EY research: Sustainability risks put pressure on the legal departments of companies

Business divisions around the world are facing a growing spectrum of sustainability-related risks that business leaders tend to overlook, according to a new study by the global legal network EY, EY Law, and Center on the Legal Profession of Harvard University Law School.

The study explores these issues, recording the views of 1,000 heads of legal departments from 20 countries, combined with more than 12 in-depth interviews with CEOs of the top 100 companies in the world according to the “Global 100” ranking.

The findings show that only 15% of respondents believe that business leaders are really aware of the risks posed by environmental issues to their organizations, including climate change and carbon emissions, while only 39% believe that business leaders are fully aware of the risks associated with social issues, including diversity and employee well-being.

According to the study, only 22% of the general managers of legal services surveyed believe that the environmental goals of the organizations they work for are clearly defined.

Another issue highlighted by the study is that CEOs of legal services seem to focus more on compliance and litigation issues related to sustainability issues, even though they believe that the reputation and brand risks of the business are most important. This is partly due to the fact that 77% of respondents feel that they are being pressured more by investors and regulators than by other stakeholders.

When asked about the most critical risks facing their organizations, the directors general of legal services pointed out that the most important were the loss of clients or the damage to the commercial reputation and the clientele as a result of bad work or environmental practices (75%). potential barriers to investment (60%) or compliance with new laws or regulations (59%).

The study also looked at the various other challenges facing legal departments. By far the biggest challenge is risk management in cases where there are no clear guidelines from regulators. 92% of survey participants said they face challenges in formulating policies to manage social issues, an area where there are no clear regulations, while 90% expressed the same view on environmental issues.

The range of risks associated with environmental, society and corporate governance (ESG) risks is widening, and businesses are focusing on addressing them. Almost all of the CEOs surveyed (99%) expect a sharp increase in the workload on sustainability issues over the next three years, while raising concerns about managing this expected increase. 96% say that their legal departments require additional know-how to manage sustainability issues, while 94% say they do not have the necessary funds to manage their organization ‘s sustainability issues.

In this context, the study examines how legal departments plan to manage this growing workload. According to the findings, 24% intend to take over the management of the growing sustainability workload internally, hiring staff or redistributing existing human resources (insourcing). In addition, 46% intend to pursue an insource and optimize strategy, which combines recruitment with redistribution of human resources, with increasing use of technological infrastructure. Finally, 34% consider a mixed sourcing scheme, which utilizes internal resources in combination with support from external legal advisers and alternative legal service providers, based on cost, quality, technology and process management capabilities.

There is clear evidence that companies are taking steps to enhance their ability to manage ESG risks, and a key performance indicator is the extent to which legal departments work with other parts of the firm. The survey reveals that 61% of legal departments plan to strengthen their cooperation with other departments of the company in the next three years, including financial management, human resources management and business operations management.