Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comWhat Do Companies Need to Understand About ESG Disclosures?
Author: Dan Brecher|December 27, 2019
The U.S. Chamber of Commerce recently issued best practices for companies that seek to disclose information about their Environmental, Social and Governance (ESG)…
What Do Companies Need to Understand About ESG Disclosures?
The U.S. Chamber of Commerce recently issued best practices for companies that seek to disclose information about their Environmental, Social and Governance (ESG)…
The U.S. Chamber of Commerce recently issued best practices for companies that seek to disclose information about their Environmental, Social, and Governance (ESG). The guidelines are timely given that ESG has become a priority in many corporate boardrooms, largely due to the increasing expectations of investors and the public.
Momentum for ESG Disclosures
The term environmental, social, and governance refers to the three central factors used to measure the sustainability and ethical impact of an investment in a business. In terms of environmental concerns, climate change and sustainability are among the chief concerns. Meanwhile, the top social concerns include diversity, human rights, consumer protection, and animal welfare. With regard to corporate governance, employee relations, management structure, and executive compensation are key ESG concerns.
In light of recent scandals involving vehicle emissions, food safety, and sexual harassment, investors are increasingly aware that weak ESG practices can lead to legal, and reputation risks that hurt a company’s bottom line. At the same time, strong ESG practices can result in enhanced company performance.
As ESG performance has become more relevant to investors, many companies now provide their own figures and data via voluntary disclosures. According to KPMG, 83 percent of the top 100 companies in the Americas published a corporate responsibility report in 2017, along with 77 percent of the top 100 companies in Europe and 78 percent in Asia. Of the largest 250 companies globally, reporting rates are 93 percent.
ESG Reporting Best Practices
When ESG information is material under federal securities laws, public companies are obligated to include it in their filings with the Securities and Exchange Commission (SEC). However, in other cases, companies make voluntary ESG disclosures. As a result, the content and format of ESG disclosures can vary significantly.
While some have called on the SEC and Congress to enact ESG regulations, the U.S. Chamber of Commerce is hopeful that its best practices can “help steer the development of a widely-approved approach to voluntary ESG reporting without the need for additional regulatory mandates.” It also highlights that because the relevance of certain ESG factors differs from industry-to-industry and company-to-company, flexibility is important. Based on the foregoing, the U.S. Chamber of Commerce has established the following best practices for enhancing the effectiveness of ESG disclosures:
- ESG disclosure should focus on a company’s risks and opportunities with sufficient potential to impact the company’s long-term operational and financial performance in light of its business. It should also discuss the company’s approach to risk management, making the connection, to the best of their ability, between the ESG topics on which they report and the company’s long-term value creation strategy;
- Before preparing its ESG disclosures, a company should consider which audience is the intended recipient of its reports and should tailor the tone and content of its reports accordingly, particularly regarding information that would be most useful for investors or for other ESG-oriented stakeholders;
- Preparers of ESG reports should consider how best to liaise with relevant departments and functions within the company to ensure that all relevant information is collected and addressed and that diverse perspectives and inputs are accounted for. However, when it comes to determining whether information is material or not as a matter of law, that assessment should reside with a company’s legal department;
- Companies should clearly define, in plain English, technical terms and terms that do not have a universally accepted definition;
- Companies should be allowed discretion in how they report and discuss ESG information. Each company should maintain the flexibility to determine which ESG factors and related metrics are relevant to it and what disclosure is meaningful for its stakeholders and not necessarily what is identified in various third-party frameworks and standards;
- Issuers preparing ESG reports should explain why they selected the metrics and topics they ultimately disclose, including why management believes those metrics and topics are important to the company;
- ESG information should be easy for users to find, such as through dedicated ESG disclosure web pages and links. ESG reports need not be incorporated into SEC filings to accomplish this objective, nor should ESG information be required as part of an SEC filing if it is not material under the Supreme Court’s well-established definition of materiality for federal securities law purposes; and
- A company should consider including in its voluntary ESG reports a description of the company’s internal review and audit process or any external verification of the information that the company received.
Key Takeaway
Voluntary ESG disclosures can have both risks and rewards. As with all corporate disclosures, it is also advisable to work with experienced counsel to ensure that your corporate disclosures are tailored to the unique circumstances of your company.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
What Do Companies Need to Understand About ESG Disclosures?
Author: Dan Brecher
The U.S. Chamber of Commerce recently issued best practices for companies that seek to disclose information about their Environmental, Social, and Governance (ESG). The guidelines are timely given that ESG has become a priority in many corporate boardrooms, largely due to the increasing expectations of investors and the public.
Momentum for ESG Disclosures
The term environmental, social, and governance refers to the three central factors used to measure the sustainability and ethical impact of an investment in a business. In terms of environmental concerns, climate change and sustainability are among the chief concerns. Meanwhile, the top social concerns include diversity, human rights, consumer protection, and animal welfare. With regard to corporate governance, employee relations, management structure, and executive compensation are key ESG concerns.
In light of recent scandals involving vehicle emissions, food safety, and sexual harassment, investors are increasingly aware that weak ESG practices can lead to legal, and reputation risks that hurt a company’s bottom line. At the same time, strong ESG practices can result in enhanced company performance.
As ESG performance has become more relevant to investors, many companies now provide their own figures and data via voluntary disclosures. According to KPMG, 83 percent of the top 100 companies in the Americas published a corporate responsibility report in 2017, along with 77 percent of the top 100 companies in Europe and 78 percent in Asia. Of the largest 250 companies globally, reporting rates are 93 percent.
ESG Reporting Best Practices
When ESG information is material under federal securities laws, public companies are obligated to include it in their filings with the Securities and Exchange Commission (SEC). However, in other cases, companies make voluntary ESG disclosures. As a result, the content and format of ESG disclosures can vary significantly.
While some have called on the SEC and Congress to enact ESG regulations, the U.S. Chamber of Commerce is hopeful that its best practices can “help steer the development of a widely-approved approach to voluntary ESG reporting without the need for additional regulatory mandates.” It also highlights that because the relevance of certain ESG factors differs from industry-to-industry and company-to-company, flexibility is important. Based on the foregoing, the U.S. Chamber of Commerce has established the following best practices for enhancing the effectiveness of ESG disclosures:
- ESG disclosure should focus on a company’s risks and opportunities with sufficient potential to impact the company’s long-term operational and financial performance in light of its business. It should also discuss the company’s approach to risk management, making the connection, to the best of their ability, between the ESG topics on which they report and the company’s long-term value creation strategy;
- Before preparing its ESG disclosures, a company should consider which audience is the intended recipient of its reports and should tailor the tone and content of its reports accordingly, particularly regarding information that would be most useful for investors or for other ESG-oriented stakeholders;
- Preparers of ESG reports should consider how best to liaise with relevant departments and functions within the company to ensure that all relevant information is collected and addressed and that diverse perspectives and inputs are accounted for. However, when it comes to determining whether information is material or not as a matter of law, that assessment should reside with a company’s legal department;
- Companies should clearly define, in plain English, technical terms and terms that do not have a universally accepted definition;
- Companies should be allowed discretion in how they report and discuss ESG information. Each company should maintain the flexibility to determine which ESG factors and related metrics are relevant to it and what disclosure is meaningful for its stakeholders and not necessarily what is identified in various third-party frameworks and standards;
- Issuers preparing ESG reports should explain why they selected the metrics and topics they ultimately disclose, including why management believes those metrics and topics are important to the company;
- ESG information should be easy for users to find, such as through dedicated ESG disclosure web pages and links. ESG reports need not be incorporated into SEC filings to accomplish this objective, nor should ESG information be required as part of an SEC filing if it is not material under the Supreme Court’s well-established definition of materiality for federal securities law purposes; and
- A company should consider including in its voluntary ESG reports a description of the company’s internal review and audit process or any external verification of the information that the company received.
Key Takeaway
Voluntary ESG disclosures can have both risks and rewards. As with all corporate disclosures, it is also advisable to work with experienced counsel to ensure that your corporate disclosures are tailored to the unique circumstances of your company.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
