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ESG Update: What Corporate Governance and ESG Professionals Need to Know

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Companies are significantly expanding their environmental and social efforts. This includes taking positive steps in areas such as environmental sustainability, human rights, and community involvement, as well as taking a more holistic look at how core, company specific ESG issues affect strategy, risk, and the long-term viability of a company’s business.

Companies are also increasingly disseminating significant amounts of information about these current efforts and future commitments through channels including corporate social responsibility web pages, lengthy corporate responsibility and sustainability reports, public speeches and presentations to investors, and even filings with the US Securities and Exchange Commission (SEC) and information regarding company products. These statements often are not audited by third-party consultants for accuracy or reviewed or approved by boards of directors.

Moreover, many of these statements are made voluntarily. Companies make social responsibility statements regarding how they handle ESG issues for a variety of reasons, including to satisfy growing investor and consumer interest in those issues, to provide information to various groups that rate the company’s ESG practices, and to address company-specific concerns, such as negative attention regarding operations or practices.

For example, in his 2020 letter to S&P 500 CEOs, BlackRock CEO Larry Fink asked BlackRock’s portfolio companies to publish disclosures in line with industry-specific guidelines issued by the Sustainability Accounting Standards Board (SASB) by year-end or to disclose a similar set of data in a way that is relevant to their businesses. He also asked them to disclose climate-related risks to their companies in line with the recommendations of the Task Force on Climate related Financial Disclosures (TCFD), including their plans for operating under a scenario in which the Paris Agreement’s goal of limiting global warming to less than two degrees Celsius. above preindustrial levels is fully realized, as expressed by the TCFD guidelines.

In addition to these voluntary disclosures, disclosures about environmental and social issues are required or encouraged by an increasing number of international, federal, and state laws and regulatory bodies.

The SEC has not adopted new disclosure requirements, yet, but it faces increasing pressure to do so. For example, in October 2018, institutional investors representing more than $5 trillion in assets petitioned the SEC to mandate standardized disclosure by public companies that identifies the ESG factors that affect their businesses.

Other countries increasingly are requiring ESG disclosures as well. In addition, investors are pressing companies to discuss how they are addressing the many issues related to human capital management arising as a result of COVID-19. Regardless of the motivation for company ESG disclosures, these statements and disclosures can create significant litigation and liability risks for companies that do not exercise appropriate care and diligence. This includes providing for oversight at the board level so that the board understands what the company is saying about ESG issues and the processes for reviewing ESG disclosures before they are made public.

More broadly, boards of directors should be aware that their oversight responsibilities, and the attendant prospect of claims seeking to hold directors liable for oversight failures, may extend to ESG matters. ESG issues that create significant risks for a company may lead investors and others to ask, “Where was the board?” in the event of a significant environmental incident such as an oil spill or a significant compliance failure that affects the safety or privacy of customers. The heightened focus displayed by a broad array of stakeholders suggests an evolving expectation that the board, as part of its oversight role, will be actively engaged in overseeing ESG matters that are central to a company’s business—and that investors and regulators may seek to hold the board accountable for perceived failures to perform this responsibility.

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