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Environmental, social, and governance risks and opportunities

The ABCs of ESG

Stuart Kaplow

Whether you own a small private business, serve on the board of directors of a public company or are a lay leader at a religious institution, you must know the essential facts and details about ESG.  ESG is an acronym for “environmental, social and governance.”  This blog post details the most basic and fundamental elements of the emergent and fast evolving ESG in 2021.

As a threshold matter, ESG means using Environmental, Social and Governance matters to evaluate a business.

These non-financial factors, that may be far from traditional SEC required disclosures of matters of material impact, are utilized to evaluate business risks and opportunities. There are no federal laws and few state laws mandating matters of ESG, but the Biden Administration has repealed enforcement of existing regulations that prohibited the use of ESG factors and has promised new statutes that will mandate ESG disclosures.

There is no one right set of factors for each individual company on how to mitigate risks and maximize opportunities with respect to ESG issues. These are complex, evolving and, in some instances, highly charged issues, but what is clear is that businesses must not only be cognizant that ESG exists, but in 2021, must act. And while there is no standard set of defined terms…

ENVIRONMENTAL: The environmental factor in ESG examines how a business, whether a public company or held privately or for that matter a not for profit, performs as an agent of its surrounding natural environment.  That may include a company’s energy use, waste, natural resource conservation, treatment of animals, deforestation, and more.  The environmental factors can be used to evaluate risks a company might face and how the company manages those risks.  We have worked with public companies for more than a decade in responding to the SEC’s 2010 climate change guidance that identifies disclosure obligations and that is often a good starting place for this analysis. We have assisted other businesses in repurposing Phase l Environmental Site Assessments as a third party prepared compilation of factors assembled in accordance with federal law.

SOCIAL: The social factor looks at a company’s business relationships including how it treats its employees and others it has a relationship with.  It focuses on employee relations and diversity, working conditions, health and safety, employee dispute resolution, and more.  The following questions can be asked when evaluating the social criteria of the ESG analysis:  Does a company work with vendors that hold the same values as the company claims to hold? Does the company donate a percentage of its profits to the local community or encourage its employees to perform volunteer work in the community? Do the company’s working conditions show high regard for its employees’ health and safety? We have worked with businesses that have updated employee policies and handbooks to reflect changing social factors. And as companies look to their supply chains for matters of human rights and slavery (required in Great Britain, but not yet in U.S. law), one of the hottest matters we have recently been asked about is how to address solar panels from China’s Xinjiang region.

GOVERNANCE: The governance factor examines how a company manages itself and how the company is governed.  This piece focuses on board diversity, tax strategy, executive compensation, corporate donations, political lobbying, corruption and even bribery. We well recognize a limited number of companies are California based, but the state’s corporate diversity requirements are particularly good to measure against. We have only recently utilized it to measure against, and likely a better yardstick for public and private companies alike, is Maryland’s new corporate diversity law that includes multiple requirements for reporting diversity data.

ESG is not as simple as the ABCs, but it is quickly becoming nearly as widespread in application as the Latin letter alphabet in the business world. ESG are factors used to evaluate company behavior today in order to predict future financial performance, and much more. Posts on this blog will educate the unknowing.

We offer turnkey ESG services, law and non-law that will assist your business in mitigating risk and securing opportunities. If you have questions or if we can be of assistance in the ESG space or otherwise in a matter of sustainability, do not hesitate to reach out to us.

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