Environmental, social, and governance risks and opportunities

A Corporate Diversity Benchmark in ESG

Kaplow

We are regularly asked if there is a checklist for ESG compliance and while there is not, with promised federal regulations not yet promulgated, there is good guidance available. A limited number of companies are Maryland based, but the State’s newly enacted corporate diversity statute is a particularly good benchmark, among otherwise woolly risk factors, when seeking to mitigate risk in addressing the governance component of ESG.

Maryland House Bill 1210 which became law on May 30, 2021 without the Governor’s signature, requires specified businesses in the State to demonstrate either: (1) diversity in their board or executive leadership or (2) support for “underrepresented communities” in their mission, in order to qualify for State capital grants, tax credits, or contracts worth more than $1 Million.

“Underrepresented communities” are defined in the bill as a community whose members self-identify: (1) as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native or (2) with one or more of those racial or ethnic groups.

The bill also requires the State government to prepare an equity report that compiles diversity data relating to corporate boards, leadership, and missions.

Additionally and most significantly, the bill requires each business entity that submits an annual report to the State Department of Assessments and Taxation submit related diversity data. SDAT advises that, ..

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approximately 430,000 entities are in good standing within the state, including small, privately owned businesses that do not have corporate boards or leadership structures, so while an accurate determination is not possible, many, but certainly not all of those entities will be subject to annual reporting under this new law.

Some have questioned should this bill be legally challenged, would a reviewing court find it violates the Equal Protection Clause of the U.S. Constitution or Maryland’s Constitution. We suggest not. A number of examples of race neutral measures that promote corporate diversity already exist. For example, the Security and Exchange Commission has available on its website a self assessment tool for assessing the diversity policies and practices of entities regulated by the agency. We are aware many businesses, including public companies and not that use the SEC tool. Another high profile example is “the Rooney Rule” used by the National Football League to address the significant lack of minority head coaches in the League. The rule requires teams to interview at least one minority candidate for a vacant head coach position. At least one analysis showed this Rule increased diversity among coaches in the League.

A recent Wall Street Journal analysis said, “ESG criteria can be woolly, data is often scarce and a variety of raking methodologies makes it hard for investors to know who is spinning a story and who is walking the talk.”

Tracking a benchmark that is state statute, like Maryland’s corporate diversity disclosure law, should allow a company to make an ethical disclosure with confidence.

About the Author

Nancy Hudes and Stuart Kaplow, two Maryland attorneys who are among the principals at ESG Legal Solutions have combined forces, joining together to publish this blog leveraging their focused experience and legal knowledge for business interests in the ESG space.

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