At the 2021 Society for Corporate Governance National Conference, SEC Commissioner Allison Herren Lee  advocated for corporate boards to "integrate climate and ESG into governance practices." She argued that integration of environmental, social and governance ("ESG") matters into board oversight would mitigate risk and help companies "compete for capital based on good ESG governance."

Ms. Lee explained that boards of directors at publicly listed companies oversee the audit of financial statements, which will increasingly have to engage with ESG matters as they affect the "valuation of assets, inventory, supply chain and future cash flows." Further, she argued, "boards increasingly have oversight obligations related to climate and ESG risks - identification, assessment, decision-making, and disclosure of such risks." Ms. Lee pointed out that existing federal requirements already implicate board engagement with ESG matters, including:

  • the SEC's 2010 climate guidance, which identifies relevant disclosure requirements;
  • the SEC's recent update to Item 101 ("Description of business") of Regulation S-K, which identifies human capital as a potentially material disclosure topic; and
  • Item 407(h) of Regulation S-K, mandating disclosure of the board's role in the risk oversight of a company, which could include climate change risks.

Ms. Lee also noted that under state law, directors have fiduciary duties of (i) loyalty and care, which requires that the board be well informed when making corporate decisions and (ii) good faith, which establishes the need to investigate "red flags" that suggest legal violations. Ms. Lee stated that the latter may require a "deeper dive" on climate change, arguing that unaddressed red flags relating to an emissions regulation violations could trigger the duty of good faith.

To maximize ESG opportunities, Ms. Lee suggested: (i) "board refreshment," or putting new directors on boards with an emphasis on diversity; (ii) enhancing ESG competence on the board by integrating ESG considerations into nominating processes; and (iii) tying executive compensation to ESG metrics.

Commentary Steven Lofchie

Currently, there is no agreement on what ESG metrics are - or should be. If Commissioner Lee's recommendation is for compensation or other factors to be tied to such metrics, then she must first define her view of ESG metrics and explain why these factors should be based on them. Without such specificity, it is difficult to evaluate the recommendation.

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