To be credible ESG advisors, professional services firms must demonstrate their license to operate

Environmental Social Governance (ESG) is a priority for all significant companies. It helps them to manage risks, meet stakeholder expectations, drive financial performance, attract investors, and, by contributing to a more sustainable future, build brand reputation and loyalty.

For professional services firms, ESG represents a lucrative new business opportunity. Most of the leading accounting, consulting, and law firms have recognised there is money to be made from peddling bundled ESG advisory services to the executives and directors who are being pressured by investors, shareholders and regulators to do more, or do better.

A simple LinkedIn jobs search reveals that RSM, Deloitte, Ashurst, and KPMG are among the professional services firms currently recruiting ESG consulting and advisory roles.

Of course, by presenting as ESG experts, professional services firms are exposing their own ESG performance to public scrutiny.

PricewaterhouseCoopers learned this recently after it emerged that the firm is embroiled in a corporate tax avoidance scandal which will have long-lasting ramifications for PwC, its multi-national clients, and the other ‘Big Four’ accounting firms.

On 1 June 2023, The Australian Financial Review published an opinion by columnist John Roskham, PWC doesn’t do what it tells its clients to do”.

“For a firm that makes such a fuss about its expertise in the area, PwC should have noticed that despite all the window dressing of ESG the concept has now been washing through boardrooms long enough that the “governance” part of those three letters is slowly being taken seriously. What PwC tells its clients to do, apparently it doesn’t do itself.”

While PwC is the one currently taking a beating, it is hardly the only professional services firm that is failing to consistently and convincingly walk to the ESG talk.

ESG is a risk, an obligation, and an opportunity

To be credible ESG advisors, professional services firms need to demonstrate their license to operate.

To John Roskham’s point: How can a firm (like PwC) credibly advise clients on governance if its own governance mechanisms have been found to be ineffective?

Still, PwC is not alone so let’s look at some other examples, starting at a macro level.

Compensation of employees and board directors is a component of the Governance pillar in ESG. Yet, according to the Workplace Gender Equality Agency (WGEA), Australia’s base salary gender pay gap is highest (at 22.1%) in the Professional, Scientific and Technical Services. That indicates many, if not most, professional services firms are failing on this metric.

Like PwC, law firm K&L Gates offers ESG services. Under the Governance pillar, K&L Gates works closely with clients “to ensure accuracy in disclosures and adherence to regulatory deadlines“. However, based on the public record (that being the Australian Border Force Register), K&L Gates is one of several commercial law firms that has not complied with the mandatory modern slavery reporting requirements.

The ESG Social pillar includes an organisation’s behaviour regarding issues such as diversity, equity and inclusion, supply chain transparency, human rights, and privacy issues.

Here, the AFR’s December 2022 Law Partnership Survey revealed there to be just 32.1% women in partnership positions despite women outnumbering men at every level of law firm seniority before partner.

It’s no better in accounting, according to the AFR’s Top 100 Accounting Firms List:

Of the big four, PwC and KPMG had the most women in their partner ranks – 33.6% and 33.4% respectively, followed by Deloitte (32.6%) and EY (30.9%). More than a quarter of the Top 100 list did not have any women in their partner ranks.

EY is also notably absent from the WGEA’s list of Employer of Choice for Gender Equality citation-holders. So, too, are accounting firms RSM, BDO, and PKF.

Cyber security is regarded as a key ESG concern, falling under the Social pillar, and being one of the Top 10 most pressing ESG issues according to research by RBC Global Asset Management. In May 2023, ‘government lawyers’ HWL Ebsworth experienced a major data breach and the AFR has subsequently reported the firm is facing ransom demands from the cybercriminals who reportedly stole four terabytes of data. Meanwhile, on its website HWL Ebsworth promotes how it can help clients to respond to cyber breach incidents.

These are just a handful of examples to illustrate my point.

To be credible ESG advisors, firms need to demonstrate their license to operate. If they don’t they should be prepared to defend their performance, including in the court of public opinion.