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Keeping you in-the-know on environmental, social and governance developments

Here are good thoughts from Liz at TheCorporateCounsel.net on trends related to corporate codes of ethics:

The average length of ethics codes increased from 6,054 words in 2008 to 7,821 words in 2019, an average increase of 29 percent. Although a handful of firms defied the trend and shortened their codes, most increased by a relatively large amount. Terms such as social mediaslaverysustainabilityfootprint, and trafficking appeared not at all or only infrequently in 2008 but appeared with significantly higher frequencies in 2019.

In this “Money Stuff” column, Matt Levine points out the reasons that companies might have for going above & beyond: using the code as a management tool to minimize legal & reputational risk, using the code as an advertising tool to shareholders & other stakeholders – especially with ESG getting so much attention. Companies should exercise some caution in adding commitments, though. 

Liz points out “it’s tempting to make sweeping ESG commitments – and shareholders, employees & communities are definitely pushing for them. But companies need to be able to back up those commitments, and it may fall to securities lawyers to ask the hard questions when the code gets reviewed.”

Gaps between corporate ESG words and actions are not new, but they are becoming more public and problematic. Liz also wrote that “the SEC’s Dallas-Fort Worth office is investigating claims made by some companies who are walking a line between shareholder ESG demands and state regulatory restrictions.” She quotes from this Mintz blog:

Specifically, the SEC is “scrutinizing potential conflicts between what the underwriters have told investors versus Texas regulators about their policies on doing business with gunmakers and fossil fuel companies.” This investigation appears to stem from a recent Texas law that prohibits companies doing business with Texas state governmental entities from discriminating against firearms or fossil fuel companies. The SEC appears to be concerned about how companies may have acted in ways inconsistent with their ESG disclosures when complying with that Texas state law.

There has been much media attention about the Corporate Climate Responsibility Monitor 2022 study from the New Climate Institute showing gaps specifically in climate commitments, which are sometimes incorporated into corporate codes of ethics, and company actions so far. The bigger take-aways from that report include:

Net-zero targets aim to reduce the analysed companies’ aggregate emissions by only 40% at most, not 100% as suggested by the term “net-zero”. All of the 25 companies assessed in this report pledge some form of zero-emission, net-zero or carbon-neutral target. But just 3 of the 25 companies … clearly commit to deep decarbonisation of over 90% of their full value chain emissions by their respective net-zero and zero emission target years. At least 5 of the companies only commit to reduce their emissions by less than 15%, often by excluding upstream or downstream emissions. The 13 companies that provide specific details on what their headline net zero pledges mean, commit to reduce their full value chain emissions from 2019 by only 40% on average. The other 12 companies do not accompany their headline pledges with any specific emission reduction commitment for their that target year. Collectively, the 25 companies specifically commit to reducing only less than 20% of their 2.7 GtCO2e emission footprint, by their respective headline target years.

Companies’ uptake of readily-available emission reduction measures shows little sense of urgency. 

Companies’ plans to offset or “neutralise” their emissions are especially contentious. 19 of the 25 companies assessed already know that they will rely on offsetting for their future pledges, and only one company plans explicitly without offsets. At least two-thirds of these companies rely on carbon dioxide removals from forestry and other biological-related carbon sequestration (nature-based solutions) to claim that their emissions in the future are offset, i.e. that the impact to the climate is the same as if the emissions were never released in the first place. But these approaches are unsuitable for individual offsetting claims, because biological carbon storage can be reversed (e.g. when forests are cut and burned) and because there is a global requirement to reduce emissions and increase carbon storage, not one or the other.

What This Means

Many, if not most, U.S. companies have adopted and made public some form of corporate ethics intended as a set of guiding principles. But if those principles aren’t followed substantively, there is a significant risk for those involved. This may become particularly acute as the SEC moves forward in making ESG disclosures and enforcement a priority, and as mainstream media finds increased popularity in coverage of the topic.

Liz specifically mentions that “slavery” has gained popularity. It is a very difficult matter and I suggest caution is warranted here. There is little question that most companies find slavery abhorrent, but it is also prevalent, insidious and difficult to detect – let alone prevent. Next week, I have a member-exclusive gut-twisting piece on modern slavery from guest contributor Matthew Friedman, a global expert on modern slavery and human trafficking, award-winning filmmaker, author and philanthropist.

It would be prudent to conduct an internal evaluation – if not a detailed audit – of how your company is implementing its code of ethics at the operational level. No doubt the starting assumption is that the code is followed 100% of the time in all situations, but reality may be different, creating potential liabilities.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile