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A basis for research and practical guidance focusing on federal securities laws, compliance & corporate governance.

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An educational service that provides practical guidance on legal issues involving public and private mergers & acquisitions, joint ventures, private equity – and much more.

CompensationStandards

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The “one stop” resource for information about responsible executive compensation practices & disclosure.

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PracticalESG

PracticalESG.com

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

I have to admit I didn’t think the water would get deeper than it was last year. By “water,” I mean the sheer volume of ESG reports, articles, analyses, opinions and topics being published. Last summer, I wrote about dealing with the “tsunami” of ESG information at that time – and earlier this year, I posted a new checklist giving specific guidance on identifying and prioritizing ESG reading material. Both of those resources are still very relevant today, but last Friday’s blog got me thinking about how ESG has changed just in the past six months – and what might that mean going forward.

Where ESG Has Gone

A partial list of significant new (i.e., within the past 6 months) turns I’ve noticed include:

  • Reasonable questions as to whether manufacturers of weaponry are appropriate to include in ESG investment portfolios when their products are used to defend against unprovoked aggressors.
  • EU climate initiatives and public policies pulled back in order to extend the use of fossil fuels due to implications of Russian oil and gas sanctions.
  • Certain countries actively buying sanctioned Russian crude because of compelling economics (buying at 30% below market value), calling into question those countries’ commitments to human rights issues.
  • U.S. states and the EU implementing consumer energy cost controls and tax rebates to manage the impact of energy cost inflation on households – an indicator that policymakers may not be ready to back alternative energy programs with higher cost than fossil fuels.
  • Wider adoption of corporate ESG performance metrics in not only executive compensation, but also employee compensation programs. Liz blogged about that recently on CompensationStandards.com.
  • Record hiring and salaries for Chief Sustainability Officers (CSOs) – albeit some companies may run the risk of this turning into a performative exercise, especially if the CSOs don’t have the support they need.
  • Three new meaningful ESG disclosure standards under development at the same time (ISSB, EFRAG and the SEC), all with some overlap but also important differences.
  • Heightened realization of the fraud risks associated with nature-based – mainly forestry – carbon offsets.
  • As of Sunday May 8, more than 9,075 written comments had been submitted to and published by the SEC on their climate disclosure proposal. Of these 972 are unique submittals with the remaining 8,100+ falling into eight separate form letter types.

What Might Be Ahead

Some of my predictions as to what ESG practitioners might face in the next 6 to 12 months:

  • The reality of public outcry/pushback about increased energy costs to fund low carbon energy transition may begin to erode those plans and assumptions. The Ukrainian situation will have a profound effect on continued use of fossil fuels.
  • Fragmentation of U.S. legal foundations for human rights – going from a consistent federal structure/definition to individual and differing states rights, potentially subject to much greater politicization.
  • Greater international distrust of certain countries’ public ESG policy commitments based on how they responded to Russian sanctions and embargoes, which may escalate into significant trade barriers beyond ESG issues.
  • After a honeymoon period, high-dollar CSOs will be squeezed to demonstrate their worth, or be forced to re-enter the job market. CSOs that were hired only for window dressing will find themselves among the first wave of staff reductions when economic conditions change. Of course, the big question is (and always has been) – how do you demonstrate your value to the company in economic terms?
  • Finalization/promulgation of at least two currently proposed ESG disclosure standards by the end of 2022.
  • The SEC’s climate disclosure may be finalized by the end of 2022 as well, but there is a possibility it will be delayed either due to an extension of the comment period or litigation.
  • Companies increasingly recognizing ESG in operational terms (revenue drivers, new markets/products, margin improvement and real cost reductions) rather than as a generalized risk (i.e., reputational risk) or as directly connecting to alpha in share price/capital markets.
  • A move away from forestry offsets, or at least more questions about their use – with a concurrent reemphasis on direct GHG emissions reductions and carbon removal technologies.

What You Can Do

The first step is to stay up-to-date on developments relevant to your company, customers, capital markets, compliance requirements and public sentiment. There are a variety of ways to do this. You can spend your own time swimming against the information tide, push to add headcount, and/or engage external counsel or consultants to do so at hourly rates. Not to toot our own horn, but continuing to follow this blog is a great way to stay ahead with practical, relevant and credible info, so that you can use your time and resources efficiently.

Even then, companies need to assess the information, make decisions about what it may mean and develop plans to address risks and opportunities. One approach to this is already rather popular – materiality assessments. My opinion of the current state of materiality assessments is that they are frequently performed once per year – and then primarily for the purpose of ESG reporting. If the past 6 months is an omen of what to expect in the future, companies should seriously consider semi-annual or potentially even quarterly reviews of/updates to those assessments and linking the outcomes directly to operating strategies.

To support successful outcomes, all levels of the company need to have appropriate awareness and training, especially where the corporate culture requires meaningful change to adopt an ESG-forward stance. Employees and management must be encouraged and feel empowered to make decisions – possibly contrary to the historical corporate culture. Incentives may need to change to reflect the new culture as well as changes in the ESG landscape. We will be continuing to report on expectations and practical ways to move forward – including at our “1st Annual Practical ESG Conference” – happening virtually on October 11th. Sign up today to take advantage of the “Early Bird” Rate, which expires soon!

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The Editor

Lawrence Heim has been practicing in the field of ESG management for more than 35 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 at the height of regulatory development, working across a range of disciplines. He was one of the firm’s leading environmental compliance and management… View Profile