In professional services, meaningful reputational risks can arise where there are potential conflicts or gaps between a firm’s values and ESG commitments and its client commitments. Firms that are perceived to be failing to live up to their values risk reputational damage with material impact, including on their ability to win other client work and to recruit and retain talent.
Firms that conduct significant work for clients in the oil and gas industry are particularly exposed to these risks in the context of climate change. Several firms have been the target of climate activism protests, including Linklaters, saw protests outside its London office by Lawyers Are Responsible in the summer. A student activist group, Law Students for Climate Accountability, publishes an annual benchmarking of the law firms that profit the most from fossil fuel-related client work, and hopes to encourage firms to withdraw from advising on such mandates in the future. For firms with large energy practices, balancing the financial considerations of continuing to act in profitable areas of work with increasing reputational risks presents a complex challenge.
This issue is not exclusive to law firms – in 2021, over one thousand McKinsey employees signed an open letter to the firm’s senior partners, expressing concern over its continuing work with large corporate polluters, claiming this would harm its brand. However, for individual law firms the question of who to act for is particularly charged, and can sit uncomfortably alongside the right to legal representation which is the cornerstone of our legal system.
The problem is further accentuated for law firms because their own emissions are miniscule in comparison to other industries. This means that the main way a large law firm can have a positive impact on reducing climate emissions is by influencing the behaviours of other organisations. It can do this by determining who it acts for, or by nudging clients into certain courses of action through its advisory work. Having your own house in order regarding emissions, while important, is not material in comparison.
A further looming risk in this area for law firms is potential future regulatory scrutiny. While the SRA has not indicated that it is looking into this area, the Law Society of England & Wales introduced climate change guidance last year. This referred to the SRA duty to ‘maintain trust and confidence in the profession’, advising that ‘this duty is one that you may wish to consider when assessing client instructions that may give rise to climate legal risks or impacts. Over time, this duty may fall under closer scrutiny as climate change becomes more pronounced.’ So, while there is not currently an explicit duty for law firms to take into account their clients’ ESG records, this guidance invites that possibility, and of course guidance can harden over time into regulation.
Despite increasing challenge from campaign groups, few law firms to date have ‘grasped the nettle’ and addressed the potential conflict between making public ESG commitments that focus on reducing emissions and continuing to act for major oil and gas clients. Among the firms highlighted by campaigners as lead advisors to the oil and gas industry, Clifford Chance stands out for its transparency – it has stated that it has previously declined, and will continue to turn down, instructions that it feels are incompatible with its climate change policy.
It remains to be seen whether, if one were to take the principles introduced by Clifford Chance a few degrees further, a leading global firm will announce within the next decade that it will not take on client mandates to create new oil and gas developments, or new energy infrastructure projects that rely on fossil fuels and will contribute significant new emissions.
The energy transition and the need to reduce emissions is a global challenge that is extremely complex. While law firms have a valuable role to play in advising the organisations that will make energy transition possible, from a reputational perspective, it is important to clarify what you stand for and what guides your decisions as a firm. Firms perceived to be avoiding this question, or who are unable to reconcile their client work with their values and public ESG commitments, are likely to face increasing pressure. The question of accountability for firms advising clients or projects contributing to global challenges such as climate change is unlikely to go away.
