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Ethical Investing’s Shifting Winds Force Law Firms to Be Nimble

Sept. 25, 2020, 9:35 AM

Companies looking to tap into the $12 trillion market for sustainable and socially responsible investments face myriad challenges—including moving targets and shifting political winds.

That’s where the lawyers come in. The boom in investors looking to bankroll companies advancing certain environmental, social, and governance priorities has ramped up demand for law firms that can help businesses live up to the wide array of expectations.

“There’s no uniform body of criteria or objectives” for gauging a company’s commitment to ESG principles, said Heather Palmer, a partner at Sidley Austin LLP. There are plenty of acronym-heavy organizations that recognize companies for voluntary ESG commitments, but no “coalescence around a specific standard,” she said.

Nimble law firms are responding by creating specialized legal teams across practice areas to demystify current ESG standards, from diversity and executive compensation obligations to global pollution initiatives. They’re also helping prepare for new U.S. restrictions on ESG investing from President Donald Trump’s administration.

ESG-related assets topped $12 trillion in 2018—an 18-fold increase from the $639 billion in play two decades ago—according to the Forum for Sustainable and Responsible Investment, which has been tracking ethically motivated investing since 1995.

BlackRock Inc. CEO Larry Fink declared sustainable investing the “strongest foundation for client portfolios going forward,” in a January letter.

“We’ve really reached sort of a tipping point,” Melissa Bender, an asset management partner at Ropes & Gray, told Bloomberg Law. “ESG integration is here to stay.”

New Kids on the Block

Some firms are treating ESG as “the next new thing,” Ropes & Gray strategic transactions partner Michael Littenberg said. But the principles have been steering financial decisions for decades, he said.

Whether they’ve been parsing ESG for a few weeks now or grappling with the underlying issues since the Watergate era, the number of Big Law firms assembling one-stop shops to quell fears about the multifaceted investment strategy keeps growing.

Winston & Strawn LLP joined the fray in August, unveiling a new ESG advisory team dedicated to making sense of it all. Partners Mike Blankenship and Eric Johnson tapped nearly a dozen attorneys who’ve made careers out of troubleshooting issues like shareholder activism, regulatory compliance, and crisis management.

The new team is the “culmination of issues around human capital that we’ve seen for many, many years,” employment litigator Cardelle Spangler said. She said diversity and inclusion initiatives, as well as campaigns to bolster equality are increasingly part of ESG analysis.

In a pandemic-ravaged world where money is already tight and politically motivated investors vote with their wallets every chance they get, Blankenship urged companies to embrace ESG or risk irrelevance.

A recent McKinsey & Company report polling nearly 600 C-suite executives and investment professionals supports Blankenship’s theory.

ESG programs “will contribute more shareholder value in five years than today,” 80% of respondents said. And 83% said they’d pay a premium—up to 10% more—to acquire a company with a positive ESG record over one with failing marks.

The Trump administration, however, is throwing cold water on ESG investing.

A proposed Labor Department rule aims to curb ESG investing by forcing fiduciaries to justify including the popular funds in work-sponsored retirement plans. The department said federal law requires fiduciaries to put financial security above “non-pecuniary” goals like combating climate change, human rights, or shunning weapons manufacturers.

Littenberg said Ropes & Gray is currently working with more than 200 clients, ranging from asset managers to influential trade groups, on ESG-related issues. Latham & Watkins LLP also has an ESG task force that features attorneys with various specializations around the world.

Watchdog Soup

Meanwhile, stakeholders keep moving the goalposts—on a constantly shifting playing field.

The United Nations Principles for Responsible Investment, for instance, asks individuals to consider ESG factors as part of their decision-making process, while the Global Reporting Initiative urges companies to report the social and environmental impact of their operations around the world.

The nonprofit Institute for Pension Fund Integrity called for clarity about ESG-centric business dealings in its Aug. 27 brief. “Companies should take the extra step to convey how they define ESG and how it impacts their investment strategies,” the group wrote.

If only it were that simple.

Stacey Mitchell, a partner at Akin Gump Strauss Hauer & Feld LLP, said bringing companies up to speed on ESG often involves highlighting “potentially overlapping, or at times, conflicting legal obligations” they hadn’t considered. Taking a holistic approach is critical, she said, because ESG considerations stretch far beyond corporate boardrooms.

Mitchell called middle management the “front-line workers when it comes to ESG issues,” mapping out scenarios where environmental compliance managers at mining companies and HR leaders at technology firms make judgment calls that have ripple effects throughout the supply chain.

Recent moves by the Trump administration also throw plan retirement administrators into the mix. The proposed Labor Department rule would impose significant new reporting requirements on retirement plan administrators that consider ESG in investments.

Josh Lichtenstein, a Ropes & Gray partner, said the additional reporting requirements could ensnare “funds that just include ESG considerations as part of their risk evaluation framework” rather than the activist entities the administration appears to want sidelined.

“If all funds that consider ESG factors at all in investing are caught up by the rule then almost every fund would be subject to it,” Lichtenstein said.

That could mean new litigation risks for plan sponsors.

“Any time you require fiduciaries to take additional steps you run the risk of plaintiffs saying they didn’t do that additional work,” even if they have an excellent investment process,” Lichtenstein said.

Winston & Strawn benefits lawyer Mike Melbinger said he’s been monitoring another ESG crackdown, from the Securities and Exchange Commission. That agency, along with the Labor Department, is moving to regulate proxy voting power by ESG investors.

The new regulations are unlikely to put a dent in ESG investing, according to Melbinger.

“The real world has kind of moved on and is doing this,” he said.

To contact the reporter on this story: Warren Rojas in Washington at wrojas@bloomberglaw.com

To contact the editors responsible for this story: Chris Opfer at copfer@bloomberglaw.com; Alexis Kramer at akramer@bloomberglaw.com

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