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The role of law session 2: Making sustainable finance work for you

Posted on 11 January 2023

The Mishcon Academy Digital Sessions.  Conversations on the legal topics affecting businesses and individuals today.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

Good morning I am Paul Clements-Hunt and I am a Director with Mishcon Purpose which is the sustainability arm of the UK law firm, Mishcon de Reya and we are delighted that you are joining us on the session looking at ESGN law and making sustainable finance work for all.  The reason Mishcon de Reya is doing is that we feel there is a huge opportunity for the legal world in its broadest sense you know, from the judiciary, through law firms, through individual lawyers to play a far more proactive role in driving sustainability.  So all the key issues, climate change, the protection of natural assets, the issues around, social issues around human rights in the supply chain, whichever you pick there is a huge opportunity but also huge challenges out there for the law to step forward and work with their client’s whether its general Counsel inside companies or whether it’s external Counsel working with clients to, to drive the sustainability agenda.  What we’ve taken here is that there is a massive role for the entire investment chain, capital markets, large institutional investors, the entire financial ecosystem to play a role in actually helping us deliver the sustainable development goals.  What we are doing is we are pivoting around the question of how can you as a company, as an investor, as the client of a law, what can you expect from both external Counsel, general Counsel in terms of helping you understand how sustainable finance can benefit you, how we can flow capital into the space in a way that it delivers results and in a way that it delivers results at scale to address these massive problems.  Karin, where is South Africa now, what’s your feeling as a you know, as a non-executive director and advising Boards, where do we sit with sustainable finance, what’s, what’s the picture in South Africa?

Karin Ireton, Non-Executive Director and Independent Sustainability Consultant

In terms of sustainability I think we are still in a difficult place.  Yes, there was a lot of leading edge work in the early 90’s, early 2000’s and quite a lot of events happening, South Africa’s renewable energy programme started to look really promising.  Two things happened which I think are instructive for this conversation or helpful for this conversation and one is that the first tranche of renewable energy projects which were requested for tendering into the Government energy system, the state owned energy company, were landed with such exorbitant finance and legal fees that renewable energy became classified as too expensive.  The coal mining industry of course is a huge employer in South Africa and this need to move away from fossil fuels throws us not only an environmental challenges but it throws up big social challenges.  There are a lot of financial products up there, the Johannesburg stock exchange does have a Board for green bonds, it’s not particularly heavily subscribed however if you look at the International green bond market or climate bond or sustainable bond market, it is huge.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

Daniela, what’s your perspective as a company, privately held but you know, working in the markets and with sustainability right at the heart of what you do?

Daniela Sandoval, VP of Corporate Affairs and Regulation, BRK Ambiental

We need, and I have a legal degree, although I don’t work only with law right now but we, as lawyers, we do need to get closer to business.  In order to provide good advice you need to be somehow have a very good risk management system, you have to go beyond law, you have to go to reputation for instance.  Law is always often I would say, but almost always behind society.  We do have certain laws that create mandates and open ups for markets for instance but usually it is behind society.  So if you are being provided advice on what is legal or illegal, you are behind.  So what lawyers need to do is to understand what society wants, what the investors community wants and it is important to sit down with them and say, what’s important for you now?  Then you see often, more often in in-house lawyers than outside Counsel, although I have very good experience with outside Counsel one you get to work with them over time, they are almost in-house Counsel’s as well but I think that’s a very important aspect that we need to improve over time so I would like to see law schools having more business classes than what we have now.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

Do you get the sense that the sustainability piece is, is at least flowing in and through Brazilian legal circles in a more, in a more embedded way?

Daniela Sandoval, VP of Corporate Affairs and Regulation, BRK Ambiental

Brazil has had very strong ESG case I would say.  On the social piece, sanitation is a piece of the social agenda, educational agenda and environmental agenda as well but on a social piece, Brazil is a country of disparity. On the environmental agenda we have huge forests, we have the Amazon for instance, not our only forest but we do have the Amazon that’s kind of on loan to the world and that’s seen like this although it’s misleading somehow and on the governance side, Brazil has had the highest fines on corruption of the history.  So very much on the ESG case.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

What perspective are you bringing to this, this conversation given some of the focus, the contentious issues, the conflict issues around credit rating in the context of sustainability in the ESG.  Your perspective would be welcome Daniel

Daniel Cash, Rhodes Scholar and Founder of the Credit Rating Research Initiative

So in my world of credit ratings the regulations are being formed as we speak in terms of the Edinburgh Reforms that were put forward last week in the UK contained elements where they will now formally regulate ESG rating agencies.  The EU is doing the same, Japan has just started.  It is a very new and nascent market that a lawyer will have to advise on at some point because the applicability of credit ratings and ESG ratings to everything to do with capital which is at the heart of this move to make finance more sustainable.  I think for me it is a case of trying to break through that complexity that’s often put into the processes on purpose and I know we are working to get on a project on green washing at the moment and what that takes and also, championing events like this and projects like this and I know Mishcon de Reya are trying to push into the sustainability approach.  I know other firms are doing it but I think there is much more that can be done to spread knowledge of these core nuanced issues to share that knowledge around more so you have events like this to share and create different element and pathways for investigations.  So the credit rating agencies are one very small component of a large framework but I think they are instructive of that in a very nascent mode that means the risks are increasing but coincidentally so are the opportunities and lawyers need to be on top of that for their client so they can take advantage and protect from both.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

Sean I am going to come to you first, but it’s that idea and you said it, you know, you don’t have lawyers working on investment policy and decision making, they are a facilitator but as someone who has run you know, huge amounts of money, what do you think the future lawyer looks like in side big asset managers?  Can you give us a snippet?

Sean Flannery, Former CIO, State Street Global Advisors

That said, one of the, one of the most important issues we need to tackle is that term, ESG is so broad that depending on how you want to apply it, there is almost nothing you can do from an investment standpoint that wouldn’t trip over one wire or another.  With intentionality and clarity of purpose as to what it is that the, that the investment will approach, if we start with that and then can pass out those issues that are and are not relevant I think that is, I think that is not only the way things are going but that also makes this overwhelming chance a little more attractable.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

How have you don’t that prioritisation as, as BRK Ambiental because I mean you’ve gone beyond sanitation, you do really look at social value in the chain and Karen, the same for you perhaps from a mining perspective, where are those priorities, the collective members of the board, what do they focus on?  Daniela over to you and then Karin.

Daniela Sandoval, VP of Corporate Affairs and Regulation, BRK Ambiental

Our business is very related to the ESG agenda.  Once you do sanitation in a city either water or waste water which has more of a hidden aspect as to the benefits, you do change a community.  It’s correlated to the environment because you are cleaning the rivers by doing sanitation so you are not collecting waste water and just throwing, dumping into the river.  The cities are changing that and treating waste water in order to be re-used or, or put into the river, that’s an environmental benefit.  The same thing with respect to social, you mentioned education.  What we do have is research relating to the gender agenda for women. Having sanitation allows for women to have a fixed job since they tend to be the ones responsible for taking care of sick children and also the elderly when they get sick.  We also have had very many projects actually in our agenda that are, the main purpose is to show to that community that we are there beyond sanitation and that’s part of our purpose, beyond sanitation is on our purpose.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

Daniel, right, credit rating agencies looking at different you know, different types of companies.  Are they beginning to factor in the valuation creation piece of sustainability well enough?

Sean Flannery, Former CIO, State Street Global Advisors

From an investment standpoint these risks that can arise from any of the issues that we, that we discussed, that we include in the canopy of ESG, any one of those risks effectively gets priced into the value of an asset so as to the way we would look at it is by, by having those ESG advantages you reduce the risk and that risk reduction therefore increases the value of the assets.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

Daniel, in terms of you know, unpacking that in the context of credit rating whether it’s the large players, the Moody’s, SMP Fitch, AM Best or it’s the specialists, how are you, how are you reading that?

Daniel Cash, Rhodes Scholar and Founder of the Credit Rating Research Initiative

I mean the main thing here is that these companies who are embedding value, creating elements need to show that in order to almost get the financial reward for doing so in terms of lower cost of capital or what have you and to their part the credit rating agencies are doing their part, they are investing heavily in their ability to analyse a company’s processes and objectives or what have you so that they can signal to the market place that this company is much better position moving forward for that release of capitals.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

Karen thank you for being patient and let me in some ways reframe it, bouncing off what Daniela had said in the sanitation context right, mining is both that huge sustainability challenge but it is the sustainability option of the future.  How do you read that in terms of both the risk and the opportunity side?

Karin Ireton, Non-Executive Director and Independent Sustainability Consultant

I think the big factors for the mining industry is the time factor, is that they longevity of product or of process or of project does accord with the sustainability timeframe, it is also a long timeframe but the absolute need to develop and to produce or be seen to produce value in the short-term is a major disabling factor in terms of getting true focus on the long-term.  What we are seeing really positively is even in the commercial finance field as opposed to the project finance field, you are starting to get financial institutions introducing ESG factors into conditionality of lending.  So commercial banks who will say even for a corporate facility you need to demonstrate some ESG credentials you know, in the main stream mining industry and the listed companies they are starting to try and link to the SDG’s, they are starting to try and demonstrate to communities this long-term value but we are nowhere near where we need to be.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

How I would like to finish is that just again, your, your general sense of as a lawyer, or as a law firm, or as general Counsel, what are the steps you need to take to do the prioritisation, to see where the focus should be, to help the clients or your company begin to make the wild west not so wild if I can put it that way?

Daniel Cash, Rhodes Scholar and Founder of the Credit Rating Research Initiative

I’d love to see it more widely developed, that law firm’s work with law schools to develop sustainability within the legal curriculum.

Karin Ireton, Non-Executive Director and Independent Sustainability Consultant

I really think that the law firm of the future needs to ensure that at every level ESG is factored into the advice they give, the contracts they look at, and how they interact with the clients that they have.

Daniela Sandoval, VP of Corporate Affairs and Regulation, BRK Ambiental

Companies do have to have that element of rotation at their core.  You get questions all the time and interests on what your business does to the community.

Sean Flannery, Former CIO, State Street Global Advisors

There is a fundamental change in the way that we need to do things going forward.  I would be looking to where is there evidence that this law firm actually is investing in the sort of things that will, that will give it the, give the firm the ability to deliver that value to me as a client and from a business standpoint, what I would say is, it’s obvious to me that there is a great opportunity for those firms that can deliver that, that capability, the question is will law firms be willing to adapt the way they do business, fundamentally change the skill sets they’re looking for to deliver that.

Paul Clements-Hunt, Director, Mishcon Purpose
Mishcon de Reya

Sean, Daniel, Daniela, Karin, lovely to have Brazil, South Africa, UK, US in play.  The hour has gone very quickly.  I hope that our participants thank you for joining us and staying with us.  This is our last event for the year so wishing everyone a good festive season and you know, a really positive and hopeful start to 2023 after the, let’s say, the challenges in different levels of 2022.

Thank you everyone for joining us, really appreciate it and it was a privilege to moderate you, so Paul Clements-Hunt and Mishcon Purpose, goodbye, good end of year, thank you very much.

The Mishcon Academy offers outstanding legal, leadership and skills development for legal professionals, business leaders and individuals. Our learning experts create industry leading experiences that create long-lasting change delivered through live events, courses and bespoke learning.

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