Wind turbines at the Martin de la Jara wind farm
Headwind: counsel must tread carefully on ESG challenges © Angel Garcia/Bloomberg

As sustainable investing grows, it has also become weaponised. As more companies and asset managers tailor their investment decisions to achieve societal goals, as well financial profit, they have met with a growing backlash from legislators and campaigners.

But, as the controversy rages, the growing market of investors wanting to apply environmental, social and governance (ESG) criteria to portfolios has created demand for credible rating systems, accounting frameworks and professional talent — including legal expertise.

Ropes & Gray is one US law firm closely monitoring a wave of so-called anti-ESG bills, which seek to limit the ability of pension funds, asset managers and businesses to base decisions on anything other than narrow financial grounds.

A year-to-date recap, published by the firm last month, points to a range of contradictory state laws now facing asset managers. The situation requires careful consideration.

“Caution, care and moderation are the order of the day to best ensure that the manager can continue to work with a diverse array of investors,” the firm says.

But, where there is confusion and dispute, there is a need for professional advice. And US-led global law firms are continuing to strengthen their teams covering the field.

“We have seen explosive growth [in ESG advice],” says Timothy Wilkins, global partner for client sustainability at Freshfields Bruckhaus Deringer.

In October, the law firm hired Doug Bryden, previously co-head of ESG and impact at Travers Smith. For his colleagues at Freshfields, “ESG issues have become a core part of the advice they give to boards and [senior executives] — whether those practices are primarily transactional, disputes or regulatory”.

BlackRock, the world’s biggest asset manager, is among the institutions rowing back on marketing products as “sustainable”, in response to scrutiny and political controversy. But investing in, and managing, companies with the aim of balancing profit with social justice and environmental protection is not going away. ESG ratings now influence which stocks and bonds are included in $2.8tn of investment funds marketed as sustainable, according to research group Morningstar.

Amid attacks from opponents of “woke capitalism” from the right, businesses and institutional investors also face intensifying legal challenges over “greenwashing” — exaggerated claims of ethical standards from ESG supporters. The US Securities and Exchange Commission has already settled enforcement cases with Goldman Sachs and German asset manager DWS over the issue.

Even so, many law firms are betting that, whatever the backlash against ESG, demand for legal advice in the field will increase. Earlier this year, Covington & Burling hired Jayni Hein, a former White House environmental official under President Joe Biden, and Kirkland & Ellis poached Rhys Davies from DLA Piper for the firm’s global ESG and impact practice, underscoring how law firms are trying to strengthen their competence.

A Morrison Foerster survey conducted in association with Corporate Counsel earlier this year found that, despite anti-ESG sentiment gaining momentum in 2023, half of companies reported no backlash. However, it noted that 15 per cent said they no longer used the term ESG or had changed terminology because of anti-ESG sentiment.

“While public companies face additional external scrutiny and activist investor pressure, public company res­pondents signalled that aligning with ESG objectives is still good for business,” concluded the report.

“Green-hushing”, rather than “greenwashing”, has become the latest approach for some US companies that are reluctant to talk about adopting ESG agendas to avoid criticism.

“The fight over ESG in public investments is far from over and may even be just beginning,” found the Ropes & Gray report.

“We believe it is generally still possible for managers to thread the needle and continue to retain both red [Republican] and blue [Democra­t] state mandates.”

But is the pipeline of legal advisory talent there?

A survey published in November by research group Wolters Kluwer, conducted among 700 lawyers across US and Europe, found that 68 per cent of law firms had established dedicated ESG practices within the past three years.

However, 69 per cent felt they were not yet “very well prepared” to meet client demand in this area.

Willkie Farr & Gallagher is one firm looking beyond the quagmire of disputes in the field to a future when ESG factors are even more central to clients’ considerations — and perhaps less contested.

The firm has launched an internship that brings in college students, who are not necessarily thinking about law as a career, to work on environmental and sustainability issues. The firm says it is possibly the only major law firm to have such an internship programme.

Since it started, “the programme has brought in nine interns, two of whom have transitioned to full-time roles”, says Peter Fradkin, chief administrative officer at the firm. The scheme is expected to welcome new students in 2024, he adds.

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