In 2008, the global economy collapsed and sparked a chain of events that would alter the world’s financial markets forever. Financial regulations were thrown out and rewritten, household names in the banking world disappeared overnight and how people viewed finance and money was permanently changed. In amongst the chaos, a new idea emerged, which has increasingly dominated headlines and discussions in the last 14 years – cryptocurrency. Where Bitcoin forged a path, many others have followed, and the digital currency market is now overflowing with cryptoassets.

Since its inception, cryptocurrency has (to put it mildly) divided opinion. However, in recent years, one notable factor has risen in prominence in the crypto debate – its energy consumption. Certain methods of mining cryptocurrency and the sheer amount of electricity required to power these processes have made headlines in recent months and years and encouraged critics and enthusiasts alike to debate whether cryptocurrency can find its place in the sustainable investment movement.

Cryptocurrency processes – a short summary

Cryptocurrency mining is regularly powered through one of three models: proof of work (POW), proof of stake (POS) or proof of authority (POA). Under the POW method, which is by far the most energy intensive, computers are used to calculate complex mathematical problems to either create or ‘mine’ cryptocurrencies or process a transaction. These computing processes (or ‘work’) are then used as a method of verification for the blockchain transaction, which is confirmed by other participants in the blockchain.

The POS model validates a transaction in the blockchain based on the amount of coins a miner holds, i.e. coin owners offer their coins as collateral in order to validate blocks within the blockchain; while the POA method is more reputation based and relies on verification from block validators that have been arbitrarily selected as trustworthy entities. Both of these methods are generally acknowledged as more eco-friendly than the more widely used POW model.

The current situation

As previously reported by the Cambridge Bitcoin Electricity Consumption Index, the energy use of Bitcoin, which utilises a POW method, is approximately 0.6% of the global energy consumption, which is roughly equivalent to the annual energy usage of countries like Norway or Ukraine.

“Where a cryptocurrency relies on a consensus mechanism (such as POW) over a distributed network, there is an enormous environmental cost” states Neil Robson, a financial regulatory and crypto expert based in Katten’s London office. “The negative environmental impact that some crypto have, such as Bitcoin, is bound to become a bigger issue as cryptocurrency gains more popularity”.

This massive energy usage has recently caused several governments and legislative bodies to take drastic action to counteract the negative climate impact. In late 2021, China banned all cryptocurrency transactions and crypto mining, the largest in a growing group of countries to do so; Russia has recently proposed a similar ban due to its effect on the country’s green agenda, and Swedish regulators have suggested a ban on Bitcoin mining to ensure Europe can meet its obligations under the Paris Climate Agreement.

However, the approach to cryptocurrencies globally has been far from consistent. As highlighted by James Burnie, a financial services regulation and fintech partner at gunnercooke, “Different local lawmakers have different priorities, cultures and philosophies. In the EU there is a focus on the importance of the individual, in the US there is a focus on the corporate and in China the focus is on the importance of the state. Therefore, there is a lack of a single unified stance on how cryptoassets should be dealt with. When this is overlaid by the fast-changing nature of cryptoassets, it means that those who create and understand the technology tend to innovate, whilst regulators are left to catch up”.

It would also be reductive to suggest that sustainability is the only issue facing the crypto market. Undeniably, the other prominent narrative around cryptocurrencies is the volatility of the assets themselves. Large volumes of crypto scams and wildly fluctuating prices have led to some arguing that a cryptocurrency’s value is solely driven by supply and demand, with no intrinsic value in and of itself. Celebrity endorsements have also added to the chaos, with recent examples leading to allegations of misleading marketing and, at worst, class actions alleging intentional ‘pump and dump’ schemes.

Similarly, the idea that cryptocurrency’s impact on the environment is contained to its energy usage ignores the other side of the proverbial coin. As reported by the BBC in late 2021, cryptocurrency mining processes produce 30,700 tonnes of electronic waste (also known as e-waste) a year, the majority of which ends up in landfills. This averages out to 272g of e-waste per transaction and is equivalent to the small IT equipment waste of a country the size of the Netherlands.

So, is there a green solution?

Several jurisdictions around the world have attempted to offer up solutions to the crypto sustainability issue with varying degrees of success.

“In terms of using green energy sources for POW, a great example is Iceland”, states Robson. Nearly 100% of the country’s electricity stems from renewable energy sources, with excess created every year to attract energy-intensive businesses to the region, including cryptocurrency miners, which have long been drawn to Iceland for its abundance of cheap geothermal energy.

However, as Robson points out, “Just last December, Iceland began turning away new Bitcoin miners due to issues with energy allocation and problems in its power station, so it appears that using green energy sources for POW mining may not be a long-term option”.

Kazakhstan has also followed a similar trajectory, initially welcoming cryptocurrency miners but shutting down mining centres or cutting of electricity supplies to miners in January 2022 due to nationwide electricity shortages.

The cryptoasset market has also seen an increased presence of sustainable cryptocurrencies in recent years. Burnie comments, “So far, the issue around sustainability has predominantly centred around Bitcoin. However, some new cryptoassets, such as Avalanche, have made sustainability a core part of their USP and are actively geared towards those who are focused on ensuring sustainability”.

Other notable examples of sustainable cryptocurrency include Cardano, which utilises a POS system; SolarCoin, which creates one coin for every megawatt hour generated from solar energy; and Bitgreen, which rewards users for environmentally friendly behaviour.

“As the techniques behind making these cryptoassets sustainable become increasingly used and accepted”, continues Burnie, “then sustainability may become less of a criticism to cryptoassets. Indeed, as there can be inherent inefficiencies in non-blockchain solutions, it may be that, in some cases, using a cryptoasset becomes more sustainable than the traditional method”.

Can regulations play a role?

Additionally, it seems increasingly likely that the future of crypto will be within a regulated landscape and, if current trends are an indicator, a landscape that focuses ever more on sustainable investments.

As Robson suggests, “Given the green incentives published by countries such as the UK, US, EU and China, it’s important to highlight that we are seeing a shift in what investors are looking for. ESG assets have become incredibly popular in the past few years and the transition to sustainable finance is only going to get bigger in the coming years”.

Burnie adds, “There is an issue here of perception. If consumers are faced with two alternatives, one of which is sustainable and the other not, then they may decide to use the former preferentially”.

Similarly, notable players in the traditional financial market have become increasingly vocal about the potential for cryptocurrency regulations. In 2021, HM Treasury and the Bank of England announced they would be creating a taskforce with the aim of looking into the possible creation of a UK Central Bank Digital Currency (CBDC), a form of digital currency issued by the Bank of England.

In January 2022, HM Treasury released the results of its consultation on cryptoasset promotion, confirming that the UK government will introduce measures to bring a broader range of cryptoassets within the scope of the UK’s financial promotion regulation. The FCA also got involved in early 2022, setting out its intentions to strengthen financial promotion rules relating to high-risk investments, including cryptocurrencies.

Given the volume of proposed changes on the regulatory horizon for cryptoassets and the wider shift in the financial markets towards a more green-conscious approach, the two seem on an inevitable collision course.

Robson suggests, “It’s worth noting that, alongside increased regulation, the UK has recently committed to a net zero economy by 2050, and we are seeing this commitment trickle down into the financial sector. For example, the UK is proposing to impose an obligation on certain UK firms to make public ESG disclosures. These include possibly requiring asset managers to disclose carbon emission data and carbon intensity metrics of the investment portfolios they manage. If this proposal is successful, and crypto becomes fully regulated, we may see crypto mining emissions being included in these portfolios in the years to come”.

Burnie adds a slightly different take: “An interesting point is regarding the assumption that crypto will have to adapt to the existing regulatory framework, whereas in fact it may be in some cases that the existing regulatory framework should adapt to crypto. It may be that these firms shape the future of regulation to come as regtech solutions are developed using this technology as part of ensuring better outcomes for markets and consumers”.

Overall, the reality is that the discussions around climate change are set to become increasingly prominent throughout the financial world, and with ESG assets predicted to exceed $53tn by 2025, the cryptoasset market will have to consider its environmental footprint when looking ahead.

As Robson concludes, “The focus on climate change and the need for sustainability has brought intense scrutiny to cryptocurrencies’ energy usage. Cryptocurrencies and their underlying blockchain technology will need to evolve in line with market needs if it wishes to be successful in the future, though it remains to be seen how sustainable or green crypto will be as an industry in one, three or five years’ time”.

Poland has been slow off the mark in its green transition. It has a historically powerful coal industry, which has brought with it a large degree of scepticism towards environmentalism. This began to change when Poland joined the EU with its environmental politics and regulation. However, larger scale changes are afoot, and lawyers I spoke to believe that corporates and even state-owned energy companies are beginning to really buy into the so-far alien concept of ESG.

While there are still a number of challenges, Poland’s renewable energy market is developing quickly, from a miniscule base, while the country’s prominent manufacturing sector is also starting to rise to the challenge.

I spoke two Polish lawyers to find out more: CMS’ Agnieszka Skorupińska, who leads the firm’s environmental law practice in the CEE region, and head of the energy practice at Rymarz Zdort, Marek Durski.

The historical challenge of coal

According to Skorupińska, ‘there are massive social issues associated with coal extraction and a coal-based energy generation. So, this is something that cannot be thrown into the bin easily’. The region of Upper Silesia is home to a large number of Poland’s mining communities that have formed a politically influential bloc backed up by a strong mining union.

Coal is also a large part of the country’s energy mix (coal-fired plants produced roughly 70% of the nation’s electricity in 2020 according to the IEA) and it is a major exporter of the material. There are geopolitical implications for Poland’s coal-dependence.

Durski observes that while the rest of Europe is struggling with high natural gas prices, electricity remains relatively cheap in Poland, which has remained wary of gas imports from Russia. ‘The starting point for Poland is definitely different than you would have in the UK or Germany or France with nuclear power’, he adds, ‘you have to invest a lot of money to actually switch’.

Coal consumption has fallen in recent years, and the slack has mainly been taken up by bio-fuel and natural gas electricity production. Durski sees this as a more positive move, because ‘in a country that has to switch from coal to cleaner energy, natural gas is treated as a fuel that will be used for quite a long time to allow for the transition to a fully, carbon-free economy’.

The Polish government has shown signs that it recognises the need to decarbonise the economy and its long-term plan (known as Polish Energy Policy 2040) aims for coal to make up no more that 56% of the energy mix by 2030, with coal being phased out completely by 2049. Skorupińska notes, ‘it’s good that there is a declaration that we won’t cross this level. But on the other hand, still, this is very high.’

The state of renewables

So where does that leave the green transition? Wind and solar have proved to be the most viable renewable energy sources for the Polish market.

Skorupińska notes that onshore wind initially ‘flourished’, however that market was stalled in 2016 when the Polish government imposed a distance requirement banning projects near settlements; it is thought the law will be amended in the near future to allow for more onshore development permits.

Offshore wind has been more successful, and there are a number of Baltic Sea wind projects in development, attracting significant foreign investment, including from Orsted and Equinor. The offshore projects are particularly symbolic, as they are a visible reminder of Poland’s energy independence and its intentions in the green transition.

There have also been positive moves in relation to solar energy. The Polish government has encouraged the micro installation of photovoltaic panels by property owners. According to official figures, in 2018, there were 490 MW of installations in Poland, of which 340 MW were micro installations. In 2021, this figure rose to 6126 MW, with private capacity accounting for 4757 MW.

Durski points out that there are also favourable conditions for industrial photovoltaic projects, under the contracts for difference mechanism, which provides a guaranteed energy price for 15 years, although these projects are slowing down as it is necessary to update the grid’s interconnection capacity.

These are, of course, positive developments, but renewable energy remains an infinitely small part of Poland’s energy mix. Despite this, there is reason to believe that economics will ultimately drive change, aided by European green policy and the burgeoning adoption of ESG.

The global change in attitudes and policy

Durski sees economics as having had a significant impact on Poland’s green transition. ‘All of the utilities that were very slow progressing transition projects to invest in natural gas sources or renewables, suddenly they realised that they could go bankrupt if they don’t do that’. As part of the EU, Poland is subject to its emissions trading scheme, which is becoming more costly every year.

Additionally, foreign investors are adopting ESG strategies that prevent them from investing in non-renewable energy generation. This is perhaps a game-changer. As the majority of power generators in Poland are state-owned, the government is working to transfer its coal-fired power plants to a “bad bank” until they reach the end of their operational lifetime.

Explaining the concept, Durski points out that ‘the idea is that all of those utilities are facing problems with securing new financing for as long as they are operating coal assets.’

Skorupińska has noticed that ESG is becoming more important outside of the energy industry, albeit among large Polish companies rather than smaller businesses. Polish chemical companies are adopting decarbonisation policies, on the back of the European Green Deal.

Citing the example of one client’s development of chemical recycling technology, she states that ‘this is something that the biggest players have built teams to deal exclusively with, in order to develop something that will probably change their business model as a company’.

Durski also identified a media industry client that had invested in an operating solar installation to hedge themselves against increasing energy costs.

Finally, at the COP26 summit in Glasgow in 2021, the Polish government signed a declaration committing to phase out coal power generation in the 2030s and transition away from coal entirely by the 2040s. Following the summit, the ministry of climate and environment clarified that Poland will phase out coal in the mid-2040s. Exemplifying the political balancing act, these promises contradict a contract signed with the mining union before the summit that the transition is scheduled for 2049.

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.

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.’