Gleaning the Direction of ESG Regulation
Many businesses find that responding to today’s ESG demands is like drinking from a fire hose in an unregulated space where, in the U.S., existing laws greatly limit the release and reliance upon ESG data while all are awaiting promised government action.
As attorneys we assist companies capturing opportunities while mitigating risks, including because our ESG efforts can be subject to attorney client privilege and confidential work product, it is our focused long term experience in sustainability law that truly advantages our clients in leveraging ESG risk as a business opportunity.
There is uncertainty in this bleeding edge subject and with new statutes, codes and regulations on the cusp of enactment at the federal level, by states, as well as internationally, we track much of that for our clients. And we advise clients how they can take advantage of the best of existing laws and private sector initiatives, even those that may appear not to have direct application, to boldly tell their ESG stories. For example, we recently posted about Maryland’s new law as a Corporate Diversity Benchmark in ESG providing an ethical and low risk guide for public and non-public companies alike.
We do not need to be a futurist to know that SEC regulation in the ESG space is coming. Much can be gleaned from comments we tracked last week by SEC Chair Gary Gensler testifying by video before the European Parliament,
Today, investors in our markets increasingly want to understand the climate risks, workforces, and cybersecurity risks of the companies whose stock they own or might buy.
Thus, I have asked SEC staff to develop a proposal for climate risk disclosure requirements for the Commission’s consideration.
In considering climate-risk disclosures, I’ve asked staff to learn from other frameworks and standards, including the Task Force on Climate-related Financial Disclosures framework.
On the other side of the equation are funds. Many funds these days brand themselves as “green,” “sustainable,” “low-carbon,” and so on.
I’ve directed staff to review current practices and consider recommendations about whether fund managers should disclose the criteria and underlying data they use to market themselves as such.
I also have asked staff to pursue similar disclosure requirements with respect to human capital and board diversity.”
SEC Chair Gary Gensler
We regularly utilize The Financial Stability Board created by the Task Force on Climate-related Financial Disclosures, referred to in Chair Gensler’s testimony, to improve and increase our client’s reporting of climate related financial information. It is one of various sources of good information in the ESG space.
Moreover, the Chair’s testimony is significant in that it is at the same time the SEC is conducting an examination requiring some money managers disclose what makes a fund ESG. And that ongoing effort follows the April SEC released the results of an earlier agency examination finding that many funds identifying themselves as ESG were not.
A recent survey reported more than 84% of public company boards of directors sought outside consultants in the area of ESG disclosures. Many utilize law firms with focused experience in sustainability law, not only to aide in separating the wheat from the chaff in all that purported ‘good’ non-financial ESG information and material, but also using attorneys to focus on risk mitigation in that winnowing process. In addition, many utilize law firms to limit claims of greenwashing or making misleading ESG claims, all within a confidential setting reporting to c-suite executives of the board of directors itself.
Businesses can read tea leaves looking for the future in the splotched residue at the bottom of a tea cup or they can seek strategic counsel from attorneys, but either way mandatory green disclosures are coming.