The exploding interest in environmental and social impact and corporate governance (ESG) has inspired new regulations for nearly every level of government within the United States, primarily focused on corporate disclosure requirements. These requirements are similar to measures already in place or under consideration in the EU and other jurisdictions in which many American companies operate. Disclosure-based ESG regulations allow stakeholders—including investors, consumers, and employees—to make informed decisions about the risks to people and the planet created by a company’s operations and the operational and financial risks posed by climate change. Therefore, companies must be aware of and address the potential long-term impact of ESG issues on their outlook for the future.
Confronting Multiple Regulations and Reporting Frameworks
While US lawmakers and regulators are moving quickly to adopt ESG regulations, companies must move equally fast to identify, measure, and track environmental impact. Because there is no universally accepted reporting framework for this information, multiple third-party reporting frameworks have emerged and are being incorporated into ESG regulations, including those developed by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD). While companies familiar with these frameworks through incorporating responsible business practices into their operations are currently at an advantage, all businesses face a moment of great complexity as they confront multiple regulations and frameworks to provide stakeholders with required and much desired ESG information.
ESG regulations are often based on the traditional business theory that you can’t manage what you can’t measure. Information gathered for compliance, therefore, opens the door to changes that mitigate climate and social risks from operations, as well as climate and social risks to operations. While a great deal of work lies ahead, the opportunity for great insight into business practices will allow counsel to help companies rethink their impacts and plan to return long-term value to all stakeholders.
The US Securities and Exchange Commission’s work to develop rules for mandatory disclosure of environmental and social impact and enhance disclosure requirements of governance practices (e.g., Proposed Rule 33-11042) is the most notable recent development in the ESG regulatory space. The proposed rule would shift corporate disclosure regulations closer to many EU member states (see the European Commission’s website on Corporate sustainability reporting).
State Legislators and ESG
In addition to the federal government, state legislatures are also very active in ESG. California, a leader in environmental and social regulation, made the Transparency in Supply Chains Act effective in 2012, requiring large retailers and manufacturers to disclose information about forced labor within their supply chains. States have also begun devising industry-specific regulations, exemplified by New York’s Fashion Sustainability and Accountability Act, proposed earlier this year (2022). The Fashion Act would create detailed ESG reporting for apparel and footwear companies of a certain size and could be expanded to cover similar industries in the future.
Third-party reporting frameworks are woven into the many disclosure laws, increasing the complexity of today’s regulatory environment. In the context of financial disclosure, there is a great deal of attention on the SASB and TCFD models, both of which touch on the nexus between sustainability efforts, climate risk, and material financial impacts. Proposed laws like New York’s Fashion Act would require companies to take a more holistic view of ESG-related issues by adopting and reporting on science-based targets and due diligence procedures consistent with, among others, the UN Guiding Principles for Business and Human Rights.
Lawyers Will Be the Heart of This Work
Adapting to a new regulatory environment and understanding the soft law standards incorporated into new laws presents a significant challenge and an opportunity. Responding to legislation that requires the integration of this kind of assessment, reporting, and disclosure framework requires lawyers to understand their clients in great detail while not losing sight of the ultimate purpose of these regulations: to provide clear and useful information to stakeholders about the risks the business faces from operations, as well as the systemic risks posed by the climate crisis. Because lawyers will be at the heart of this work, we have the chance to add value to the people, planet, and profit goals for our clients in a new way.