While corporations are enthusiastically touting their positive environmental, social, and governance (ESG) contributions, corporate general counsels are nervous. In a recent survey, in-house counsel identified ESG issues as one of the principal risks they are monitoring. One survey respondent said:
I am increasingly worried about ESG. Data privacy is the top risk, but ESG is the top trending risk and rising rapidly because of exposure in the future for corporations.
And this risk is complicated further by the fact that, for U.S. companies, there are no national ESG disclosure principles and no consensus around the key data points that ought to be reported. A recent analysis by Bloomberg Law indicates, for example, that reporting companies are increasingly categorizing their compliance with data privacy regulations and norms as ESG matters. And ESG risks do not merely pose legal challenges for in-house counsel: they may also lead to significant reputational problems.
While ESG principles may play a role in all areas of business activity, they are perhaps somewhat more developed in supply chains. One article found that “[b]y 2019, most Fortune 250 firms in the United States established various ESG goals ranging from greenhouse gas emissions to worker safety, transparency, and responsible procurement.” And supply chain revelations, perhaps more than other areas, have given rise to significant reputational risks, particularly when the public learns of human rights violations by the multinationals that source their products abroad.
Financial institutions and investment funds have been taking up the challenge to offer their clients opportunities to select investments based on ESG criteria for a while. At least since Kofi Annan’s 2004 initiative challenging financial institutions to contribute to sustainable development, they and the investment services industry more broadly have taken the lead in identifying ESG opportunities, encouraging ESG investments, and developing data that would support these goals. And the financial services industry continues to be more broadly committed to ESG strategy than any other industry.
The pressure to market ESG metrics combined with the lack of consistent standards and the range of liability from misreporting exacerbate ESG reporting risks. It’s possible that the development of regulatory and auditing standards in this area could in theory quantify this risk—but the ad hoc nature of available data, whether developed internally or obtained from expert sources, may prove a challenge, even if rules are made explicit.
According to a 2021 Thompson Hine study, U.S. public companies are still divided in the ESG standards they utilize: 38% selected the Sustainability Accounting Standards Board (SASB); 27% selected the Global Reporting Initiative (GRI); and 25% selected the Task Force on Climate-Related Financial Disclosures (TCFD). Even so, many (but not all) companies in that survey said they were going to use quantitative data: 73% of public companies that planned to make public disclosures said that they planned to use quantitative metrics in their disclosures, while 53% of private companies in that position said they would do so. Looking further, the main metrics disclosed were board diversity data and workforce diversity data—which of course can be calculated from internal information.
In the meanwhile, the U.S. Securities and Exchange Commission continues to struggle to define its standards. Specifically, the SEC’s priority has been to focus on disclosures concerning climate change, human capital, and board and employee diversity. Thus far, the concerns about ESG disclosures have further delayed SEC action: work to issue a rule defining climate change-related disclosures has produced conflict within the SEC, particularly around what kinds of disclosures can be required and whether to require auditor sign-offs. However, the SEC’s Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions indicates that it expects to provide final action on climate change and human capital management during October of this year.
