We spoke to several experts working in the ESG arena within the legal industry across the world to see what developing issues they see as critical ones to watch. These are what they considered the five most important themes for the year ahead:

1. Supply chain transparency

Supply chain diversity and transparency of material issues around ESG will mature because of upcoming deadlines on reporting by regulators in the United States, United Kingdom, and the European Union.

“As law firms realize that they are actually just a vendor in somebody else’s supply chain, they must recognize the need to start making efforts to comply with regulations,” says Aragon St-Charles, Global ESG Officer at Dentons, adding that these regulations are increasingly being driven by new reporting rule-making by U.S regulators and implementation of existing E.U. Corporate Sustainability Reporting Directive regulatory mandates in reporting that are coming in effect in 2024.

Omar Sweiss, CEO of JusticeBid, a technology platform that helps corporate law departments expand efficiency in outside counsel selection and gain increased transparency on ESG topics for Tier 1 and Tier 2 suppliers, agrees. “A burgeoning area of focus coming in 2023 is that every vendor in the legal space, not just law firms, is really going to have to start thinking about their own supplier diversity programs,” Sweiss explains. “Up until now, the majority of these players in legal have been immune to supplier diversity efforts. I believe this is going to change dramatically in the next 12 months.”

2. The growth of ESG benchmarks, scorecards & frameworks

With an expanded collective understanding of ESG material issues for the legal industry, custom frameworks for the industry too will evolve. The beginning of this trend started in the last 24 months, as numerous outside parties began offering up metrics in the ESG space.

For example, impactvise provides a comprehensive measurement of law firms internal ESG strategy; and the Law Students for Climate Accountability focuses on law firms’ client work around climate in litigation, lobbying, and transactions. While Diversity Lab’s Mansfield Rule provides a measurement for diversity, equity & inclusion as part of the social part of ESG.

3. Increased legal risk for law firms

Clients are starting to make ESG demands about corporate values and positions that present a potential risk for multinational law firms, observes St-Charles. There are important implications for this growing trend regarding the rule of law and the right to representation for multinational law firms. To illustrate how the risk shows up, imagine a client working with a partner at the U.K.-based office of a law firm who asks the firm to agree to terms that contractually prohibit it from working with fracking companies, even in other countries. If that law firm is working with such clients in other jurisdictions, then agreeing to this could contractually open up the firm to legal risk.

4. Biodiversity as an emerging dimension of the “E”

The critical need to retain abundant biodiversity is an issue requiring closer attention of the legal sector, notes Adam Woodhall, chief executive for Lawyers for Net Zero, a non-profit initiative launched in mid-2021 that supports general counsel and their teams to drive action on climate and ESG within their organizations. Indeed, governments from around the world — as part of the United Nations — gathered in December 2022 to agree on a new set of goals to guide global action through 2030 in order to halt and reverse nature loss; and the Taskforce on Nature-Related Financial Disclosures, a financial services industry advisory group whose members represent more than $20 trillion in assets, is expected to release its final risk disclosure framework in Fall 2023.

5. Increased pressure to speak out on controversial events

Law firm leaders are increasingly caught in the middle between activism coming from employees, clients, and politicians on one side of a hot-topic issue and another group of clients who may be on the opposing side. For example, we’ve recently seen corporate clients that are leaning into ESG actions, such as enacting net zero commitments, while expecting their supply chain partners to do the same; yet, on the other side, a small group of members of the U.S. Congress warned law firms in a recent series of letters about the “collusive effort” to restrict fossil fuels.

To successfully navigate these events, law firms should “think through the process of if, when, and how to respond and address it from the law firm’s values,” says Gayatri Joshi, former Executive Director of the Law Firm Sustainability Network and a Partner at Vorgate Legal ESG Impact. Indeed, many law firms already have been doing this during the Ukraine/Russia conflict, either by making public statements or internal statements to their employees or clients describing the impact of the this event on the firm and its stakeholders.

Although the ESG issues that stakeholders care about differ across the legal industry, the fact remains that ESG will only increase in prominence for legal organizations in 2023 because of the many external factors — regulations, clients’ ESG strategies, politics, and activism among stakeholders — that influence the industry.

That means, law firms should proceed with introspection and caution.

“Law firms need to get their own house in order if they do not want to run the risk of losing and not attracting new clients,” says Adrian Peyer, Co-Founder & CEO of impactvise. “Until now, the ESG performance of a law firm has been ‘a nice to have’, but 2023 and beyond will move it to ‘a need to have’.”

Woodhall, of Lawyers for Net Zero, agrees, highlighting the unique role of general counsel. “The foundation of our society is a livable planet, so savvy GCs and their teams are supporting their business to be part of the climate and biodiversity solutions, as well as providing the social and governance advice which helps nurture flourishing businesses and society.”

As we enter 2023, the specter of a potential recession looms over all budgetary and strategic decisions. Professionals in corporate law and tax departments are already anticipating having to do more with less, which will likely impact how they work with their outside partners over the next 12 months. Add into this a mixture of new governmental regulations, and these next 12 months could start to look less optimistic and more of a trial to overcome.

In the most recent Thomson Reuters Institute Insights podcast, available on the Thomson Reuters Institute Insights podcast channel, our team of strategists reveal the trends they’re watching as we enter 2023, and how changes in the overall economy may affect this coming year’s strategic priorities.

Rabihah Butler, Head of Compliance & Government Insights, says that compliance is the name of the game in the risk and fraud space, with the Beneficial Ownership Act, the Enablers Act, crypto-regulation, and ESG compliance all playing their part to make the coming regulatory year a complicated one. And in the event of an economic downturn, there may be questions surrounding who bears the burden of that compliance risk, as well as how government entities and court systems will be able to continue key system reforms that they began during the pandemic.

Natalie Runyon, Head of ESG Insights & an Advisory Services Consultant, believes 2023 may be “a painful year because of multifaceted operational challenges and other headwinds” facing those responsible for ESG within organizations. The Securities and Exchange Commission’s rules on greenhouse gas emissions and the European Union’s new corporate sustainability reporting requirements both will increase work for lawyers and accountants, while certain social aspects of ESG — most significantly, the increased focus on employee well-being as a key performance indicator of organizational well-being — will remain a key priority for boards, especially in a tighter labor market.

Zach Warren, Head of Technology and Innovation Insights, views the tech and innovation landscape as one where next-generation technologies such as artificial intelligence, blockchain, and even ChatGPT may be taking a back seat to tried-and-true standards like business development and security and data protection. Thomson Reuters research has shown that while technology investment has continued thus far in the legal and tax industries alike, a recession may mean scaling back some research and development initiatives.

Bill Josten, Head of Legal Marketplace Innovation Insights, notes that what is top of mind for corporate law department leaders and law firms alike isn’t changing: the volume of matters they’re seeing is increasing. However, flat budgets and a potential down economy may have changed the calculus of how those matters will be tackled. Tighter budgets are forcing corporate law departments to tier their outside work, which could mean a potential rise in utilization of alternative legal services providers. Law firms, meanwhile, also are eyeing what inflation might mean for their realization rates and how to hold onto demand in the face of those tightening corporate purse strings.

Finally, Nadya Britton, Head of Tax and Accounting Insights, explains that small and midsize tax & accounting firms are looking to continue their advisory services expansion, particularly with continued industry automation and a de-emphasis on simple compliance work, while large tax firms are focusing on specialization in specific industry areas. Corporate tax departments, meanwhile, are “all about data, data, data,” Britton says, particularly with trying to better integrate the tax function into their organizations’ wider business initiatives. Even though any economic downtown may not impact tax as strongly as other industries, there are still implications around the industry’s growth plans to be considered.

As our team of strategists describe it in the podcast, 2023 is set to be a complicated year, but research has shown that there can be reason for optimism among all areas of professional services. Even with economic uncertainty looming on the horizon, the next year can prove fruitful with a little strategic planning and care.

Episode transcript.

You can get the whole story on the outlook for 2023 and listen to the most recent Thomson Reuters Institute Insights podcast here.

While talent issues remain high on the board agenda for many companies, organizations need to do more to explicitly tie the well-being of their people and corporate purpose directly to corporate ESG activities on a consistent basis. Indeed, measuring social impact — the S in ESG — through the lens of people’s well-being is not yet mainstream, although it is gaining traction.

Multinational food manufacturing giant the Kellogg Company (Kellogg’s) is among those companies that consistently link their global purpose platform to their sustainability agenda and ensures their purpose is centered on the well-being of their employees and other stakeholders. More specifically, the company, through its Kellogg’s Better Days Promise, aims to advance sustainable and equitable access to food by addressing the intersection of well-being, hunger, sustainability, and equity, diversity & inclusion to create better days for 3 billion people by the end of 2030.

Enacting a multi-pronged stakeholder engagement strategy

Kellogg’s also embeds its corporate purpose into its growth strategy. This definitive integration of purpose and growth dates back a century to its founder and is well entrenched within the organization’s business and culture today, says Stephanie Slingerland, Senior Director of Philanthropy and Social Impact at the Kellogg Company.

The Better Days Promise is a key element of Kellogg’s Deploy for Balanced Growth strategy, which includes consideration of the varying sustainability-related preferences, needs, and desires of the company’s multiple stakeholder groups — employees, customers, consumers, investors, and the communities in which the company is based and operates.

With the recognition that the “company should and can do well by doing good,” Kellogg’s has taken a proactive approach to engaging with stakeholders to communicate how its corporate ESG strategy remains central to its operations and growth strategy through a people well-being lens, Slingerland explains.

Kellogg’s has seen positive implications by intentionally collaborating with stakeholders to integrate the organization’s corporate purpose and social impact into its ESG strategy in a variety of ways, including:

• • • Cross-stakeholder ESG initiatives — Honoring World Food Day is a month-long event at Kellogg’s. It is an opportunity for the company to engage with many of its stakeholders, including food banks, retail partners, and employees, through workplace and community volunteering opportunities, donation drives, communications, and events.
    • Employees — Kellogg’s employees regularly engage with ESG initiatives over the course of the year. Indeed, cultivating employees as ambassadors through the promotion of the Better Days Promise to employees’ networks, customers, and partners enables a multiplier effect on the company’s ESG communications and social impact.
    • Consumers & community — Kellogg’s has a long history of involving consumers in its philanthropic activities. In the summer of 2022, for example, the company’s launch of the Build for Better program and competition, executed in partnership with Minecraft and the nonprofit KABOOM!, allowed consumers to design a virtual playground on Minecraft and submit it for the chance to see it built in real life. The winning design was built at a Boys and Girl Club of America in Marietta, Georgia in November 2022.
    • Customers — Likewise, the company’s retail customers recognize the importance of ESG initiatives and are eager to partner on Better Days Promise. For example, Kellogg’s collaborated with a retailer to launch Kellogg’s InGrained, a program that helps rice farmers reduce climate impact. Another retail partner, recognized Kellogg’s commitment, investment, and partnership on philanthropic, sustainability, and well-being initiatives, named the company the first-ever ESG Supplier of the Year.

Storytelling & data are essential

Data and storytelling are key to executing holistic, multi-pronged communications to a wide variety of stakeholders. While it is sometimes tricky to address all audiences’ preferences and expectations, “sharing stories about the people behind our strategy who have such a passion for their work, or the people that the initiative impacts, resonates the most,” Slingerland says. “Data helps to contextualize the impact of the stories.”

One of the most common challenges in implementing an ESG engagement strategy is how to influence late-comers or those who question the validity of the widespread attention that ESG is receiving. To make progress, companies should stay focused and highlight the positive impact company initiatives can have on the surrounding communities, and how these initiatives help drive company’s growth, Slingerland advises.

Whatever the ESG concerns that emerge, both say, they are among an already full plate of work for corporate tax teams in 2023.

Readiness to take on ESG responsibilities

The extent to which corporate tax functions will be prepared to take on upcoming regulatory requirements around ESG will be a key factor in 2023. At the same time, tax leaders don’t seem too worried. The infrastructure upon which most tax teams can lean are the processes and governance already in place to meet current financial disclosure requirements, explains Sturgis. Indeed, corporate tax functions have solid protocols and procedures in place to comply with existing regulations, and they already have experience with calculating how much the company contributes to local economies in which the company operates.

Sturgis offers these essential actions that can help determine if the current process framework is adequate to absorb ESG requirements:

• • • Make sure tax leaders are able to articulate how the tax function is reducing risk.
    • Evaluate how the tax function is grasping the company’s current tax liabilities, which includes income tax, payroll tax, personal property tax, and value-added tax. In addition, a detailed understanding of those liabilities from state, local, federal, and international perspectives also is important.
    • Assess the tax compliance process and conduct a gap analysis against best-in-class practices.
    • Review processes to understand how new tax laws are being identified and evaluated.
    • Analyze how adding technology to processes might help reduce that risk.

Evaluation of IRA tax incentive opportunities

The full implementation of the IRA could reduce the domestic greenhouse gas footprint in the U.S. by as much as 40%, given that there is more than $300 billion of climate-related and clean energy investment incentives from solar wind energy storage, hydrogen, carbon sequestration, clean aviation fuel, and charging stations for electric vehicles, says Hall. Because of the expansive incentives related to the IRA, any corporate tax function can be a vital and valuable contributor to a company’s ESG strategy execution around climate and the environment in 2023.

What is interesting about the IRA is its supercharge tax credits, which actually have been on the books for years. In addition, the law also offers extensive opportunities to enhance social initiatives — the “S” in ESG — which include: i) a low-income area provision that allows a company to leverage additional incentives if a company’s energy project is in a low-income community that is below or near the poverty line; and ii) an “energy community” special rule that encourages investment in communities that have historically been negatively impact by fossil fuel industries, while at the same time, are in need of economic revitalization.

ESG-infused cross-border tax regulations

In addition to the issues on the horizon around tax in the U.S., there are tax concerns related to ESG in other jurisdictions. Two notable ones, according to Sturgis and Hall, are the potential for a carbon border tax and IRA-like legislation in other countries. Indeed, they could increase the difficulty of the work by corporate tax teams, if passed.

For example, the implications of the European Union (EU) enacting a carbon border tax could be significant, notes Sturgis. The EU is already taxing carbon, but the carbon-based border tax complicates the incentives to keep the production of goods sourced and manufactured within national borders because these goods would be at a price disadvantage. Also, more jurisdictions passing their own IRA-type legislation to incentivize domestic investments would also have an impact. “A headwind on the IRA legislation in the U.S. is that our friends over in Europe were not too happy about it,” Hall says.

ESG here to stay in 2023

Political and financial headwinds are likely to slow progress around ESG in 2023. Sturgis and Hall point to the divided U.S. Congress and the high cost of capital that are likely to both slow companies’ efforts to take advantage of IRA incentives.

However, both anticipate progress over the long term because of ongoing rulemaking and the staying power of the importance of ESG among the public, investors, employees, consumers, and other stakeholders. As a result, corporate tax teams as well as their outside tax & accounting firms are likely to stay busy in 2023.

“Whenever [ESG] rules come out, they need to be implemented via controls and audited,” Hall states. “As accountants and CPAs, that is where we can help.”

As a result, these topics will become part of the normal course of business discourse in 2023. More specifically, here are five ESG themes that will be on the horizon this coming year:

1. ESG takes two steps closer in becoming just “business”

At its core, sustainability is about using fewer resources — natural, financial, and human — to generate increased efficiency and effectiveness in business performance, while reducing risk and identifying leveraging opportunities. John Friedman, Managing Director of ESG at Grant Thornton, advocates for the idea of calling sustainability “business” and reframing it in that way, because “no matter what you call it, it is just smart business to understand and manage those things that are levers for attracting more customers and investments [and] engaging your workforce, which all drive profitability.”

To underscore that point, a recent Deloitte study found that more than half of executives said they anticipate benefits from enhanced ESG reporting, including increased employee retention (with 52% of survey respondents citing this as a benefit), improved return on investment (52%), stronger stakeholder trust (51%), elevated brand reputation (49%), and reduction in risk (48%). Indeed, Infosys research found a strong correction between ESG and financial returns and realized financial benefits, including the lower weighted average cost of capital, according to McKinsey & Co.

2. Return to office is so 2022

Hybrid work is here to stay, and employees continue to crave flexibility. In addition, there is emerging evidence that remote working does not automatically mean a lack of engagement based on recent research of metadata gathered from virtual meeting platforms from 10 large global organizations, spoiling one of the major arguments for bringing employees back to the workplace immediately.

3. Employees still maintain an advantage over employers in major markets, albeit a smaller one

The tight labor market is likely to continue in major markets, despite the expectations of a recession in the U.S. and Europe in 2023. A key factor behind this is that labor force participation rates in the U.S. and in Europe continue to shrink over the long term. Further, attracting retirees back into the work force and shrinking net migration rates in the U.S. and the European Union are unlikely to fill in the gaps.

Moreover, one-third of European workers surveyed in mid-2022 said they were expecting to “quit their jobs, even amid the destabilizing conflict in Ukraine, rising inflation, and [as] growing fears of hiring freezes and job losses have created a difficult set of conditions for companies.” Against this backdrop, the European Commission is seeking to attract and retain foreign talent in the region through the Skills and Talents Package, a set of operational and legislative proposals to attract highly skilled foreign individuals, that was established last year.

4. Power skills get the attention of corporate boards

There is a growing need in the nation’s workplaces to rebrand so-called soft skills and instead refer to them as power skills, which can be key to motivating and engaging high-performing teams consistently, especially in the aftermath of the pandemic. In fact, “executives and shareholders are now crystal clear on the value of the human side of leadership, meaning the capability to connect with others, show empathy and compassion, be inclusive and resilient, and excel even in uncertainty.” As a result, boards of directors now want even more involvement in workforce issues.

5. The “S” rising in importance

The momentum of the human side of business has been building since early 2020. In addition, elements of the “S”  are quickly becoming a key success indicator of an ESG strategy. These include workers’ well-being, executive pay increasingly being tied to diversity, equity & inclusion goals, and pay equity and transparency, according to Brian Bueno, ESG Leader at Farient Advisors.

Jenn Ramirez Robson, Vice President of Employment Services at disability inclusion nonprofit Northwest Center, and Gayatri Joshi, former Executive Director of the Law Firm Sustainability Network and Partner at Vorgate Legal ESG Impact, both say that pay transparency and equity are emerging as issues of increasing importance, even as jurisdictions enact additional laws.

In fact, concentrating on the individual well-being aspect of ESG highlights other areas of ESG, such as a critical focus on the environment, Joshi explains. “When we can give respect and equity to all people, the S paradigm will often shift to support E.”

One aspect of how society gains greater awareness of environmental sustainability is through its impact on people, she adds. “When we don’t have equity, we don’t have equal power and choices, and it can translate to whether you can afford to live in a place free of pollution and climate risks or affording healthy food. It’s one of the reasons why the S is so important — we need all those stakeholders to have power and have a say.”

As we enter 2023, business will continue to become increasingly human-centered, and as a result, ESG and workers will keep moving to the forefront, gaining critical attention and importance throughout the coming year.

To understand this more fully, the key components of fraud — pressure, opportunity, and rationalization (known as the fraud triangle framework) — must be better understood themselves, according to Carey Oven, National Managing Partner of Deloitte’s Center for Board Effectiveness.

All of these components come into play in fraud, Oven explains, adding that i) pressure is present around the increasing expectation that ESG data be released to the public; ii) the transparency, auditability, and nature of disclosed data are governed by the controls around that data, the estimates used for the data, and the data creation — all of which present additional opportunities for fraud; and iii) the immaturity in the data’s transparency, verifiability, and auditability “presents an opportunity for additional pressure and ultimately rationalization of fraud.”

For example, many companies were very quick to issue climate transparency reports, even a decade or so ago, and now these disclosures are in the public domain. The problem is that these disclosures were not conducted with hardened, auditable data. And this increases the risks that these ESG numbers will be seen as potential fraud.

Corporate boards become involved

Corporate boards have a huge role to play in reducing the potential for ESG fraud and risk. Indeed, “the board’s responsibility around ESG boils down to risk,” Oven states, simply because of their fiduciary responsibilities. To meet these requirements, corporate directors need to understand what could potentially go wrong with performance disclosures that a company is making public around their ESG activities.

Indeed, ESG risks have been on the minds and agendas of boards for the past several years, Oven says, mostly because risk oversight is a perennial responsibility of a corporate board. That means, that whatever ESG information has been publicly disclosed voluntarily and what might go into public filings is of keen interest to the full board and the audit committee.

Management is also trying to understand what additional proactive measures they need to put into their risk management processes for ESG both in terms of using some of the existing infrastructure they have around risk, but also how the unique scenarios and risks specific to ESG layer into that.

Possible risk reduction actions

Audit committees and C-level management need to take joint steps to assess and mitigate ESG risk, Oven says. Some of these steps should include:

Dedicating resources — The first step in reducing the potential for ESG fraud it so make sure that enough time, budget, and effort have been allocated to assessing the ESG risk landscape and how it impacts the company. Management and the board must understand what risks need to be addressed and what effective, permanent resources are required to continually analyze this new risk area.

Embedding ESG into the company’s risk infrastructure — Another key step is analyzing how ESG fits into the current risk infrastructure of the company, explains Oven. Because ESG is on the board agenda, top management needs to provide additional disclosure to the board and involve the board as the company moves through the ESG risk assessment journey.

The risk appraisal part of this preparation also involves understanding and documenting the full ESG data evolution from the point of collection as raw data to the point the information is publicly released. This ensures that detailed processes and procedures are developed and that the right internal controls and data governance levels are fortified. “Boards with their responsibility for and expertise in oversight and governance should be involved in this effort,” Oven states.

Gathering stakeholders to weigh in — Once the documentation of protocols and controls is complete, stakeholders from across the organization, including individuals from corporate legal, finance, and internal audit, need to convene to determine what information will be reported in any filings and transparency reports. “What we see organizations doing is putting forth responsibilities where Chief Sustainability Officer or Chief Risk Officers are owning certain elements of the program,” says Oven. “But the program right from the planning stage needs to be influenced by internal stakeholders, including internal audit and board.”

It is easy to conclude that the potential for ESG fraud will remain high on the agendas of corporate directors because of the ongoing acute presence of the three components of fraud — pressure, opportunity, and rationalization. As a result, corporate boards and their audit committees will continue to play a pivotal role in the maturation of ESG data governance and in supporting internal controls to ultimately reduce these risks.

Issues on the ESG horizon

Adding to the complexity is the proposed rule by the Securities and Exchange Commission (SEC), The Enhancement and Standardization of Climate-Related Disclosures for Investors, which is likely to spur a ton of activity among public and private companies, according to April Little, Partner, Tax Risk & Advisory Services at Grant Thornton. “As we get closer to the SEC finalizing their rules, we’re going to see public companies have to start disclosing various aspects of their emissions described in three scopes,” Little explains. These scopes include:

• • • Scope 1 emissions — These are direct emissions from sources of operations owned or controlled by a company;
    • Scope 2 emissions — These are indirect emissions from purchased utilities, such as electricity, gas, and other energy sources; and
    • Scope 3 emissions — These are all other emissions associated with company activities, including those of its supply chain, which include many private small-to-medium sized enterprises (SMEs). [Note: As proposed, Scope 3 emissions disclosure is only required if material and is not required for smaller reporting companies.]

With the anticipated finalization of SEC rules — which is expected to be met with a lot of legal challenges — corporations need to establish appropriate processes, policies, and governance over the reporting is essential. Tax professionals, CPAs, and accountants “are in a great place to really jump into the fray on that data gathering exercise because we understand how the data fits into financial statements, where it comes from and how to make sure that it’s complete and accurate,” Little says.

When finalization of the SEC rules is completed, third-party ESG assurance is another avenue of growth for CPAs. “For companies looking to make progress on ESG to strengthen relationships with key stakeholders like customers or lenders, it’s important to consider both ESG strategy as well as ESG reporting and compliance,” says Marjorie Whittaker, Managing Director of ESG and Sustainability at Grant Thornton. “Both elements are critical to the success of an ESG program and provide meaningful opportunities for CPAs to add value.”

Whittaker explains that many of the elements of ESG transparency are similar to those found in traditional financial reporting and assurance. “For example, establishing reliable baseline performance data, making sure that reported information is fairly presented, balanced, and meets the requirements of the applicable reporting standard — all of those skillsets are resident within CPA firms,” she adds.

Business opportunities for accounting firms

In particular, reporting requirements on Scope 3 emissions in the near term will cause the most headaches for multinational corporations and their suppliers because the rules will require large companies to estimate greenhouse gas emissions from their supply chain partners, whether they are a public or private company. In addition, many of these vendors are SMEs, located across the globe. Yet, the more proactive SMEs see what is coming even in Asia, and they are preparing now to provide the necessary of information in anticipation of the finalization of the SEC rules.

This and the aforementioned growth in complexity is a huge market opportunity for tax & accounting and consulting firms. Early movers, such as public accounting firm Sensiba San Filippo (SSF), are seeing tremendous growth in their already robust multi-disciplinary ESG practices.

SSF’s sustainability practice advises SMEs on their sustainability strategy as part of the Sensiba Center for Sustainability, which launched in 2020, under the leadership of Jennifer Cantero. Before 2020, the firm’s practice was centered on consulting companies through the B Corporate certification, but expanded when an audit partner approached Cantero about getting the Fundamentals of Sustainability Accounting Credential, which equips professionals with the “knowledge and skills to understand the link between financially material sustainability information and a company’s ability to drive enterprise value.” The credential is awarded by the Sustainability Accounting Standards Board (SASB), which is one of the popular ESG frameworks that sets standards for disclosing financial material sustainability by businesses.

The firm’s growth path of its sustainability practice came from already existing clients that operated in manufacturing as part of the food and beverage industry. The firm’s practice includes an assessment of their current operations based on a comparison against a standard, usually using one of the well-known frameworks, such as SASB. Within this service, there is a whole range of targeted benchmarking evaluations, which include product life cycle assessments, pay equity analysis, and information security exercises.

Another key part of their services is examining and calculating a SME’s carbon footprint with recommended options on how to reduce it. SSF analyzes collects, compiles, and analyzes raw data from the client’s records, which is essential for a rigorous review. “That’s the superpower of the accounting world is that we can go in and do a pretty good job of analyzing data to determine its quality,” Cantero notes. “We’ve been doing it for a millennia on the financial side, and now we’re just applying those principles to all the non-financial data.”

Another advantage for accounting firms in building their own sustainability practice is that they are then able to wrap in already-existing services that fall under ESG. For example, SSF already provides services related to data privacy regulation audits, such as the European Union’s General Data Protection Regulation. Firms can then conduct those audits based on recognized methodologies, such as the American Institute of Certified Public Accountants’ Service Organization Control (SoC) 1, 2, and 3, which reports on various organizational controls related to security, availability, processing integrity, confidentiality, or privacy.

Whether the proposed rules on climate disclosure are finalized next year or later really does not matter, because institutional investors’ demands around transparency and risk management will remain — as will corporations’ obligations to meet these demands. In this environment, the business opportunities for tax & accounting firms around sustainability and ESG transparency is growing and will continue to do so.

Indeed, as global economies moved away from the worst of the pandemic, it seemed early on that 2022 could provide a sense of normalcy, if not a return to traditional business practices. However, the rocky shoals of the war and global economic turmoil soon put an end to that sunny thinking. Yet many professional service firms and their corporate counterparts in the US and around the world found ways to remain profitable, resilient, and forward-thinking enough to allow some positive direction as we all head into 2023.

The Thomson Reuters Institute, through its blog posts, podcasts, market reports, and in-depth analysis, has chronicled many of the changes that swept through the last year, offering insights into how many organizations are adapting and what solutions are being successfully utilized.

If there were trends to discern in this very busy year, it was that twin issues of talent and technology implementation were impacting corporate departments and professional service firms to a greater degree as the year went on. And some of the most-read pieces on the blog site reflected that. For example, one piece that was very widely received described the different power skills that allow employees to flourish in new hybrid work environments; also, the changing regulatory stance toward the practice of law, especially around whether non-lawyers can own law firms, was of keen interest to our readers.

Further, many law firms, government agencies, tax & accounting firms, and corporate departments were beginning to grasp that the technology needed to meet the growing demands of the digital economy was of paramount importance. Indeed, as we moved toward the end of 2022, it was clear that technology adoption and maximizing its use simultaneously was among the biggest challenges and most promising opportunities that organizations are facing going forward.

Key market reports & in-depth podcasts

Throughout the year, it was the goal of the Thomson Reuters Institute to bring together people from across the legal, corporate, tax & accounting, and government communities and ignite conversation and debate in order to shed some insight on the newest industry developments and the most critical opportunities and challenges market participants are experiencing.

You can explore our top trending Thomson Reuters Institute insights that shaped 2022, or you can relive some of our highlights from this year here. And for further coverage of the legal, tax & accounting, corporate, and government sectors, visit the Thomson Reuters Institute.

We did this in part by providing coverage of these topics on the Thomson Reuters Institute blog site — such as podcasts, videos, and key market reports — and by hosting world-class events, which kicked off in Amelia Island at our 29th Annual Marketing Partner Forum, which brought together global law firm leaders and the best strategic thinkers from around the world to discuss the steep challenges facing firms in the legal market; and continued in New York City with our 21st Annual Law Firm COO & CFO Forum, along with many more in-person and virtual events throughout 2022.

As our reach expanded over the year — the Thomson Reuters Institute blog site reached more than 1 million annual page views this year for the first time in its history — our coverage expanded as well. We created two new resource centers on the site, to accompany those dedicated to covering the legal, tax & accounting, corporate, and government areas. Our new resource centers — Environmental, Social & Governance (ESG) and Technology & Innovation — allow us to offer readers dedicated content and insight into those areas.

Throughout the year, the blog site offered a steady stream of analysis and market insight reports that shed light on what participants in the legal, tax & accounting, and corporate fields were experiencing in their respective marketplaces in today’s economy. For example, in the 2022 Report on the State of the Legal Market, we saw that the legal market has remained resilient, even though numerous key challenges remain for many law firms, including a hot market for legal talent that has driven up costs. Even so, the report showed that many law firms have managed the difficult market with a good level of success last year.

On the other side of the table, our reports on corporate law departments and corporate tax departments shed further light on the immense pressure these departments were under from their corporations to transform the way they operate, with special emphasis on working more efficiently and cost-effectively. Indeed, coming out of the pandemic, it appears the dramatic changes undertaken by corporations during that time — especially around talent management and adopting new technology — may only be the beginning.

Also, our series of twice-monthly Insights podcasts offered in-depth discussions throughout the year on topics ranging from the viability of the new cryptocurrency economy to the most common misconceptions in the legal industry around artificial intelligence, and from how financial institutions were managing Russian sanctions to how organizations can benefit from client feedback programs.

Now, as we move into 2023, the Thomson Reuters Institute will continue offering insight into the latest events and trends, bringing leaders together, and mapping out the opportunities and challenges facing corporations and professional service firms going forward.

Just a few months later, this prognostication could be closer to reality than originally thought, given the rate at which law firms and professional services firms are fielding inquiries from existing and potential clients and having to add resources and personnel to handle it all.

For example, Eversheds Sutherland’s ESG practice went from a handful of lawyers to more than 200 attorneys in just two years, according to Herbert Short, co-lead of the firm’s global ESG team. “Our management saw ESG as a critical area for our clients and put a leadership team in place when we got serious two years ago,” Short says.

Since then, the firm has created a cross-regional team of 25 senior lawyers, including heads of sector groups and managing partners of geographic practices who are dedicated to assisting clients with ESG strategy. The team re-visits the practice group strategy regularly to remain in tune to clients’ needs across the globe, Short adds, and uses real-time client feedback to shape the practice area’s strategy going forward.

An expansion in the breadth of ESG

Interestingly, those law firms with existing expertise around clean energy, employment contracts, and board governance have elements of an ESG practice, even if those efforts aren’t overtly pitched as such. Within these areas, however, corporation clients — because of pressure from investors, shareholders, and regulators — are asking more detailed questions around emerging ESG-related operational and financial risks, explains Short.

Some areas of clients interest in ESG activities include:

Leadership and governance — Board compensation and composition as well as the scope and structure of the audit committee examining such issues as executive pay, are big areas of focus for many corporations that are seeking to improve their ESG bona fides. Similarly, designating a board member to oversee how ESG requirements and regulations are evolving is a necessity for boards’ governance activities, especially because of litigation risk.

Jessica Lu, a litigator at Brown Rudnick, says the primary driver of this new trend is the divergence between what a company signals its values to be and its implementation of those values. Too large of a gap in this area can carry a lot of risk, ranging from reputational harm to serious regulatory trouble. “We’re seeing corporate ESG disclosures giving rise to costly securities litigation with corporations being sued for securities fraud based on overstating or misstating their ESG commitments and shareholder litigation against officers and directors for failing to ensure diverse candidates for board seats,” Lu says.

Decarbonization — This area — which involves carbon offsetting and clean energy commitments such as in wind, solar, battery, and hydrogen sources of green energy — is quickly becoming a client focus. Many corporations are engaging in green-power purchase agreements, which grant clients’ access to renewable energy and minimize their carbon footprint for a fixed cost.

Another area of growth, according to Short, is carbon credits, in which companies purchase these credits as a mechanism to reduce their greenhouse gas emissions. Marketplaces exist to trade these credits, which are based on a value of carbon sequestration of forestry land and allow small and large landowners to monetize the carbon-capture of their land.

Supply chain management — In addition to demanding transparency into global corporations’ ESG activities, investors and regulators are seeking the same in corporations’ vendors and supply chain. Corporate clients need to be aware of this heightened scrutiny, says Honieh Udenka, at litigator at Brown Rudnick. “We advise clients to start thinking about investments and due diligence in supply chain monitoring and tracing to mitigate risks that can arise down the supply chain,” Udenka explains.

Protecting human rights among workers is a central social issue — the S in ESG — for companies that contract with suppliers based in other countries to produce their products and serve their customers. To that end, multinational companies need to update their vendor and supplier contracts with clauses to meet new data reporting and verification requirements around workers’ protections in order to better reduce reputational risk, says Short, adding that companies also need to utilize appropriate international arbitration clauses to resolve cross-border disputes involving labor.

Data protection — Cybersecurity, data privacy, and other data and information concerns are another ESG pillar that’s become top of mind for clients seeking legal guidance. In a recent survey, cybersecurity was ranked as the second most-cited ESG concern among investors. Complexity in managing the data privacy of consumer information and data governance issues for companies all fall within the G of ESG and continue being seen as an increased areas of risk.

Sustainable finance — Sustainable finance, which include lending, debt, capital markets, green bonds, social bonds, sustainability bonds, and sustainability-linked bonds, is a growth vector for many law firms. Disclosure of ESG-related financial and operational risks is another economic engine among firms’ ESG practices, especially because of the expected finalization of the Securities and Exchange Commission’s rules around Scope 1, 2, and 3 greenhouse gas emissions.

Congruence between talk and action

Corporate clients are demanding that their legal service providers act responsibly through the alignment between the ESG guidance they offer to clients and law firms’ own internal commitment to ESG. It takes proactive action to make this alignment work.

Eversheds Sutherland, for example, is accredited by the Good Business Charter in the UK and validates its own emissions-reduction targets through the science-based targets initiative. At Brown Rudnick, Mark Grider, chair of the firm’s Crisis Management Litigation & Government Response group leads many elements of the firm’s ESG practice and uses that role to center the firm’s values into the core of its business and culture. In fact, Grider’s first-step advice to clients often involves a re-evaluation of their current corporate policies, procedures, and practices through the lens of their values.

Within the firm, this values-derived perspective allows Grider to help mentor up-and-coming lawyers like Lu and Udenka to ensure he is leading with authenticity, forging genuine relationships with clients, and living the firm’s ESG commitment at the same time.

Walking the talk as a responsible business starts at the top. Managing partners of law firms and practice leaders are best positioned to ensure their law firms’ purpose, core values, and internal practices are aligned to their public declarations of ESG initiatives and responsible action.

As a result, visibility into supply chain actions and outcomes has catapulted to the top of many corporate wish lists — but many business leaders become frustrated when their operations and technologies don’t deliver. Still, experts say, better visibility into corporate supply chains can be achieved, but only if companies are willing to think about their sustainable supply chain initiatives in a more innovative way.

According to a September EY report on sustainable supply chains, visibility has become one of the top priorities among supply chain leaders. Of the 525 large corporations surveyed, 58% said that increased end-to-end visibility in their supply chain was among their top two priorities in both the past two years and the upcoming two years. However, despite that desire, just 37% of supply chain leaders reported achieving supply chain visibility over the past two years, indicating a large gap between the desire for more visibility and the progress many organizations are practically achieving.

Rae-Anne Alves, ESG & Sustainability Supply Chain Leader at EY Americas and co-author of the report, said that visibility is the key first step to compliance. “When companies are thinking through their supply chain and trying to make it more sustainable, they need end-to-end visibility to know is what is happening,” Alves said. “Companies are lacking the transparency that they need from their suppliers through logistics, especially in areas outside of their four walls.  Achieving this transparency will give them the visibility they need across their supply chain.”

Recent research from the Thomson Reuters’ Market Research & Competitive Insights team mirrored these findings. In interviews conducted with senior leaders of US-based companies charged with tracking ESG efforts, large numbers of companies say they have established dedicated ESG efforts but collecting data and measuring those efforts remains disconnected and lacks consistency.

The issues in raising visibility

When it comes to trying to raise the visibility of supply chain practices and outcomes, many corporate leaders have run into an unfortunate reality: the difficulty of gathering and mingling data that lives in disparate systems. One public company ESG head explained that a common supply chain review pulls data from systems as broad as risk management and operations software, human resources software, and procurement and supplier-oriented software.

Combining all of these types of data into one truth remains difficult. “I don’t even know how they collect their data,” said the supply chain head of another public company. “Every vendor has their own process.”

This problem is only increasing as companies are beginning to scale up the types of data that they collect, EY’s Alves added. To take a firmer grasp on their supply chain, many companies are looking to catalog not only emissions from scope 1 (directly owned by the company) and scope 2 (indirect use of energy the company purchases), but increasingly scope 3 emissions that result both up and down the company’s value chain as well. Indeed, the more a company’s data collection scope expands, the more complex the visibility question becomes. Many supply chain-centric software providers have arisen in recent years to try and compile and display all of these data sources, however, currently, there is not a leader that has captured a substantial share of the market.

Some companies have been able to achieve more supply chain visibility, becoming sustainable supply chain “trailblazers” with an “extreme focus on transparency”

“It’s unclear yet whether there will be a provider that is able to deliver the end-to-end capability needed for a digitally network-connected supply chain,” explained Gaurav Malhotra, Partner and Americas Supply Chain Technology Leader at EY. “There are many factors that have to come together, versus just a singular platform from a control tower or visibility standpoint to enable the orchestration.”

Instead, many companies have tried to apply other technological fixes to the issue, often without much success. “Almost everything is run on Excel. It’s truly terrible,” a public company’s supply chain head told Thomson Reuters Institute. “We have very few tools for environmental stuff. Everything is reported through Excel, everything is measured in Excel, everything is rolled up in Excel and it’s extremely inefficient because we have all these different teams.”

Supplying more visibility

Still, some companies have been able to achieve more supply chain visibility. EY’s report designated certain companies as sustainable supply chain “trailblazers” and noted that one of the traits they have in common is an “extreme focus on transparency” through which “[t]hey can significantly or moderately peer into Tier 2 and 3 supply networks.”

EY’s Malhotra said these leaders often undertake two simultaneous shifts to aid this transparency. One involves automating individual supply chain functions so that they can run more efficiently and be consistently reliable. The second involves integrating those individual functions and making sure their output data is portable to enable the needed effective real-time communication, both internally and with external supply chain ecosystem partners.

Currently, he explained, most supply chain networks are “not digitally integrated in their true sense” because they operate in multiple stages. Data is processed by one organization that controls their section of the supply chain ecosystem, then it is transmitted to be able to be consumed or processed by other organizations. While Malhotra concedes that it takes “time and effort to ultimately get to a mostly autonomous state,” he believes combining, integrating, and automating these steps will be the future of supply chain management.

“What we have found is that some leading companies have moved towards an integrated process and singular platform that allows the right level of visibility, orchestration and actioning with their supply chain network partners,” Malhotra said. “Enabling trust, effective execution and accountability with the overall network in play, resulting in a highly efficient, highly integrated, differentiated and reliable supply chain.”

Leading companies are also pushing for data standardization among common supply chain suppliers, Alves added. Many sustainability frameworks are available, and increased regulatory attention continues to add more complexity. Increased standardization can make supply chain data more actionable, and auditable, potentially lowering a company’s risk profile. When asked about top supply chain priorities for the coming year, the ESG head of one public company was clear: “We want to make sure that we have auditable processes in place, that the data is sound.”

However, Alves added that for sustainable supply chain measurement and reporting businesses are “definitely not there yet.” As both public and regulatory attention in the space continue, expect that visualization into supply chain processes and data will become even more important, and leading organizations will continue to invest resources and personnel to get their supply chain data house in order.