The following is the first in a series of Brown Rudnick Client Alerts regarding the growing regulatory focus on environmental, social and governance ("ESG") disclosure and reporting standards, as well as the increased need for implementation of related ESG policies and compliance framework initiatives.
For over a decade, a growing cohort born from a desire for social equality, environmental consciousness, and responsible corporate governance has taken form, and called upon industries, companies and relevant stakeholders to adapt their business practices to confront the issues and meet the demands of the world in which we all find ourselves living today. 1 In response to this call, U.S. lawmakers and regulators recently have stepped forward in unprecedented fashion to signal that they are paying careful attention to how these issues drive value and influence investor decisions in corporate America. Indeed, on March 15, 2021, Acting Chair of the U.S. Securities and Exchange Commission (the "SEC") Allison Herren Lee announced that the SEC would be seeking the public's comments on climate-related disclosure, as the agency continues to consider the broader spectrum of environmental, social, and governance ("ESG") disclosure issues.2
For many companies, an ESG policy is a roadmap for responsible corporate decision making and respecting the planet and its people. While industry certainly impacts the content of particular ESG policies-one-size does not fit all-effective and conscientious policies have certain constants. They generally tackle such issues as a company's carbon emissions (carbon footprint) and sustainability practices, workforce diversity, and gender parity.3 As shareholders,4 private companies,5 and regulatory bodies alike demonstrate their growing concern for these and related matters,6 companies are responding. In recent years, there has been a dramatic uptick of companies voluntarily developing ESG policies and publicly reporting on how successfully they adhere to their own commitments.7
The growing expectation that companies adopt ESG policies8 has been compounded by events of the past year. The nation's reckoning with racial and social injustice has underscored the necessity of robust equity, inclusion, and diversity strategies, and has prompted some companies to revisit their efforts in this respect.9 Companies, for the first time (at least in a long time), are not simply looking at "checking the box" when considering social issues. Instead they are increasingly finding themselves needing to focus on the impacts of disparity among genders, ensuring that "Equity, Inclusion and Diversity" is not simply a catchphrase, and developing a systematic approach to ensuring a well-rounded, well-informed workforce is vital to corporate success.
Similarly, lawmakers and executive agencies are responding to the mounting societal demand for ESG accountability like never before. In particular, the SEC is focusing upon whether some companies are overstating or misrepresenting their ESG metrics in voluntary corporate disclosures.10 Corporate accountability vis-à-vis ESG policies are a clear priority for President Biden's administration, which is predicted to focus on strengthening ESG-related issues, with a particular emphasis on climate change.11 The Environmental Protection Agency is expected to promulgate a suite of climate-focused regulations during President Biden's tenure,12 while the Treasury Department and Federal Reserve also recently indicated their commitment to addressing the climate crisis.13 Similarly, climate-related disclosures have been slated to receive enhanced scrutiny by the SEC-the Division of Corporation Finance was recently directed to increase its focus on climate-related disclosures in public company filings,14 while a new Climate and ESG Task Force in the SEC's Division of Enforcement is identifying "material gaps or misstatements in issuers' disclosures of climate risks under existing rules."15 The Task Force was announced a mere month after the SEC appointed its first ever senior policy advisor on ESG regulatory issues.16
Although time will tell when we might expect to see concrete regulatory requirements on ESG reporting, not to mention enforcement actions based on inaccurate, incomplete, or misleading ESG disclosures, for companies that have yet to implement an ESG policy, the prudent time to act is now. Companies with existing policies would be well advised to re-examine them with a focus on determining whether the values they promote are being achieved and, more importantly, accurately portrayed in any public company reports or statements. Given the importance of ESG issues to the modern-day investor and the SEC's position that disclosures about these issues are material to investor decision-making,17 it is a matter of time before we see SEC reporting requirements on ESG issues and related enforcement activity. Thus, the imperative that companies develop clear and effective ESG policies has arguably never been greater.
1. See, e.g., Francesco Rutigliani, Who Cares, Wins: Why ESG is Important for Your Business (Jul. 2, 2019), https://www.techedgegroup.com/blog/who-cares-wins-why-esg-is-important-for-your-business.
2. Allison Herren Lee, Acting Chair, U.S. Securities and Exchange Commission, Address at the Center for American Progress: Public Input Welcomed on Climate Change Disclosures (March 15, 2021), https://www.sec.gov/news/ public-statement/lee-climate-change-disclosures.
3. See generally McKinsey, Five ways that ESG creates value (Nov. 14, 2019), https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value; PricewaterhouseCoopers, Making Sense of ESG (Oct. 29, 2020), https://www.pwc.com/us/en/cfodirect/publications/in-the-loop/esg-reporting-controls.html.
4. PricewaterhouseCoopers, Making Sense of ESG (Oct. 29, 2020), https://www.pwc.com/us/en/cfodirect/publications/in-the-loop/esg-reporting-controls.html.
5. See, e.g., Larry Fink, Larry Fink's 2021 letter to CEOs (Jan. 26, 2021), https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter; Dan Ennis, State Street doubles down on ESG pledge, while HSBC's comes under scrutiny (Jan. 11, 2021), https://www.bankingdive.com/news/state-street-HSBC-ESG/593121/.
6. See, e.g., Central Banks and Supervisors Network for Greening the Financial System, https://www.ngfs.net/en (last visited Mar. 8, 2021); U.S. Securities and Exchange Commission Press Release, SEC Division of Examinations Announces 2021 Examination Priorities: Enhanced Focus on Climate-Related Risks (Mar. 3, 2021), https://www.sec.gov/news/press-release/2021-39.
7. See, e.g., Governance and Accountability Institute Inc., FLASH REPORT: 86% of S&P 500 Index® Companies Publish Sustainability / Responsibility Reports in 2018 (May 16, 2019), https://www.ga-institute.com/press-releases/article/flash-report-86-of-sp-500-indexR-companies-publish-sustainability-responsibility-reports-in-20.html, cited in Catherine M. Clarkin, Melissa Sawyer, and Joshua L. Levin, The Rise of Standardized ESG Disclosure Frameworks in the United States, Harvard Law School Forum on Corporate Governance (Jun. 22, 2020), https://corpgov.law.harvard.edu/2020/06/22/the-rise-of-standardized-esg-disclosure-frameworks-in-the-united-states/#1.
8. PricewaterhouseCoopers, Making Sense of ESG (Oct. 29, 2020), https://www.pwc.com/us/en/cfodirect/publications/in-the-loop/esg-reporting-controls.html; Martina Cheung, Seven ESG Trends to Watch in 2021 at para. 6, https://www.spglobal.com/en/research-insights/featured/seven-esg-trends-to-watch-in-2021.
9. See, e.g., American Airlines 2019-2020 ESG Report at 40 ("At American, we aim to translate the energy and awareness sparked by Black Lives Matter protests into meaningful change."); Martina Cheung, Seven ESG Trends to Watch in 2021 at para. 6, https://www.spglobal.com/en/research-insights/featured/seven-esg-trends-to-watch-in-2021.
10. See generally Peter Driscoll, Director, U.S. Securities and Exchange Commission's Division of Examinations, Comments at Investment Company Institute Conference (March 15, 2021).
11. See Suzanne Smetana, ESG and the Biden Presidency (Jan. 23, 2021), https://www.etftrends.com/esg-channel/esg-and-the-biden-presidency/; Stephen Bier, Julien Bourgeois, and Nicholas DiLorenzo, Expectations Under the Biden Administration: The ESG and Diversity/Inclusion Outlook for Reporting Companies and Asset Managers (Jan. 5, 2021), https://www.jdsupra.com/legalnews/expectations-under-the-biden-4179287/; Martina Cheung, Seven ESG Trends to Watch in 2021 at para. 2, https://www.spglobal.com/en/research-insights/featured/seven-esg-trends-to-watch-in-2021.
12. See, e.g., Karen A. Winters et. al., Looking Ahead to 2021 - Implications of a Change in Administration on Environmental Policy, National Law Review (Dec. 7, 2020), https://www.natlawreview.com/article/looking-ahead-to-2021-implications-change-administration-environmental-policy.
13. See Sylvan Lane, Yellen: Treasury's approach to climate will "change dramatically" from Trump era (Feb. 12, 2021), https://thehill.com/policy/finance/538628-yellen-treasurys-approach-to-climate-will-change-dramatically-from-trump-era; Governor Lael Brainard, The Role of Financial Institutions in Tackling the Challenges of Climate Change (Feb. 18, 2021), https://www.federalreserve.gov/newsevents/speech/brainard20210218a.htm.
14. Acting Chair Allison Herren Lee, Statement on the Review of Climate-Related Disclosure (Feb. 24, 2021), https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-disclosure.
15. Press Release, U.S. Securities and Exchange Commission, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (Mar. 4, 2021), https://www.sec.gov/news/press-release/2021-42.
16. Press Release, U.S. Securities and Exchange Commission, Satyam Khanna Names Senior Policy Advisor for Climate and ESG (Mar. 4, 2021), https://www.sec.gov/news/press-release/2021-20.
17. Allison Herren Lee, Acting Chair, U.S. Securities and Exchange Commission, Address at the Center for American Progress: Public Input Welcomed on Climate Change Disclosures (March 15, 2021), https://www.sec.gov/news/ public-statement/lee-climate-change-disclosures.
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