Locke Lord QuickStudy: ESG Regulation Is Coming. Are You Ready?‎

June 21, 2021

In addition to the building momentum behind environmental, social and governance (“ESG”) ‎tracking and disclosure spurred on by climate policy, activist investors, and racial justice ‎concerns, legislators and regulators are beginning to consider whether to regulate ESG and ‎climate risk reporting. Well behind their European colleagues, these nascent regulatory ‎developments will likely first apply to public companies but could set standards that could be ‎applied to all companies. ‎

On June 16, the House of Representatives passed the Corporate Governance Improvement and ‎Investor Protection Act (the “Act”). A cluster of five measures designed to increase public ‎company disclosures, the Act would require public companies to disclose the link between ‎environmental, social and governance (“ESG”) metrics and their long term business strategy ‎and the process that the company uses to determine the impact of ESG metrics on their long-‎term business strategy. The Act would also create a new Sustainable Finance Advisory ‎Committee to the Securities and Exchange Commission (“SEC”) which would recommend ‎policy changes to facilitate capital flow toward environmentally sustainable investments. The ‎Act would also require public companies to assess physical and transition risks associated with ‎climate change and describe corporate governance structures and processes to identify, evaluate ‎and disclose such information to investors.‎

Passage of the Act as structured is unlikely but it is an indication of legislative interest in ‎regulating ESG. The Act passed the House by one vote with no Republican votes and four ‎Democrats voting against. Although the Act has active White House support, this partisan vote ‎in the House makes it highly unlikely that the Act in this form would garner the ten Republican ‎votes necessary for passage in the Senate.‎

Congress is not the only authority focused on ESG and climate disclosure regulation. The Act ‎passed the House on the day after the public comment period closed on a set of questions posed ‎by the SEC on expanding climate change disclosure. In December 2020, the ESG ‎Subcommittee of the SEC Asset Management Advisory Committee issued a preliminary ‎recommendation that the SEC adopt standards by which public companies would disclose ESG ‎risks. Commissioner Allison Herren Lee has reportedly stated that the SEC would propose ‎expanded climate disclosure requirements by the end of this year.‎

It appears likely that the SEC will issue rules regarding climate change disclosure and may ‎issue standards to track and report ESG risks. While this would directly impact only public ‎companies, it would set standards to which limited partners, lenders, insurers and institutional ‎investors could potentially hold all companies. ‎

Whether by stakeholder pressure, management interest or regulatory requirement, ESG is a ‎corporate reality that every company should be preparing to address now. Are you ready?‎

Implementing ESG is more than just writing a report or a policy, although those are key ‎components. Ultimately, effective ESG is a program that requires management commitment, ‎developing and tracking metrics and an effective management structure. Although all ESG ‎programs have similar fundamental components, programs can vary substantially by industry. ‎Locke Lord lawyers have worked with clients in the energy industry, insurance and other areas ‎to perform an array of ESG services, including policy development and implementation, Board ‎and management presentation, audits, transactional due diligence and crafting effective ‎disclosures. ‎