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Ethical Business: The Obstacles in the Way - Alfie North

Ever-growing is the pressure on professional services firms to commit to, and prioritise, the instantiation of ethical business. ‘Ethical business’ can include, but is not limited to, commitments to DE&I, ESG, and CSR. Emphasis on such initiatives is controversial, and on the rise. The phrase ‘ethical business’ seems appropriately practical, in that a firm's ethical commitments are entirely superficial if not embodied in actual practice. It can, by its very nature, refer to a diversity of opinions. For simplicity, and with generalisation in mind, I will define it as a business practice that a) treats people fairly and with respect; b) treats our planet fairly and with respect; c) treats our broader society and its institutions fairly and with respect.

Socially responsible business is hard, and its financial, legal, and political ramifications are multi-level and not yet fully understood. In this article, I will explore some of the many challenges businesses face in their efforts to adopt socially and ethically responsible practices.

Professional service firms and their values: who to provide services to?

In all professional services industries, values are felt throughout the business, from the back office to client meetings. A firm that commits to ethical business must ensure both its work and its clients are aligned with them. A firm's impact is measured not only by its values but by its clients. As one commentator recently pointed out, the UN’s guiding principles on business and human rights directly link firms to their clients’ activities. The problem is guidelines like these are not hard laws. All too often firms pay lip service to socially responsible business practices but fail to implement them in practice.

Yet ethical success is often viewed as a costly distraction by market participants. For example, companies that rank highly on CSR are more likely to be the target of hedge fund activism. Investors may see a commitment to such practices as a misalignment of focus; a company's goal, they argue, should be shareholder returns. This position is worsened if they view the commitment as nothing more than 'greenwashing'.

Seemingly, then, there is often some financial trade-off to a commitment to ESG and CSR. On the one hand, it can align a company’s values and harmonise its practices. On the other, saying yes to CSR can mean often mean saying no to certain clients, markets, and ultimately, revenue. When companies are dictated by stakeholders whose primary goal is return maximisation, this can often be at the detriment of policies addressing social and environmental concerns.

Sometimes, however, firms have different priorities. New Law Society guidance suggests that solicitors’ ability to accept or decline clients should be considered in light of the context of climate change. Further, it suggests that law firms or individual solicitors “may… choose to decline to advise on matters that are incompatible with or … [that] actively work against the [1.5°C of the 2016 Paris Agreement] goal if it conflicts with their values or their law firm’s stated objectives”. In other words, there is scope for individual solicitors to deny work in a professional and precedented fashion. The same Law Society guidance notes that a commitment to climate change may be treated as a philosophical belief and therefore as a protected characteristic under employment law. Law firms and other professional services firms must be mindful of this and balance their responsibilities to clients against sensitive management of such issues when they arise.

In just the same way as it can harm, pressure from stakeholders who recognise or share the vision of a firm can give firms a real boost in applying ethical practices and structures to their organisations. The first step towards responsible business is ensuring top-down alignment and instantiation of core values, internal practices, and priorities of a firm or company from the very top. Managing directors and partners, boards, and executives all have a role to play in mandating responsible practices.

Ethical business as an offering

Intimately connected to the type of companies a firm may work with, an ethical business can also take the form of service offerings that best represent them and their values. This, it seems, represents perhaps the biggest shift in recent years, with over 50% of law firms in Europe and the US having an ESG practice, and 18% with plans to establish one in the next three years. Eversheds Sutherland’ ESG practice, for instance, has grown from a handful of lawyers to over 200 in just two years. An increased focus on pro bono initiatives, as evidenced by the rise in pro bono partners over the last two decades, is another way firms have tagged 'ethical business initiatives' onto their existing offering. This is most effective when in harmony with a broader strategy which is values-driven too.

So, why don’t more firms create service offerings that embody ethical values? The problem, as well as the financial disincentive mentioned above, seems to be a political backlash against ethical business, most obviously in the US. Last year, for example, a group of Republican senators wrote to multiple US law firms warning them about a potential violation of antitrust laws due to the way in which their ESG practices were restricting the supply of fossil fuels. Coal, oil and gas, of course, remain deeply lucrative.

The US functions well as a case study in demonstrating the challenges firms face when trying to implement sustainable business offerings. Pressure on financial and professional services companies in progressive states such as California and New York has resulted in rapid growth of ESG products, but this has sparked an anti-ESG pushback led by figures such as TV personality Tucker Carlson and former vice-president Mike Pence. Last August, Texas banned state funds from holding shares in a blacklist of financial groups that the government considers hostile to fossil fuels. Other states have adopted similar measures. And the Supreme Court recently accepted the arguments of Republican-led states and fossil fuel companies in its ruling that limited the power of the Environmental Protection Agency to regulate greenhouse gases without specific Congressional approval. Such political division adds to the uncertainty for businesses and might well contribute to the inertia felt by firms in their adoption of responsible practices. Navigating these competing priorities and disincentives is no doubt one of the greatest hurdles to aligning business practice with socially responsible values.

What does the future hold?

In recent years, commercial law firms have become increasingly keen to demonstrate a genuine commitment to ESG and CSR. Firms publish statistics and are very proud of their numbers. Firms now have full-time staff members and specific partners for these initiatives. For example, Tiernan Brady at Clifford Chance is spearheading global inclusion and policies and campaigns. Formerly the director of several successful and high-profile social movements, Brady and his counterparts at other firms reflect a commitment by firms to a socially responsible management style and a more responsible future. It is also worth noting that it is not just professional services firms that are committing to a more responsible style of business – it is their clients too. For example, 42% of energy executives now say investing in the transition from fossil fuels to sustainable energy is high priority (up from 14% in 2020). Trying to move away from ESG and CSR may, as a professional services firm, prove to be impossible. It’s likely your clients will be doing it even if you aren’t. The proverbial tide is beginning to change, and companies will find it easier to embrace these practices than to avoid them.

One key driver behind the rise of ethical business is that many consumers – especially young people – really value it. Research shows that companies that engage in socially or environmentally harmful behaviour risk losing a “significant percentage of potential customers”. Further, the study highlighted the fact that a majority of American consumers think it’s important for companies to take a stand on key issues. Despite the lack of consensus about what form that stand should take, it seems that citizens in general feel there is value in companies that represent their values and hold true to responsible business ideals.

The future of business is, as ever, uncertain. However, it seems that corporate social, political, and environmental responsibility is not going away. It is here for the long haul, and that is something that corporations will have to continue to navigate in order to reach outcomes that serve both the company and the world at large.

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