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.”

The hearing exposed some partisan differences even as broad agreement emerged on what needs to be done to reduce risks for crypto investors. Republicans and Democrats remained apart in their views of the future of a digital-asset world shaken by the swift collapse of a firm regarded as one of the safest bets in the industry. Indeed, the FTX failure showed basic concerns that must be resolved before mainstream firms can assure regulators that investor protections are in place.

Republicans who have been ardent advocates of deregulation used the hearing to slam U.S. agencies for failing to act sooner to halt fraud at FTX and for going too slow in drafting rules. Numerous Democrats argued against taking hasty actions until more is known about the FTX failure, which led to Bankman-Fried’s recent arrest and indictment on multiple criminal charges.

Garden of Eden full of snakes

“My fear is that we will view Sam Bankman-Fried as just one big snake in a crypto Garden of Eden,” U.S. Rep. Brad Sherman (D-Calif.) told the hearing of the U.S. House Financial Services Committee. “The fact is, crypto is a garden of snakes.” Sherman has been a persistent critic of cryptocurrency, which he sees as mainly a tool for tax evasion, funding for illicit activities, money laundering and sanctions evasion.

Republican legislators at the hearing argued against curbs that discourage innovation and argued for moving more quickly to put basic rules in place.

Despite testy exchanges and finger-pointing across the aisle, the hearing showed bipartisan consensus that the industry needs to assure transparency, asset custody, and governance that curbs conflicts of interest and self-dealing.

The FTX case also illustrates the challenging complexities in resolving a digital-asset bankruptcy, Ray said during the hearing. But the process was the same that he followed while overseeing the collapsed energy trading firm Enron, he said. “You follow the money.”

The FTX event could lead to “information being gathered that will inform legislation in a positive way,” said Sarah Riddell, a Morgan Lewis lawyer who worked for the Commodity Futures Trading Commission (CFTC) and participated in drafting the Dodd-Frank legislation.

Riddell compared the job ahead to the post-financial crash rulemaking that required a multi-faced, complicated process. The industry firms that have put compliance in place in their crypto practices could emerge intact, she said. “The firms with good tires will survive the heightened attention this has brought.”

AML as a unifier

U.S. Senators Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kansas) recently introduced bipartisan legislation aimed at mitigating risks that digital assets pose to U.S. national security by closing “loopholes” that enable money laundering using cryptocurrencies. The introduction of the Digital Asset Anti-Money Laundering Act of 2022 comes in the wake of a number of high-profile government actions and scandals in the crypto sector, including the Treasury Department’s blacklisting of the cryptocurrency “mixer” Tornado Cash in August as well as the FTX bankruptcy and founder Bankman-Fried’s subsequent indictment. Amid these scandals, pressure on legislators and regulators to rein in the sector and strengthen anti-money laundering (AML) activities has only mounted.

Among other things, the Digital Asset Anti-Money Laundering Act of 2022 would extend AML obligations to a much broader spectrum of cryptocurrency players. For example, it would require such crypto entities as digital asset wallet providers, miners, validators, and other network participants to comply with portions of the Bank Secrecy Act, including know-your-customer requirements. The Act would also prohibit financial institutions from using or transacting with digital asset mixers and other anonymity-enhancing technologies and from handling, using, or transacting with digital assets that have been anonymized using these technologies.

The Act would also direct the U.S. Treasury Department to establish an AML/counter-terror finance compliance examination and review process for money services firms and directing the U.S. Securities and Exchange Commission and CFTC to establish similar compliance examination and review processes for the entities those agencies regulate.

“Rogue nations, oligarchs, drug lords, and human traffickers are using digital assets to launder billions in stolen funds, evade sanctions, and finance terrorism,” Sen. Warren said in a written statement. “The crypto industry should follow common-sense rules like banks, brokers, and Western Union, and this legislation would ensure the same standards apply across similar financial transactions. The bipartisan bill will help close crypto money laundering loopholes and strengthen enforcement to better safeguard U.S. national security.”

The senators noted that the Treasury Department, U.S. Justice Department and other national security and financial crime experts “have warned that digital assets are increasingly being used for money laundering, theft and fraud schemes, terrorist financing, and other crimes.”

In fact, rogue nations have used digital assets to launder stolen funds, evade American and international sanctions, and fund illegal weapons programs, the statement noted, adding that in 2021, cybercriminals raked in at least $14 billion in digital assets — an all-time high.

Further, Binance, the world’s-largest crypto platform, was reported to have laundered more than $10 billion for criminals and sanctions evaders over the last few years. However, splits among Justice Department prosecutors are delaying the conclusion of a long-running criminal investigation into Binance, it was recently reported. A Binance spokesperson declined comment.

A tax department operating efficiently can go beyond providing compliance work and instead make the shift to being a proactive business unit that provides the company with tax and business guidance to mitigate risk and improve profitability. However, leaders and department heads must first understand where their department stands before thinking or wishing to become proactive.

For example, how does a corporate tax department leader know whether the department is proactive or reactive?

Being proactive — creating or controlling a situation by causing something to happen, rather than simply responding to situations after they have happened — means that the department should be organized in such a way that even though all external factors cannot be controlled, the mechanism in place can help plan for the unknown or the out-of-left-field happenstance.

The nature of the types of work done by the corporate tax department and how that work gets done is under almost constant change — the recent local, national, and international regulatory changes is just the latest example. The use of technology also has collapsed borders, allowing individuals and companies alike to traverse with ease. Like the individual, many companies can stretch into parts of the world that would have been only accessible by a few large corporations in the past.

Yet, along with this ease of crossing borders, there is a complexity in navigating it, especially for doing business. Companies can grow by reaching customers across the globe, but the cost of doing business brings challenges, such as having to work within the legal and financial systems in which the customer is located.

Corporate tax department leaders must not only navigate the tax laws of a nation, state, and local government but now increasingly must deal with multi-nation rules, especially if their companies have customers around the globe.

Some corporate tax departments might find it hard to believe that they are not proactive simply because part of the nature of this department is to predict their company’s tax liability and ensure it remains tax compliant while paying the necessary amounts of tax.

Of course, there are some telltale signs that a tax department is not operating efficiently and therefore isn’t proactive. Taking a look at these four areas can help department leaders make a proper assessment.

1. Process management

Departments that use a systematic approach to ensure adequate and efficient business processes are in place are engaging in proper process management to better align business processes with strategic goals. For corporate tax departments, there may be different ways in which data is collected, reports filed, analysis provided, and feedback given back to the business that all may seem to work. However, if they rely primarily on manual work and are multi-stepped (to the point that it takes weeks and months to complete), it may be worth asking some questions of the department’s process management.

Indeed, does process management even exist within the department? Can it be articulated clearly, shown to work repeatedly, and stand on its own? Does it only work for the individuals that helped create it, or can someone new step in and have it work the same way? If the answer to these questions is no, proper process management isn’t in place.

2. Data management

How does the department gather data? Does it feel like a version of the Hunger Games that requires seeking, finding, negotiating, and trying not to step on a land mind? Is this a manual process, collecting various spreadsheets from around the business and then entering the information into the department’s management systems? Or, can the tax department software be integrated to extract data from other part of the business? Is it seamless? Manually processing data significantly increases the chances of error, makes it challenging to verify data sources, potentially creates a tax risk, and is time-consuming.

And yet, even when technology is employed, it’s only as good as its users. Leaders should assess whether current technologies are efficient or actually are creating more work or processes for the department. Often staff — whether incorrectly trained or simply preferring to use their own methods — utilize just certain parts of a software program and rely on manual labor to do other tasks.

In these cases, workers time is not being used efficiently. Further, not having proper data management systems in place also causes bottlenecks in the work flow of department as employees wait for pieces of data in order to move forward. These inefficiencies can create a potential opportunity for risk, such as missing or incorrect data that leads to erroneous results.

3. Compliance & reporting

How long does this process take? Quite often, reporting is the final step in the process and as such, can be significantly impacted by how well or how poorly the previous process were conducted. Again, if there are many manual steps here, it will likely result in wasted time and resources while increasing the chance of risky mistakes.

4. Analysis

Corporate tax departments have always been an advisory to the business by the very nature of their role in providing tax planning. However, this role has increased as departments are now expected to provide insights into tax implications related to deal-making, mergers, business divestitures, and environmental, social & governance (ESG) initiatives to name a few. For departments that aren’t functioning optimally, leaders will find that they cannot provide useful or beneficial advice to the larger businesses because departments themselves lack the bandwidth and resources needed.

Tax departments and their leaders should strive to manage processes and data efficiently and effectively. By utilizing automation and having a clear mindset about the role of the tax department within the organization, a leader can improve the department’s work process, relieve the stress on overworked employees, and provide invaluable information to the business to make it more profitable.

Indeed, this kind of transformation within corporate tax departments has happened, led by leaders who have recognized and adjusted to the new realities of the business and taken advantage of improved technology and process management techniques.

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.

As those cyber risks have increased, so too has the growth of insurance coverage for cyber incidents. But while cyber insurance has begun to receive more uptake, increasingly stringent standards for coverage as well as confusion about the options available for cyber incidents could leave some companies in the lurch.

According to the 2022 Cyber Readiness Report from insurance provider Hiscox, almost two-thirds (64%) of companies now have cyber insurance as either a standalone insurance policy or as part of another policy. This represents a small rise from 58% two years ago. The highly regulated financial services sector has the highest rate of cyber insurance adoption at 74%, while the construction and travel/leisure industries have the lowest adoption at 53% each.

Crimes of opportunity

Judy Selby, a partner in the insurance practice at law firm Kennedys and a regular speaker on cyber issues, said that she’s beginning to see an improvement of companies’ general cyber awareness that current hacking incidents are largely “crimes of opportunity,” rather than dependent on the industry in which a company operates.

“I think for years, there was a thought process that nobody would be interested in my data, my company’s data,” Selby said. “And if you remember the days of the big retail incidents, the data breaches, I remember companies saying to me personally, well, we don’t have credit cards, so nobody’s going to want our information.”

Now however, she added, “I think the uptake is getting higher now than it used to be. And part of that was this realization that yes, it can happen to us, which is a really big deal. And also recognizing that the exposures come from so many different angles.”

Indeed, the Hiscox survey found a strong correlation between exposure to a breach and a desire for cyber insurance. Out of the firms that did not have cyber insurance or did not plan to get it, nearly 80% had not experience a cyber-attack within the past year. Just over half (51%) of those were also considered “novices” in cyber readiness, according to the Hiscox scale.

Even among those companies that had cyber insurance, however, there remained some stratification between the types of coverages they held. Notably, companies were split roughly down the middle as to whether they held a standalone cyber policy or covered cyber as part of a larger policy. Among companies with 250 or more employees, 35% had a standalone cyber policy in place, and 40% had cyber coverage as part of another policy. At companies with under 250 employees, those figures were 28% and 29%, respectively.

“I think the uptake is getting higher now than it used to be. And part of that was this realization that yes, it can happen to us, which is a really big deal. And also recognizing that the exposures come from so many different angles.”

Selby said she is a proponent of standalone coverage, if possible, for a few reasons. First is simply “because the coverage is so comprehensive, you have all this great first-party coverage for dealing with an incident.” Particularly with more sophisticated cyber-attacks, policies that include business interruption coverage, regulatory coverage, and liability coverage are coming into play.

Concerning the latter, Selby noted that many companies are “not technically or financially able to respond to an incident on their own.” When a network is encrypted and the company’s access to it is blocked, for example, even the simplest of questions become complicated: How do we communicate with each other? How do we hire vendors to come in and help us? And even if we wanted to pay a ransom, how would we do that?

“These are things you don’t want to have to learn on your own,” she explained. “And so, the first-party coverage can be a real lifeline to companies to efficiently and effectively manage this incident from [not only] a financial standpoint [and] an operational standpoint, but also from a reputational standpoint.”

Preparing for a cyber incident

Outside help on cyber incidents may be increasingly necessary because overall cyber readiness is falling, the Hiscox survey notes. Respondents’ self-assessment of overall cyber readiness fell by 2.6% overall during the past year, with the number of companies qualifying as “experts” falling from 20% to 4.5%. The survey attributed those decreases to awareness of new vulnerabilities such as the Apache Log4j logging library vulnerability, as well as a continued talent crunch for cybersecurity experts.

That’s why Selby said she tells clients to not only get to know the details of their insurance providers’ coverage options (and subsequent limits on policies), but also what she calls providers’ “cyber squad” team. A typical cyber insurance provider will have a mix of panel firms, forensic analysts, notification vendors, and more that can be a godsend in a pinch, often provided at discounted rates.

This extra value can be important when making a business case for cyber insurance as well, she added, as the insurance has become more expensive and the scrutiny for coverage has gotten more intense. Some security measures, such as multi-factor authentication, are now table-stakes for coverage, which could scare off some businesses. However, Selby drew an analogy to property insurance: Every provider is going to ask not only about fire incidents that happened in the past, but sprinkler systems and fire exits that could help prevent them in the future.

“It always surprises me when people… complain about having to provide the information,” Selby said. “It’s like, if you don’t understand your own risk, why would you expect another company to say, okay, we’ll insure that for you, we’ll take that risk on your behalf when you don’t know what it is? And then when you say that, they go, oh yeah, that makes sense.”

Ultimately, cyber issues aren’t going away, particularly as the Hiscox survey found the median cost of a cyber-attack nearly doubled in the both the United States and the United Kingdom last year. That means cyber insurance will also continue to represent a piece of companies’ risk mitigation profile by necessity.

“The issues that people have with applying for the coverage, that shouldn’t stand in the way,” Selby said. “I think people should proceed and get the coverage, and when you get it, keep it, even if the price has gone up.”

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.

In a May decision from the US District Court for the Southern District of New York, Upsolve, Inc. et al v. James, Upsolve, a nonprofit that helps individuals file for bankruptcy for free, challenged the state’s application of the unauthorized practice of law to other trained professionals. To help low-income individuals facing debt collection navigate and respond to their suits more readily, Upsolve launched the American Justice Movement program in January, which trains professionals to offer complimentary legal advice about whether and how to respond to debt collection lawsuits. Specifically, the volunteers sought to help New Yorkers fill out checkboxes on a one-page answer form provided by the State of New York to avoid automatic default.

In the Upsolve case, the New York Attorney General argued that such guidance was the unauthorized practice of law, but ultimately, the judge ruled that those rules did not apply to the program because the legal advice was protected as speech under the First Amendment. The court also stated that the advice mitigated the risk of harm to the consumer while addressing a significant legal problem area, further in favor of the decision.

In our new column, NextGen Justice Tech, by Kristen Sonday, we will take a look at the people, trends, and technology shaping the future of access to justice.

The ruling is monumental because it allows legal professionals to provide guidance on completing legal forms that might be applied to other areas of law, including through online tools that can reach exponentially more individuals.

“By ruling in favor of Upsolve, the Southern District of New York… established a new First Amendment right in America: the right for low-income families to receive free, vetted, and accountable legal advice from professionals who aren’t lawyers,” said Rohan Pavuluri, Upsolve’s Co-Founder and CEO.

If further applied to online forms and filing apps, then tech companies, court employees, and other volunteers would be able to assist people with basic questions about whether and how to respond to government requests, vastly expanding the number of people who can help. For individuals who are too afraid or uncertain of navigating such services on their own, this support would provide peace of mind and tangible next steps to assist significantly more low-income folks in managing the legal process.

The “sandbox” model

The implementation of state-run legal tech sandboxes is another opportunity to spur justice-related innovation. Utah was the first state to launch such a sandbox in August 2020, in which lawyers and legal professionals can develop and promote new legal solutions under the supervision of the state’s Supreme Court. One year in, the Utah Supreme Court had approved 30 companies, including those that created initiatives to provide individuals help completing court forms and receiving legal advice via chatbot.

The sandbox concept helps mitigate risk for justice tech founders since they’re building and testing ideas alongside a legal authority. In addition, through this model, “justice technology companies can partner with authorized legal services providers to offer consumers actual legal advice. Attorneys are the most obvious partners, but authorized document preparers, among others, are an often-overlooked partner,” says Natalie Knowlton, Founder of Access to Justice Ventures.

Finally, the Association of Professional Responsibility Lawyers (APRL) has made a powerful recommendation to update the American Bar Association’s (ABA’s) Ethics Rule 5.5 and permit lawyers who are admitted in any jurisdiction to be able to practice across others. “Our proposal advocates that a lawyer admitted in any United States jurisdiction should be able to practice law and represent willing clients without regard to the geographic location of the lawyer or the client, without regard to the forum where the services are to be provided, and without regard to which jurisdiction’s rules apply at a given moment in time,” the APRL wrote in its letter to the ABA president.

This change would be significant for justice technology companies and non-profits in that their lawyers would be able to serve individuals across jurisdictions, regardless of lawyer or client location. Justice tech companies would save time and money by being able to serve more individuals virtually, and with a leaner staff, could free up capital for other initiatives. For tech companies that currently have to hire staff who are licensed in each state in which they want to provide lower cost legal services, this reform would be game-changing.

“As a startup, an update to Rule 5.5 would allow us to move much faster in expanding our services to those in need,” says Erin Levine, the Founder and CEO of HelloDivorce. “We would be able to hire and train fewer, high-quality lawyers that provide consistency in our services across jurisdictions, as well as quickly build out subject matter expertise that can increase the number of clients served.”

Further, under this scenario, legal services organizations would be able to refer pro bono clients to attorneys across the country, making those referrals more efficient and potentially better aligned. The rule also would greatly enhance access for folks in rural areas, as they often are limited to those lawyers in nearby metro areas who might work on their matters.

By being able to access legal assistance from anywhere in the United States — via in person or online, through lawyers or other approved professionals — the magnitude by which the legal profession could greatly help those in need through better legal reforms is significant for the justice tech community and underserved citizens across the country.

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.

Clearly, it is well past time to innovate in the tax & accounting industry, but the question immediately arises: Who is responsible for developing innovative ideas and driving innovation within a tax & accounting firm?

People within many organizations often can feel like innovation is someone else’s job. They hesitate to share ideas, believing they aren’t creative enough or that there must be a good reason why those ideas haven’t been tried. Or they get so bogged down in the details of the work, they can’t see the problem or even view it from a different perspective. And unfortunately, most tax & accounting professionals don’t believe they have the time or skills to innovate.

First, the good news is that innovation is not as complicated as we make it. Innovation is simply a “new idea, method or device”; so, one way to innovate then, is to make something new out of items that already exist. Take, for example, the smartphone. All the pieces of the smartphone had been invented previously, but it took someone, or a group of people, to reimagine how the components could be put together to improve how we communicate, work, and live. This means that anyone can innovate by tapping into their knowledge, experience, perspective, and awareness of a problem or a need that people have.

Specifically, in the tax & accounting profession, firms have several problems and needs to be resolved, including:

• • • getting more work done in a more efficient manner;
    • staying current on regulatory changes;
    • providing services that are relevant and appealing to new generations of clients;
    • building a profession that attracts talent; and
    • establishing a sustainable work/life integration.

No one person within a firm can solve all these challenges, of course. Yet, through collaboration and piloting ideas, answers can, and are, being found.

The role of leaders

It is not the role of leaders to generate all the ideas. In fact, as leaders advance in their careers, they get further away from many of the day-to-day tasks, making it harder for them to innovate around daily process improvements. Nevertheless, leadership strongly impacts innovation within the firm. As leaders share more openly and gather feedback from their team on the vision and direction of the firm, the firm’s talent is more likely to develop ideas that are relevant and timely.

To build a culture of innovation, leaders must first adopt the mindset of innovation, which is often described as a growth mindset. When operating from a growth mindset, leaders recognize failures will happen and accept them as valuable learning moments. If the reaction is punitive, rather than accepting, the professionals and staff within the firm will be more reluctant to vulnerably share ideas or attempt to try something different in the future. Leaders need to recognize successful innovation will include initiatives that won’t succeed; therefore, they should encourage their teams to learn from the misses and refocus on the desired result.

Leaders also enable innovation by clearly defining resources — such as budget, personnel involved, time allotted, and the timeline — when project ideas are approved. When resources are clear, team members have the confidence to experiment, test, and pilot within the boundaries that leaders have set.

Any innovation includes some risk of additional costs. To sustain the trust extended to the team that’s innovating, leaders should establish expectations about how frequently they want status updates on the initiative. There should be agreement about what success looks like and how it will be measured. Achieving the project as it was initially envisioned at first should not be the measure of success, since any good innovation process will be iterative and incorporate feedback along the way. Instead, measure success by how well the initiative solves the problem or fills the identified need.

The role of talent

Talent within the firm has various perspectives on processes, clients’ needs, effectiveness of technology, training, and much more. They should break the routines of SALY (same as last year) and ask themselves how things can be improved going forward.

When talent brings ideas to leadership, they should communicate the benefits of the innovation, not just what it is. Too often we assume the listener understands the benefits of the idea, but that is not always the case. When proposing the idea, talent needs to describe how the firm, clients, and the team will be better off as a result of making the investment in the idea.

In a culture where innovation is especially encouraged, many people may have ideas, so not all of them can be implemented at once. If an idea is not initially accepted as something to investigate, this does not mean the idea is worthless. The person bringing the idea to the table should ask for additional feedback to gain insights into how to adjust it or how to re-propose the idea at a later time. The key is to not get discouraged, but rather to keep watching for opportunities to contribute innovate solutions.

The innovation process should be looked at as a symphony with everyone in the firm playing in concert. This process also takes everyone being receptive to change. To accomplish this, leaders and talent must share with their colleagues the benefits of making a change by communicating how employing the innovation affects their workflow and processes. The key is to not leave them wondering what will be required of them if this innovation comes to fruition, so it may be wise to over-communicate at first.

Innovators also should recognize that innovation is exciting for some and nerve-racking for others, and they may need to adjust their message to address the concerns of a particular audience. Yet when these steps are followed, this process toward innovation can put your firm on the path to finding new solutions to the old problems the entire tax & accounting industry is facing.

Corporations’ contributions to the communities in which they serve is one of the biggest proactive drivers of a company decision to create and implement an ESG strategy. Indeed, one of the biggest, yet least visible, ways companies achieve this objective is through the payment of taxes to local communities in which they operate.

There are many tax related ESG credits and incentives to reward positive corporate behavior, as well as taxes to disincentivize negative ones. Corporate tax functions are critical to practices that best serve company objectives through the financial support of the communities they serve.

Surprising to many tax novices, there are many elements of an effective ESG policy that can factor into a company’s tax strategy. For the environment, these include water efficiency and curbing emissions; social goals include ensuring human rights, promoting diversity, equity & inclusion (DEI) policies; and governance includes strong business ethics and anti-corruption policies.

Encouraging changes in behavior by taxation and incentives is increasingly common in the environmental area, for example. Across the world, many countries are encouraging movement away from products and practices that cause environmental damage through tax incentives or disincentives. Such taxes can address carbon and other pollutants, plastics, landfill waste,water pollution, and certain chemicals. As a result, there has been a rapidly evolving landscape of new taxes involving carbon, waste, water, plastic packaging, and chemicals. Thus, as governments enhance their focus on measurable improvement in the environment, companies simultaneously are able to take advantage of many credits and incentives in the environmental area.

Under the social category, corporate transparency on how income taxes are paid on a country-by-country basis can demonstrate that corporations are not avoiding, evading, or artificially reducing taxes in any particular geography.

Further, obtaining tax credits and incentives for diversity and corporate giving are common social tax initiatives and can include:

• • • Hiring & retaining a diverse workforce — For example, the Work Opportunity Tax Credit allows tax breaks for employing targeted segments of the workforce such as those receiving government assistance and individuals who have been unemployed long-term or have a felony conviction. And Opportunity Zone credits incentivize moving a business to a government-designated area that qualifies for renewal efforts.
    • Charitable contributions — Tax deductions incentivize corporations to give back to the communities in which they operate by providing funds, community service hours, or donations-in-kind.

Shifts in the regulatory landscape across geographies also are important to determine a corporate tax function’s role in a company’s ESG strategy. Corporate income taxes are one of the most foundational components of the governance strategy, starting with the “tone at the top” and including a strong tax risk management policy.

“A robust tax risk management policy, in line with the board and C-suite’s overall governance strategy for an organization, guides how the tax piece of the organization operates by outlining how decisions are made,” explains Grant Thornton’s Little. When addressing governance strategies, such policies target core investments that an enterprise makes, such as deciding where to locate a facility and finding tax planning opportunities, “while still ensuring that the company is paying the right amount of tax globally,” she adds.

The “tone at the top,” according to Little, guides how tax decisions are made, particularly those that have ESG implications. For example, a company may choose to enter into a transfer pricing arrangement to shift profits from one jurisdiction to another, which is a decision that may be perfectly allowable within the transfer pricing guidelines for the two different jurisdictions. However, to align with governance goals, the tax risk management policy may help steer the company to determine its portion of the global tax base to both jurisdictions rather than minimizing the overall tax.

Typically, tax risk management policies are more detailed and robust in Europe because they are required for public companies across the European Union and in the United Kingdom. “Companies operating in those geographies generally have to post these policies on their website or make them publicly available,” Little says.

Involving tax at the beginning

A company’s ESG journey generally starts with a decision by a company executive to move forward in the ESG space. This declaration is typically followed by a benchmarking exercise to understand what industry peers are doing; a materiality assessment to determine which ESG issues matter most to the company’s stakeholders; and a determination of what data is available for reporting and how to measure progress.

During the ESG strategy formulation, there are important implications for tax. For example, the tax function can help to minimize taxes incurred along the supply chain and increase return on investment by identifying credits and incentives. This is especially important for companies with operations in the EU and UK because these geographies dictate a tax framework for disclosure in that ESG landscape.

The tax function then helps conduct scenario-planning around accounting methods, such as performing a cost segregation study to enhance or accelerate deductions from a tax perspective. To maximize the value of the deduction, depreciation methods can be changed to accelerate or defer a deduction.

Detailed tax decisions such as these that align with a company’s ESG strategy can have a sizable effect on a company’s ability to achieve its twin goals of generating profit and acting responsibly as a corporate citizen.

To get started, recent research shows that forward-looking tax department leaders have already started to uncover their total picture, developing a strategy to embed ESG principles into tax policies and practices, communicate tax impacts as part of regular disclosures, and put governance mechanisms in place to ensure tax decisions are sustainable moving forward.