impacts of the business model. Such internal policies could be further bolstered by a corporate leadership model, whereby all relevant stakeholders are included within a special governance board established within the company to promote sustainable corporate governance. This entity, led by the CEO, could prove to be the key to preventing the company from indulging in illegal and/or illegitimate practices, such as colourwashing. In fact, this internal mechanism may prove to be significantly more effective than external regulatory measures.

AB: What do you see as the role of the legal department in the prevention of ESG colourwashing?

TS: Companies could provide for an expanded role of the legal department when publicly supported by the CEO. The legal function could serve as part of the company’s moral compass, supporting the CEO in ensuring that corporate hypocrisy is not tolerated anywhere within the company. In-house lawyers can, in this manner, demonstrate, support and facilitate accountable leadership within the company and safeguard compliance with both laws and uniform global ethics, even when no one is watching.

In its expanded role, the legal department should fully assess corporate behaviour not only within the remit of applicable law, including consumer protection, competition, and anti-fraud laws, but also against a uniform code of global ethics and traditional moral values such as honesty, fairness, and commitment to inclusion, thus limiting the potential exposure of the company. In practice, the corporate framework and especially the CEO must provide the legal department with the necessary autonomy to raise concerns vis-à-vis commercial decisions that might constitute ESG colourwashing and corporate hypocrisy. At the same time, the CEO should expand the mission of the legal department to also assess other matters of importance, such as strategic, HR and budgetary matters.

AB: The European Commission is currently drafting a potential Directive on Sustainable Corporate Governance. What can be expected from this?

TS: The potential Directive on Sustainable Corporate Governance represents an extension of the European Green Deal and aims to further stimulate the integration of sustainability considerations into companies’ strategies and decision-making processes. The drafting phase has given a glimpse into what can be expected. The European Commission is exploring the possibility of expanding the directors’ duties of care to require directors to consider the environmental and social ramifications of the business model. Furthermore, the proposal could include a so-called due diligence duty, whereby corporates would be obliged to implement adequate processes for preventing, mitigating, and accounting for human rights and environmental impacts in both companies’ operations as well as supply chains. The European Commission is also considering introducing appropriate measures to align directors’ remunerations with long-term objectives of the corporation. For example, their remuneration may be linked to the company’s sustainability metrics or vary depending on achieving various non-financial targets. Lastly, the European Commission aims to alter the composition of boards of directors, making it necessary to involve environmental and human rights experts.

It remains to be seen how this initiative will develop in practice. In any case, regulation can never replace the need for corporate leaders acting with integrity and making sustainable business decisions.

The Norwegian continental shelf and its production of petroleum and gas resources has contributed substantially to Norway’s economic success, pushing the country to the forefront of oil and gas exportation and counting for a notable proportion of the country’s GDP. Norway currently exports roughly 70% of its oil production to the wider European region (with the combined exportation for oil and gas equating to 50% of the country’s total value of exported goods) and sits in the top 10 countries for crude oil exports by dollar value.

However, Norway also stands out as a leader among nations in its dedication to renewable energy and sustainability. In a recent survey conducted by energy tariff comparison site Utility Bidder, Norway was ranked as the top user of renewable energy, with the vast majority of the country’s energy coming from green sources. For Norway, the primary source of sustainable energy is hydropower plants, and the country has utilised its extensive coastline and steep valleys to generate hydroelectricity since the early 1900s.

Offshore and onshore wind projects are also increasingly common across the Norwegian landscape and, alongside carbon capture and storage (CCS) projects, are receiving increased investments from both the Norwegian government and the private sector; in 2021, the Norwegian government announced the first licensing round for the construction of offshore wind farms in two areas of the North Sea.

For Norwegian law firms, this dichotomy has forced notable changes in the approach taken to energy work, but these adaptations are not as antagonistic or as new as one might expect.

‘Norway’s ambition to be an international leader in combating climate changes could, in certain respects, be argued to run counter to our status as one of the world’s significant oil and gas exporters’, say state energy expert June Snemyr and managing associate Ole Christoffer Ellingsen at Thommessen. ‘The move may have created difficulties for some law firms which have been primarily assisted oil and gas and oil service clients, but not for us. We have always had a designated team for renewable energy and infrastructure, with close connections to the renewable energy industry’.

Aksel Tannum, who is head of the renewable energy practice at Haavind, agrees: ‘Haavind has a long tradition of working for the power industry in Norway, which has been based on hydropower and wind power in more recent years. This legacy provides us with relevance in the market and insight into, and experience with, a complex and heavily regulated sector’.

This long-standing expertise has allowed Norwegian firms to place themselves well in response to the general societal shift at a national and international level regarding climate change and sustainability, a move which has seen key businesses in the wider energy market take action.

Notable Nordic companies (and clients of the leading firms) have made substantial moves away from the oil and gas sector in recent years, framing their businesses in a more eco-friendly light. DONG Energy (which stood for Danish Oil and Natural Gas) rebranded in 2017 to Ørsted and dedicated itself to green energy solutions, while Norwegian company Statoil followed suit in 2018, changing its name to Equinor and investing heavily in clean energy projects.

With long-standing relationships with many of these changing businesses, firms are able to leverage the practical experience of their established oil and gas departments when assisting clients on clean energy projects.

‘Traditionally, Simonsen Vogt Wiig’s practice (like that of many other long-standing firms) has been geared towards international shipping, transportation, and oil and gas – some of Norway’s historically most important exports’, states Peter Aall Simonsen, who leads the firm’s infrastructure and renewable energy department. ‘Our experience in working with these industries has given us considerable expertise in international infrastructure investments and project financings generally. Combined with in-depth knowledge of the domestic regulatory framework, this makes us a valuable partner for developers and investors within all sectors of the new renewables landscape’.

Notable examples of this energy project expertise bearing fruit include Simonsen Vogt Wiig’s recent work advising Biojet on the development of pioneering technology for the production of organic biofuels; Haavind’s substantial involvement in new power production mandates encompassing wind, hydro and grid projects, including the largest onshore wind power projects in Norway – the Fosen and the Øyfjellet wind farms; and Thommessen’s work regarding the licensing, development and operation of onshore wind power facilities, as well as advising on the merger between Lyse Produksjon’s hydropower business and Norsk Hydro’s Røldal-Suldal power plants to create one of the largest hydropower producers in Norway.

Beyond assisting clients directly, firms have also played a key role in the regulatory shift in the wider legal framework across Norway.

As Tannum comments, ‘While we have assisted major players in the market with making the transition from oil and gas activity to renewable energy sources, we have also aided the decision makers to set up a viable legal framework, especially within the offshore and hydrogen arenas’.

Snemyr and Ellingson continue, ‘Law firms’ expertise in renewable energy law is an important source for the authorities, and an important factor for the development of a legal framework that facilitates investments in renewable energy or sustainability’.

Similarly, beyond billable work, firms in the market have also taken up the green gauntlet directly and adapted their own internal processes for the sustainability movement. Haavind has set its sights on being carbon neutral by the end of 2022, while Thommessen has created the freely accessible Sustainability Database, a tool which provides clients and others with analysed and summarised information both on hard law and soft law developments in the field of sustainability, as well as establishing ThommessenZero, an internal team aimed at making the firm more environmentally sustainable.

So, what does the future hold? For the team at Thommessen, ‘We consider the Norwegian energy and industrial market to be an important part of the solution to climate change related challenges. Both the existing energy industry and new innovative companies must contribute if Norway is to continue to assert itself as an important energy producing nation in the future. Existing energy companies have valuable expertise that is crucial for the success of the transition to a sustainable low-emission society’.

However, the journey ahead may not be entirely smooth sailing for the green movement. Simonsen proposes, ‘While we believe the market will continue to grow, the next few years will likely also see a significant number of poorly funded and/or less viable projects, which will not last. We also believe the market going forward will be dominated by large industrial players, as deep pockets might be necessary to fund many early projects, especially within (for the time being) less bankable pioneer industries’.

To sum up, as Tannum states: ‘We have had a substantial amount of projects and transactions for many years now, and with traditional oil and gas players turning to new sources within renewables, we see no signs of this sector cooling down’.

Environmental, social and corporate governance compliance has become a household term for companies, investors and law firms. All across Europe, sustainable investments are booming, and surges in ESG considerations have been widely reported. In the DACH region alone, the market is said to have more than doubled from 2019 to 2020.

The DACH countries Germany, Austria and Switzerland are not only located next to each other in Central Europe, but also have de-facto nation-wide language as well as a strong, stable economy in common. The countries, with a population of just under 100m between them, all have a high density of SMEs as well as significant activity in the industrials and chemicals, IT and telecoms, and consumer goods industries.

While the most common transactions are still purely corporate ones, other forms of investment have increased steadily over the years. With the world’s continuous high interest in the aforementioned sectors, it is no surprise that private equity and venture capital funds as well as other investors often look to the DACH countries for promising and secure business.

Although a focus on the ‘E’ aspect of ESG has been around for some years, it started to have an undeniable influence on the private sector when the Paris Agreement was finalised in 2016. Germany, Austria, and Switzerland all ratified the agreement in October 2016. Since then, various laws have been passed in the countries to reduce or neutralise greenhouse gas emissions. Nonetheless, as the recent elections in Germany have shown, even in 2021 it remains a divisive topic.

Investors, however, have continued to increasingly take a target’s impact on the perceived factors of climate change, as well as sustainability efforts, into account in their investment decisions. While it is too early to have a fully number-backed link between ESG investing and financial returns, the market has had to react to the growing demand from consumers, employees and limited partners.

According to Lucina Berger, who focuses on corporate governance at German full-service firm Hengeler Mueller, society is a key driver: ‘Campaigns such as the Fridays for Future or the Black Lives Matter movement contribute further to making ESG an omnipresent topic.’

In Berger’s opinion, it is also due to the public’s interest that ESG could hold its ground during the last two turbulent years. With Covid-19 spreading across the globe, the demand for transparency and an environmental conscience took centre stage for consumers. This has led to an all-time high in instructions for law firms to advise on ESG-related matters.

Berger sees not only large companies inquiring but also SMEs – or the Mittelstand – seeking advice.

While ESG concerns climb higher on DACH region companies’ agendas, one of the main challenges continues to be the directive – or rather the lack thereof. Austria, Germany and Switzerland all struggle with the sheer volume of guidelines, laws and standards existing at federal, state and international levels.

Mandatory sustainability reporting, as well as incentive structures, seem to be measures that have caught on well in all aforementioned jurisdictions. Nevertheless, ‘due to the lack of a uniform rating and classification systems, the risk of greenwashing cannot be excluded,’ according to Wolf Theiss partner Sarah Wared.

As a corporate and M&A lawyer in Austria, Wared increasingly assists clients with developing their sustainability efforts and ESG compliance. ‘It is a challenge to adhere to all regulations as there has been no real uniformity,’ she states, but is also hopeful about the new EU regulation which intends to address this issue: The EU Taxonomy, a classification system establishing a list of environmentally sustainable economic activities.

A first delegated act was formally adopted in June 2021, with more to follow. These acts aim to provide companies, investors and policymakers with appropriate definitions, protect from greenwashing and subsequently increase sustainable investment. ‘Time will tell how the Taxonomy plays out but it’s a step in the right direction,’ says Wared.

While not a part of the EU, Switzerland also has an eye on the new classification system. ‘We have to make sure that whatever we do here isn’t in a vacuum. Alignment with the EU and other jurisdictions is of massive importance,’ says Christoph Vonlanthen, a partner in Schellenberg Wittmer’s M&A and Capital Markets teams in Switzerland, and an ESG specialist.

‘Climate change is going to have a profound impact on the economy,’ he states, and refers to a tangible example in the form of a study published by the Swiss Sustainable Finance (SSF) association. In its Swiss Sustainable Investment Market Study 2021, data on the funds and mandates reported by banks and asset managers and internally managed asset owner volumes shows that sustainable investment funds overtake conventional funds for the first time.

‘Besides the regulatory changes and the public’s role, climate-related disputes are another key driver for awareness’ says Berger, referring to the recent, prominent Shell litigation. Dutch environmental group Milieudefensie, together with four Nigerian farmers, brought proceedings against the oil giant alleging pollution caused by oil spills that took place in 2004-2007. In early 2021, the Dutch Court of Appeal in The Hague held Shell liable, and the company is now also required to install equipment to prevent damage in the future.

These cases set precedents and serve as a warning sign for those who neglect to keep their house in check. However, by now, most take heed: ‘Wanting to get ESG expectations right is at the forefront of board members’ minds and for that, they seek counsel more than ever,’ says Berger. All three firms report a significant uptick in ESG due diligence mandates.

By implication, clients also expect their law firms to have integrated ESG criteria into their business. ‘Especially if you want to get on a panel, companies will request insight into their providers of legal services’ initiatives; interestingly enough, while this was traditionally more regarding (gender) diversity, sustainability efforts are now equally inquired about,’ says Berger.

In 2021, being involved in ESG matters as well as working on internal sustainability efforts contributes to a law firm’s competitiveness. In conversation with Schellenberg Wittmer, COO and Sustainability task-force member Alexander Rohde mentions, ‘When hiring new talent, you want to be a firm that’s at the forefront of contemporary behaviour.’

As part of the firm’s measures, Schellenberg Wittmer launched a working group to reduce its carbon footprint, and as Rohde states, ‘It is important to engage the full breadth of firm members here; thinking with ESG in mind is in our DNA.’

‘By involving firm members across the board in our initiatives, we can advise on the full spectrum of the matter,’ Sarah Wared agrees. Wolf Theiss, a firm with offices not only in Vienna but in numerous CEE/SEE countries, recently launched a dedicated ESG practice which also recognises that ‘the assistance in drawing up new business models needs to be tailor-made to the industry. A company in oil and gas has to work out a different plan than others.’

Even though ESG is often called upon in connection with finance and litigation expertise, it is a cross-sectional topic both in regard to legal practice areas and industry sectors. Hengeler Mueller therefore also pursues a holistic approach with ESG specialists in the various different practice groups. ‘This way positions you closer to the market requirements as well as being able to provide specific advice,’ according to Berger.

With this rise in ESG practices and internal ESG pledges by various law firms in the market, a sensitive question arises: will it be controversial for them to advise companies that are either environmentally harmful or not genuine in their efforts?

‘So far, I’m not familiar with law firms doing ESG due diligence on their own clients, except for what is statutorily required or needed from a reputational perspective, but I’d be curious to see how this area develops,’ says Berger.

Wared adds, ‘It always depends on which areas of ESG are neglected. It is always important to differentiate.’

Vonlanthen agrees: ‘At the end of the day, there are very few black and white cases. Most companies want to do the right thing, even though they might be in the wrong industry and have to reposition themselves. Our legal assistance would be very valuable here.’

While all three partners share the opinion that the number of guidelines can be challenging at times, they are in good spirits. ‘It is telling how pervasive the whole conversation has become. ESG used to be a soft topic, rather reputational and a lot of commercial consideration would trump it; this is no longer the case in Switzerland. Enormous progress was made in a short amount of time,’ says Vonlanthen.

Berger adds, ‘Even though it comes with hurdles and additional effort, ESG has made it into the German boardrooms. The fact that this topic gained so much significance and attention at the highest levels of companies is a positive signal. In a few years, these efforts will hopefully pay off.’

Wared also highlights that: ‘In Austria, you can even see companies which are not subject to regulatory obligations establishing a dedicated ESG task force. To sum it up, all in all, quite positive developments.’

Law firms and Net Zero – Advisors and leaders?

The race to reduce carbon emissions remains at the top of the global agenda, particularly with the recent hosting of COP26 in Glasgow, which saw broad commitments from UN member states to reach net zero in emissions within the next 30 to 50 years. Previous holdouts including Russia, China, and India joined the global movement, with the focus now turning to how governments, and perhaps more crucially, the private sector, can sharply reduce their carbon footprints.

The role of law firms in this process is, somewhat obviously, traditionally that of a legal advisor, with corporate governance, energy, and tech lawyers, among others, advising their clients on matters such as energy transition schemes, renewable infrastructure projects, and internal ESG commitments. Crucial developments such as the EU Green Deal have placed new pressures on businesses to comply, a panacea for corporate governance and regulatory compliance teams advising global blue-chip clients.

Even more indirectly, we see firms play a role – as advisors to impact funds investing in green infrastructure, or activist shareholders seeking to divest from fossil fuels, as well as representatives of climate protesters facing criminal charges.

Brussels-based White & Case partner Jacquelyn MacLennan explains: “Public companies, most visibly, are facing pressure from institutional investors who are increasingly engaging with them via ‘stewardship teams’ that are urging them to adopt more sophisticated due diligence, disclosure and management of ESG risks in their operations and supply chains.”

Elaborating on the changing role of lawyers amidst these new pressures, MacLennan says: “Environmental activists have been using climate change litigation as a means of putting pressure on governments and corporates to meet emission reduction goals. Lawyers are increasingly called upon to advise on these corporate governance and litigation risks.”

These pressures have resulted in a change in attitude at board level, according to Darren Walsh, head of power and utilities at DWF: “What’s really important is the buy-in we’re now seeing from companies. Six or seven years ago we would suggest renewable energy sources to clients and they just wouldn’t be interested. Now, even in the last six months there is much more of a buy-in from boards, CEOs, and CFOs.”

Similarly, leading law firms and their partners have also contributed to thought leadership on the topic of climate change mitigation, both in the form of opinion and as advisors to intergovernmental organisations dedicated to keeping climate change on the global agenda, as well as developing potential policy responses.

Law firms as climate actors

Another way to look at the role law firms play, however, is to examine their own contribution to climate change. Law firms across Europe and globally employ millions of employees, and many have multiple international offices and significant global footprints, not to mention the vast amounts of paper utilised in briefs and bundles. While curtailed by the pandemic, international legal work has necessitated the heavy use of air travel for client negotiations, conferences, and even job interviews.

To put it simply: law firms are polluters too. Like all major companies, their day-to-day activities create carbon emissions, in some cases more so than other businesses, or at least in ways other businesses do not. As the global private sector looks to how it can ‘go green’, the legal industry finds itself under the spotlight.

For the first time, Legal Business’s LB100 requested information on carbon emissions from City-based firms, sorting the firms’ responses into a table calculated via dividing total emissions by headcount.

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As noted above, firms with larger global presences and headcounts have a higher environmental impact than others. Peter Duff, chair of Shoosmiths, a national firm who feature among many City-only operations in the second-bottom category, speaks on the role firms can play, and the importance of setting an example, adding:

“We believe that with collective action and visible leadership from the global business community on climate change, a greater, faster reduction of carbon can happen. We have found that sharing the knowledge we’ve accrued on our journey towards net zero has helped clients and contacts’ businesses, and we would encourage other firms to have these conversations to share best practice.”

At international operators such as White & Case, efforts are also being made. Per MacLennan: “Law firms such as White & Case are undertaking the same efforts to reduce our carbon footprint as our clients. For example, we have conducted multiple GHG emissions assessments [and] instituted a global Environmental Management System of some 60 actions that we expect each of our offices worldwide to adopt.”

These assessments have proven fruitful, translating into direct action, as MacLennan points out. “So far about a third of our electricity is powered by renewable energy”, she reveals, demonstrating the very similar pressures law firms face to their corporate clients, resulting in efforts to directly reduce emissions.

Law firms and ESG

The rise of the ESG agenda within businesses does not exclude law firms, which face new pressures to meet internal sustainability targets, both internally and externally. One firm taking the lead in this space is listed firm DWF, which faces unique pressures as a public company.

Darren Walsh and Kirsty Rogers, who administers the firm’s ESG programme, discuss the firm’s work as advisors and its obligations as a listed law firm.

Rogers explains: “As a listed company, we are required to report and are rated on ESG requirements. We have also committed to the SBTi and keeping emissions under 1.5 degrees by 2030, and to be net zero by 2050. It’s a journey lots of firms aren’t on yet – because they don’t have to be. We do and we want to be.”

DWF has a UK-wide and global presence, which creates difficulties further detailed by Rogers, with office rental contracts cited as a key issue: “We’re adopting a science-based approach, looking at emissions from our global offices. This includes looking at leases, and areas where there may be a break or opportunity to revise the energy supply to improve emissions. Manchester is already 100% renewable in terms of the energy we use and this is our largest office.”

For Walsh, action as a legal advisor is equally important as the work the firm does internally, both in terms of promoting action, as well as helping the firm meet reporting targets: “Working with clients on these projects isn’t just work for us, it’s genuinely important that we see positive changes as a result of what we do. It also helps us demonstrate that we’re committed to our climate and ESG targets as a public company – which we sincerely are.”

MacLennan also notes the role firms play in ESG initiatives, arguing that “ESG is also a key area of opportunity for organisations. Law firms are at the cutting edge here, developing innovative solutions in terms of the existing and evolving legal frameworks.”

Duff echoes these sentiments, expanding on Shoosmiths’ own ESG efforts: “We feel a responsibility to help make the planet a better place for future generations and have been tracking our ESG impacts since 2012. We’ve made a commitment to decarbonise our business. In January 2020 we set a target for Shoosmiths’ operations to achieve net zero status by 2025, and are proud that in November this year, our near-term science-based emissions reduction targets applicable to our entire value chain were approved by the Science Based Targets initiative”.

It is perhaps reasonable to argue that law firms themselves cannot turn the tide as far as global carbon emissions are concerned. Their role as legal advisors is ultimately limited to counsel and implementation of wider schemes, both governmental and otherwise, and their carbon footprints pale into comparison against the oil and gas, air transport, and manufacturing industries.

However, it is clear that the combined role firms can play – both their traditional one and increasingly as contributors to net zero themselves – is crucial, and one that is increasingly on the radar of firms and their leadership teams.

In Italo Calvino’s Invisible Cities, a fictionalised version of the famous 12th century merchant Marco Polo speaks with Kublai Khan about various cities along the Silk Roads. Khan is naturally curious about his vast, seemingly endless (and endlessly diverse) empire, and Marco Polo is only too keen to share stories about the various cities he has supposedly seen in his travels.

Supposedly, because the accounts Marco Polo gives aren’t always realistic: some cities float, others are impossibly extravagant. The great emperor loves listening to him regardless, because with each city he describes, Marco Polo reveals some fundamental truth – not about a specific place, but about human nature.

One of the cities Marco Polo talks about is called Euphemia, where merchants gather in the bazaar and exchange goods, the way merchants naturally would in any other city. But in Euphemia, the bemused Khan hears, those merchants don’t just exchange goods. They also tell each other stories about their experiences of how they came across those goods. They tell each other about wolves, battles, hidden treasure.

What makes Euphemia truly special, Marco Polo says, is that afterwards, when those merchants are on the long, solitary journey home, they each think about the stories they’ve heard and discover that now, their own recollections of wolves, battles and hidden treasure have changed. In Euphemia, Marco Polo tells the enchanted Khan, people don’t just exchange goods; they exchange memories.

The new German law that puts supply chains under scrutiny

Trade in today’s heavily interconnected (and real) world is immeasurably more complicated than this. Even with our straining global supply chains, we are still able to manufacture, grow, assemble, and deliver an astounding variety of goods right to our doorstep.

In fact, the intricacies of the world’s supply chains are of such staggering complexity that often artificial intelligence is utilised to manage all aspects productively and maximise efficiency. There is no time to sit around idly and exchange fanciful stories about how those products came about – not if we want those presents home in time for Christmas.

But it is also possible that by connecting the world in these new and exciting and often ingenious ways, we have also disconnected ourselves from the stories each product brings with it along its journey. Products have no memories themselves, but the humans that made them do.

And when a product comes from the other side of the world, it is not always easy to know about the conditions in which it was made – if the desire to know is there at all. Reports of any human rights and/or environmental abuses often go missing along the way, even if the products themselves are able to reach us without issues.

It is possible that a step away from that status quo may have been taken with a new German law that forces large companies to take a closer look into their supply chains. The German Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains (Lieferkettensorgfaltspflichtengesetz, “LkSG”) was adopted by the Bundestag in June 2021 and is due to come into effect on 1 January 2023.

Under the LkSG, German companies will, for the first time, be obligated to implement due diligence procedures so that they can demonstrate compliance with core human rights protections in supply chains (and, as we will see, a limited few environmental rights protections too). This not only applies to German companies, but to foreign companies that have branches in Germany as well.

It is important to note that this version of the law initially only affects companies that have 3,000 employees or more, and from 2024 onwards, that threshold will drop to 1,000 employees, significantly raising the number of companies that will fall within the scope of the law.

In essence, with the LkSG, the burden falls on German and German-registered companies to demonstrate that they have taken reasonable actions to ensure no human rights abuses take place in their own operations and in the supply chain (primarily their direct suppliers) – irrespective of sector.

Paving the way towards addressing environmental concerns

Of note here isn’t only the vast scope of the law (as it is expected to impact a substantial number of companies and their suppliers worldwide), but its potential implications for the future. It is possible that by addressing human rights abuses, the LkSG could one day pave the way towards addressing environmental concerns in supply chains as well – even as the initial focus remains on protection of human rights.

Dr. Lothar Harings, partner and head of the International Trade practice group at Graf von Westphalen, explains: “With respect to environmental concerns, the act only stipulates due diligence obligations in regard to the use of mercury and persistent organic pollutants, and aims to safeguard the prohibition of exporting or importing hazardous waste to or from certain countries.”

Dr Harings goes on to clarify that there are currently no signs that LkSG will be expanded to include further environmental provisions, including in regard to climate change. He goes on: “Taking into account recent court judgments in EU countries that oblige member states to take action against climate change, it seems questionable why climate protection has not already been included in the scope of protection. Despite this, it is more likely that Germany will wait for EU legislation on the matter of environmental due diligence obligations. The draft EU directive suggested by the EU Parliament indicates that environmental concerns may receive a stronger focus – in this case, Germany would have to amend its supply chain legislation accordingly.”

Dr. Marc Ruttloff and Prof. Dr. Eric Wagner, partners at Gleiss Lutz, agree that environmental concerns are more likely to be addressed at an EU-wide level: “This legislative development is supported by recent trends in Germany’s jurisprudence: in spring 2021, the German Federal Constitutional Court decided on the constitutionality of the Federal German Climate Protection Act in a landmark judgement, determining that, inter alia, the legislator is obliged to enact an effective climate protection law under the German constitution. From a European perspective, the global significance of climate protection could lead to substantial regulation of climate protection-related obligations, particularly at EU level.”

Birgit Schreier, salaried partner at Heuking Kühn Lüer Wojtek, comments on the wide scope of the LkSG: “We do expect that the LkSG will affect the provisions in the supply chain – with regard to the environmental risks mentioned – as the law requires the companies to impose the due diligence obligations on their contract partners. That’s why the LkSG will also affect small and medium-sized companies not exceeding the thresholds for direct application of the law. Such a transfer effect of the obligations under the law along the entire supply chain is particularly intended by the LkSG.”

Something to be taken seriously

The fact that the LkSG can have far-reaching implications for companies can be further demonstrated from the fact that certain interest groups appear to have lobbied to limit the scope of the act, while NGOs tried to expand it. In the form it was adopted, there are indications that the LkSG is something companies have to take quite seriously indeed.

Dr. Marc Ruttloff and Prof. Dr. Eric Wagner explain: “the enforcement of the LkSG is supported by the threat of severe sanctions like extensive fines and the exclusion of procurement procedures for years.”

Birgit Schreier, however, also clarifies what the limits of the LkSG are: “LkSG explicitly states that a breach of the obligations under this act does not give rise to a civil liability” and that “on a general basis the companies are only required to check their own business and their direct contractual partners for human rights risks”.

Nevertheless, Birgit Schreier also states that the LkSG’s adoption in itself is substantial: “The law has been passed and indeed sets a new standard for German companies to consider a human rights due diligence in their supply chains.”

The beginning of a conversation

The LkSG is, therefore, significant, not only for the basic human rights it helps safeguard, but also for the blueprint it may provide for the future. It is unlikely that on its own it is going to be enough, of course. One swallow does not make a summer.

But dismissing its significance is also dangerous. It might just be possible that, along with those vital, and long overdue, human rights safeguards, the LkSG’s most significant contributions could lie in helping us recognise our own capacity for change: to help us look into the ways our modern supply chains operate and realise that things we thought static and immovable don’t have to be that way.

The desire for change is there, sometimes in unexpected places. As Dr. Harings mentions: “In our current practice we see a strong commitment of companies not only to implement the minimum legal requirements, but to take the new legal act as a real chance to create a new working culture and to contribute to the improvement of the global human rights situation and environmental crisis.”

That might be the best way of viewing the LkSG in its current form: not as the final word on anything, but the beginning of a conversation that, for the longest time, we did not want to have. New memories that reach us from far away. It is not all wolves and battles in Euphemia: there’s also talk of hidden treasure.