ESG reporting: Why you need to care
If you think “ES what?” when you hear ESG or Environmental, Social, and Governance reporting, you are not alone. You are likely familiar with aspects of ESG like climate change and corporate social responsibility. ESG reporting is now front and center for publicly traded companies because of recent announcements by the Securities and Exchange Commission (SEC), the White House, and a proposed bill before Congress. But, understanding ESG should be on the radar of every business, not only publicly traded companies.
What is ESG reporting?
ESG reporting aims to provide more transparency into a company’s management of ESG risks and opportunities for the benefit of investors and other stakeholders. Depending on the size and nature of the company or organization, ESG reporting generally reflects some or all of these categories of non-financial-based information:
|-Climate change and greenhouse gas emissions|
-Deforestation, biodiversity, and nature loss
-Waste management and reduction
|-Diversity and inclusion|
-Labor standards, pay equity, wages, and benefits
-Health and safety
-Talent management and training
-Discrimination, harassment, and human rights
-Supply chain management
|-Governance body composition|
-Stakeholder engagement on material issues
-Anti-corruption and legal compliance
-Internal reporting mechanisms and ethics
-Strategic sustainability oversight and risk management
-Political contributions and lobbying
ESG reporting for publicly traded companies
The Biden Administration has brought increased attention to ESG reporting obligations through a number of initiatives that directly impact publicly traded companies. This increased attention on ESG reporting will affect companies large and small regardless of whether they are publicly traded.
Current SEC Requirements: Over 10 years ago, the SEC took the position in its 2010 guidance, “Commission Guidance Regarding Disclosure Related to Climate Change,” that legislative, regulatory, business, and market impacts related to climate change, as well as significant physical effects of climate change, have the potential to materially affect business and operations, triggering SEC disclosure requirements. Some companies provided quantitative and qualitative analysis of climate change risks, while other companies – even in the fossil fuels industry sector – provided no disclosures of climate risks.
SEC Actions: Through several actions and announcements this year, the SEC has signaled its intention to up the ante for mandatory ESG reporting.
- In March, the SEC opened public comment about whether existing disclosures are adequate to inform investors about known material risks, uncertainties, impacts, and opportunities, and whether greater consistency is needed.
- In July, SEC Chair Gary Gensler stated he asked SEC staff to develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration. Recent information indicates the rules could take effect as early as 2022.
- In September, the SEC sent letters to numerous companies, primarily those in the oil and gas sector, questioning the validity of previous climate-related disclosures or the absence of such disclosures. These letters and the sample letter SEC published will apply even greater pressure, in advance of mandatory ESG Reporting requirements, on publicly traded companies to consider and report material climate change risks.
Congressional Action: On June 16, 2021, the US House of Representatives passed HR 1187 (the ESG Disclosure Simplification Act of 2021). If enacted, HR 1187 would impose ESG due diligence requirements on publicly traded companies, requiring them to disclose their commitments to manage ESG risks, including those associated with their operations and supply chains.
White House Executive Order 14030 on Climate-Related Financial Risk directs federal agencies to evaluate and mitigate risks from climate change as part of a comprehensive, government-wide strategy.
Potential reporting requirements for non-publicly held business
Once the new SEC rules are in effect, privately held companies and other organizations may well face external or internal pressure to voluntarily engage in ESG reporting, including:
- The Federal Acquisition Regulatory Council and various federal agencies are considering whether to require federal contractors to disclose greenhouse gas emissions and climate-related financial risk, pursuant to Executive Order 14030. Climate change risk reporting may become a condition of doing business with the federal government.
- More and more, publicly traded companies are requesting business partners and suppliers of goods and services to report ESG information. Law firms, accounting firms, and other service providers now routinely receive requests from their publicly traded clients to provide ESG information. And, the requests may go beyond tracking and monitoring to a condition of doing business.
- Many companies and organizations (even universities and churches) have started collecting and reporting ESG information to remain competitive. This is especially true of US-based companies operating in Europe where mandatory ESG reporting requirements are being expanded.
- Adopting ESG standards is good for business by lowering the cost of capital, improving operational and market performance, and attracting workforce talent, according to a study reported in the Harvard Business Review.
- Customers, clients, and stakeholders will continue to increase pressure on companies and organizations to compile and disclose ESG information.
Potential risks of voluntary and mandatory ESG reporting
Publicly traded companies are exposed to risks associated with ESG reporting, including shareholder derivative actions and securities fraud claims flowing from disclosure of climate change impacts. For example, Exxon is currently defending allegations brought by a plaintiff pension fund and other shareholders alleging that the company made intentional material misstatements regarding financial implications of specific projects with climate change implications. Mandatory SEC ESG disclosure requirements could increase these types of lawsuits for companies in the fossil fuel and extractive industries, and other industry sectors that contribute to greenhouse gas emissions.
Other companies, whether or not publicly traded, are exposed to “greenwashing” and false advertising claims under federal and state consumer protection laws and other legal theories, which can arise from misleading information about the environmental benefits of products and services. This year, Greenpeace and other organizations filed FTC complaints claiming that Chevron overstated investments in renewable energy and its commitment to reducing fossil fuel pollution.
Compelled by stakeholders, business partners, and market pressures to commence ESG reporting, companies and organizations may face the challenge that no uniform, reliable, or widely accepted ESG reporting standards currently exist, leaving them to rely on or adapt a hodgepodge of ESG guidance and frameworks. Legal risks arise now that regulators of companies in highly regulated industries routinely review and compare a company’s voluntary ESG reports with regulatory submissions.
ESG reporting is on the horizon and companies should consider investing in developing internal ESG competency as part of proactive risk management. Engaging outside ESG consultants to help develop ESG capability and create accurate, balanced, and transparent reporting can go a long way to accurately identify and mitigate the risks of ESG reporting. Involving experienced legal counsel to evaluate ESG risks also should become standard practice.
To explore the current state of ESG standards, unpack ESG metrics, ESG reporting, and risk management, join Holland & Hart attorneys, experienced ESG practitioners, and industry experts for a one-hour Utah Business webinar at noon, October 27. Click here to register.
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