Why private markets law firms are tooling up for impact and ESG

Law firms are recruiting specialist ESG attorneys amid rising demand for regulatory advice and investors’ due diligence and data requirements.

Kirkland & Ellis this week hired Sofia Martos as a partner in its ESG and impact practice – the latest recruit in an intensive hiring spree that has seen the firm’s dedicated ESG and impact practice group grow from three to seven partners in five months.

Kirkland is not necessarily ranked among the upper echelons of ESG legal advisers – for example, Chambers ranks Clifford Chance, Herbert Smith Freehills, Linklaters and others above them – but the firm is leveraging a prominent position in private markets: it scooped 13 Law Firm of the Year awards for fund formation and transactions in various regions in affiliate titles Private Equity International, Private Debt Investor and PERE’s 2020 awards. Kirkland’s clients include Blackstone, Vista Equity Partners, The Carlyle Group, Warburg Pincus, Bain Capital and TPG’s The Rise Fund.

Martos joins from law firm Paul, Weiss, Rifkind, Wharton & Garrison, where she served as an associate in the firm’s sustainability and ESG advisory practice. Earlier this month, Kirkland recruited London-based Ruth Knox, who had spent nearly 11 years as an environment and climate change associate at Linklaters. In July, Mary Beth Houlihan joined Kirkland from Fried Frank, where she spent over 10 years as an associate and special counsel. Sara Orr joined Kirkland in May 2021 after 16 years at Latham & Watkins.

The firm is not alone in tapping lawyers with ESG credentials. Travers Smith added Simon Witney, a familiar face in European private markets, as a senior consultant focused on sustainable finance and ESG in September 2020. Latham & Watkins and Herbert Smith Freehills are growing their ESG and sustainable finance services by training attorneys internally and, in HSF’s case, actively recruiting.

Alex Farmer, who heads up the practice group at Kirkland, says it was formed to meet client demand – and because the firm anticipated that demand would grow. Before 2019, Farmer worked in Kirkland’s environmental practice group, where her work increasingly involved providing guidance on due diligence: identifying material environmental risks for mergers, acquisitions and investments.

ESG due diligence and advisory services forms a large part of the the practice group’s services today, says Farmer. But now it sees two other key areas of client demand. First is ensuring fund managers understand what their marketing, reporting and disclosure obligations are for ‘sustainable’ funds under either US or EU regulatory law. Second is how to streamline the various side letter requests from LPs regarding ESG data reporting. “The volume of demand from LPs has significantly increased [since 2019],” says Farmer, “And it’s created a lot of administrative complexity for our clients, that they’re seeking now to reduce. Some of our clients are thinking about how to come out with middle-of-the-road provisions that satisfy all their LPs.”

The practice group also advises on signing up to, using and complying with ESG frameworks and guidelines.

Rising demand

Other law firms have seen a similar increase in demand for ESG-related services.

“We have been approached by a number of funds to help them set up EU SFDR Article 8 and Article 9 Funds,” says a spokesperson for Macfarlanes, another firm active in the private funds space. “This is likely to be a key area of growth for our clients and for us as many see this as essential to their fund strategies going forwards and investors like the product classification that the SFDR provides.”

Travers Smith has seen increased demand related to litigation risk relating to climate change and other ESG matters. The firm is also reporting increased work on ESG-linked debt finance arrangements. “We are also experiencing a rise in demand for our expertise in complex and innovative ESG-related financing structures,” says a spokesperson. “In recent months we have seen a significant number of large leveraged finance transactions and fund finance arrangements with ESG-linked margin ratchets and associated KPIs alongside growing interest in ESG-linked carried interest structures and management incentive arrangements.”

A dedicated practice group?

Some law firms have dedicated ESG practice groups while others have cross-departmental taskforces or are hiring ESG specialists within other practice areas. Macfarlanes has ESG specialists spread across practice areas (“We need all parts of our business to have ESG experts, rather than one ESG group in an isolated team”): as does Travers Smith (“We regard expertise on ESG issues as part of our lawyers’ core knowledge and skillset”). Herbert Smith Freehills has a “multi-disciplinary global ESG practice” of 101 partners, 18 of whom primarily focus on ESG.

But Kirkland’s Farmer thinks the volume of client demand due to legal requirements and LP disclosure demands – which bundle various different areas of sustainability together – means that a dedicated legal practice that deals with ESG issues holistically is necessary.

Kirkland’s practice group will continue to grow, says Farmer. “The majority of my time right now is spent recruiting, hiring and training. I wish I had more time right now to work directly with clients, but I trust the team that I’m building to do that.”