ESG: views from a regulator and a regulated business

The latest Centre for Legal Leadership webinar, hosted in conjunction with Thomson Reuters, focused on environmental, social and governance (ESG) issues. Jenny Block, General Counsel and Board Secretary at Ofwat, the economic regulator of the privatised water and sewerage industries, offered a regulator's perspective. Christy Baker, General Counsel and Data Protection Officer at the multinational transport company, FirstGroup, provided a view from a regulated business.

Ofwat sits within a policy and regulatory system with ESG at its core. It has three strategic goals:

While Ofwat sets the framework, its aim is for the water companies to "own" the ESG agenda. These companies need to go beyond mere compliance and deliver environmental and social value as part of their core functions.

There can be quite a bit of "fluff" when it comes to setting ESG targets and therefore companies must choose something that matters to them. Ofwat is clear that the social and environmental benefits need to be:

Transparency is key. Companies must be open about information and insights on their performance, and their impact on the environment and the communities that they serve. If bad news is hidden, this lack of candour will eventually find its way to the surface.

Good governance underpins good decision making and it also helps companies perform better and minimise problems. Conversely, poor performance can almost always be traced back to governance failures. Ofwat created four principles, which eventually became objectives in the licence. These focus on:

There has been a noticeable shift in the culture and governance of water companies. Boards that were previously solely focused on the financials have now broadened their outlook and are recruiting individuals with environmental expertise. Reporting is generally improving too. Ofwat is also involved with board governance via pre-appointment meetings with new non-executive directors (NEDs). Feedback from NEDs who attend these meetings is always positive.

Finally, you don't need to be an environmental lawyer to have an impact. You can be a contract lawyer, a tax lawyer or a pensions lawyer; whatever your role, you can find a home for your interest in ESG.

ESG has always been important for general counsel and legal teams as they are tasked with ensuring good corporate governance, but the whole organisation is now being forced to focus on ESG. There has been a noticeable step change in the last few years due to the introduction of reporting obligations on sustainability, and increased pressure from investors. FirstGroup are now seeing the most pressure on ESG coming from investors, rather than regulators. Employees are also invested in the ESG agenda and the company's progress on ESG is part of its recruitment and retention strategy.

One example of the links between the E, S and G is the recent update of the company's standard procurement contract. This was driven from a sustainability angle as, if FirstGroup is to meet its sustainability targets, it needs its suppliers to meet theirs too. The process also provided the opportunity to review diversity and inclusion provisions and, where necessary, insert them into the contracts. There are several projects that the legal team is currently working on that have a specific ESG goal and even those that do not have specific goal are often now viewed through an ESG lens.

It's vital to understand and to help drive the setting of corporate goals on ESG. Ideally these should be science-based targets, rather than nebulous long-term goals, as science-based targets provide more credibility to stakeholders. Internal data analytics is becoming more important as your company will need to rely on its data and its people to support its green claims and avoid accusations of greenwashing (see Practice note, Data analytics and business intelligence: an overview). In FirstGroup's case, the aim is to be net zero by 2050, with an interim target of making their bus fleet net zero by 2035. Incremental targets and staging posts are necessary to help meet these goals as the organisation's senior leadership team are likely to be retired when the target dates are reached.

A similar approach is needed at the legal team level. It's important to explain to your team how they can help reach these targets. For example, M&A strategy, forging innovative partnerships and B2B opportunities (such as delivering charging points for other businesses in bus depots) often have a large legal component. The General Counsel Sustainability Leaders programme has helped to provide a framework here. It has been particularly useful in identifying where you can get the most "bang for your buck" as a GC to drive change. It's also helpful to speak to peers who are facing the same challenges and to share best practice. For further information, see Article, General counsel are sustainability leaders.

Lawyers are adept at bringing teams together in cross-functional working groups as they typically have a good set of relationships across the organisation. However, it's important to avoid these working groups becoming a talking shop. While there is space for discussion, the focus should be on setting targets and starting work on specific tasks. Don't let perfection be the enemy of good; simply getting the ball rolling will help to create a positive snowball effect. Try and mix up your targets. Make some internal and others external, and make some difficult and others more straight-forward.

Remember to cut yourself some slack as you will not have all the answers. Find your allies and talk to your colleagues in the business, particularly your sustainability or corporate responsibility teams. You may have access to pockets of information that others do not, and this can enable you to join the dots and create a useful narrative for the whole organisation.