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.
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