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ARTICLE

Integrating Environmental Justice Criteria into Voluntary ESG Disclosure Frameworks

Barbara Ballan

Summary

  • ESG disclosure frameworks aim to enhance corporate accountability, but EJ criteria remain largely unaddressed.
  • Integrating EJ within ESG disclosures can empower vulnerable communities and promote sustainable business practices.
  • The adoption of double materiality assessments could redefine the scope of ESG, better aligning it with EJ goals.
  • Corporate governance solutions and private environmental governance remedies are an ad hoc and temporary fix due to the absence of public regulations.
Integrating Environmental Justice Criteria into Voluntary ESG Disclosure Frameworks
Thomas Barwick via Getty Images

The integration of environmental justice (EJ) criteria into environmental, social, and governance (ESG) frameworks offers an innovative approach that allows companies to report and measure the impact of their operations in vulnerable communities, but such integration faces substantial gaps in implementation. The U.S. Environmental Protection Agency (EPA) defines EJ as “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.” On the other hand, ESG encompasses a metrics-driven approach necessary for addressing sustainability challenges. It introduces data that businesses can use to build upon transparency and accountability in their operations and promote environmental, social, and economic welfare. 

The world is at a pivotal moment—systemic and long-standing environmental injustices and the irreversible effects of the climate crisis evidence the need to take into consideration and critically analyze all of the available tools to tackle these challenges, including those that are borne from private environmental governance mechanisms. Corporations around the world are reporting their sustainability impacts and opportunities using voluntary ESG disclosure frameworks and metric-driven approaches to achieve corporate accountability. Public law is also developing mandatory frameworks that adapt to voluntary ESG frameworks.

ESG frameworks are used by companies to disclose ESG information voluntarily and are heavily criticized for being used as an advertising tool rather than generating authentic change in corporate decision-making. EJ criteria highlight systemic inequities, particularly the disproportionate environmental harms experienced by marginalized communities. EJ impacts and opportunities can be measured, for example, by using pollution-related demographic indicators and mapping tools that measure the impact that environmental degradation has on environmental justice communities.

While ESG and EJ both aim to tackle social and environmental challenges, their integration remains limited. ESG metrics often lack the specificity to address EJ concerns, and the voluntary nature of these frameworks can lead to fragmented, inconsistent disclosures and greenwashing scenarios. Despite these challenges, ESG offers potential as a tool for advancing EJ goals, particularly through double materiality assessments that consider both financial risks and broader community impacts. Thus, it is important for EJ advocates and companies that are sincerely committed to sustainability to understand the implications of EJ disclosure into ESG frameworks.

Challenges in Integrating EJ into ESG Frameworks

Fragmentation and Flexibility

ESG frameworks such as the Global Reporting Initiative (GRI), and the International Sustainability Standards Board (ISSB) provide valuable tools for assessing corporate impacts. However, these voluntary frameworks allow companies to selectively disclose information, often omitting EJ concerns or including these concerns in their reports without any background data or information.

Companies have reported on EJ by, for example, disclosing the use of public tools such as EPA EJScreen. For instance, the American chemical company Chemours, has reported to have completed an EJ evaluation of manufacturing sites in the United States using EJScreen. The lack of standardized metrics for EJ in these disclosure frameworks further complicates this issue, because there are no directions on how companies should utilize public tools to disclose EJ impacts and opportunities in their reports.

The Importance of Materiality

Traditional materiality focuses on financial risks that happen inside the company from the point of view of a reasonable investor. In U.S. securities law a stated or omitted fact made by a company is “material” when there is a substantial likelihood that a “reasonable investor’s” decision to buy or sell the security would be influenced by the business claim. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 445 (1976).

This narrow perspective generally excludes EJ criteria because EJ impacts mostly occur outside the company but can be a direct consequence of corporate behavior. This approach is taken by frameworks that are directed to investors, such as the ISSB standards and the SASB standards, and also in U.S. securities laws and mandatory disclosure frameworks. On the other hand, the evolving concept of double materiality being used in voluntary frameworks such as GRI and mandatory frameworks in the European Union (EU) considers both an inside-outside perspective and offers a pathway to integrate EJ into ESG disclosures.

The Role of ESG in Advancing EJ Goals

Achieving EJ Goals Through Disclosure

ESG disclosures that include EJ criteria allow EJ communities to access information about the company’s impacts on EJ communities. Also, ESG can work as a form of risk management, and reporting frameworks that include EJ criteria can enable companies that choose to report on EJ to consider and assess environmental justice impacts in their operations. Thus, the inclusion of EJ criteria on reporting frameworks can help lower the risks and assess the opportunities that the consideration of EJ impacts can provide to the business.

Moving Beyond Greenwashing

As mentioned above, voluntary ESG frameworks often serve as public relations tools, with businesses selectively disclosing favorable information. Hence, the importance of integrating EJ criteria into ESG metrics with standardized methodologies to ensure comparability and accuracy and prevent greenwashing.

Lessons from Mandatory Frameworks

The EU’s implementation of mandatory ESG reporting directives such as the Corporate Sustainability Reporting Directive (CSRD) and its double materiality approach highlight opportunities for advancing EJ integration. While U.S. ESG regulations lag behind, lessons from the EU can inform future frameworks to incorporate EJ considerations.

Toward an ESG-EJ Framework

To integrate ESG and EJ, it is important for businesses and regulators to consider the following:

  1. Standardize EJ metrics. Develop clear, consistent criteria for assessing EJ impacts within ESG disclosures.
  2. Adopt double materiality. Expand materiality assessments to include community and environmental impacts alongside financial risks.
  3. Corporate governance bodies. Incorporate corporate governance bodies (e.g., management and board committees) with technical expertise on environmental justice issues and assign detailed analysis to an appropriate committee of the board of directors to oversee.
  4. Enhance accessibility. Ensure that EJ data is comprehensible and accessible to affected communities. Community metrics can be used to supplement public data and for a more complete understanding of environmental justice concerns in any specific location.
  5. Public-private partnerships. Foster collaboration between businesses, government agencies, and EJ advocates to develop integrated solutions.

The integration of EJ criteria into ESG frameworks represents an opportunity yet underutilized approach to align corporate accountability tools to tackle environmental harms faced by vulnerable communities and address systemic inequities. While the voluntary nature of ESG reporting has provided a starting point for corporate accountability in the sustainability space, the lack of mandatory reporting, and the persistence of greenwashing present solid challenges to the effectiveness of these frameworks. The double materiality approach, as adopted by the EU, has a potential to align corporate practices with EJ goals. However, the U.S. faces a long and winding road in this regard, particularly as political dynamics now threaten to undermine progress in the EJ space. Furthermore, the SEC’s climate-disclosure rules, which have already been stayed, are not expected to resurface anytime soon. Consequently, this political reality raises scepticism about the near-term feasibility of integrating EJ into mandatory ESG frameworks in the U.S. In such a polarized environment, voluntary frameworks remain the possible alternative for advancing EJ considerations in the corporate accountability space.

Nevertheless, where there are challenges, there is also room for opportunity and hope. The landscape of ESG disclosure is evolving as is the awareness of EJ issues, making essential the redefinition of corporate responsibility and empowering communities to confront environmental injustices. Many U.S. companies are still required to comply with mandatory reporting at state and international levels. The EJ/ESG integrated analysis helps corporate governance bodies promote their long-term viability through sustainable business practices while contributing to a more just and equitable society. However, it is important to stress that voluntary ESG reporting functions as an ad hoc mechanism due to its voluntary nature, and for a transparent, just, and enforceable approach, public law must ensure the creation of mandatory frameworks that incorporate metrics that address EJ concerns. 

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