Among public company directors’ many obligations is mitigating ESG-related risks to the company, but as ESG columnist John Peiserich points out, in many organizations that means thinking about the environmental implications and not much else.
Former SEC Commissioner Allison Herren Lee gave an incredibly insightful keynote address at the 2021 Society for Corporate Governance National Conference and spoke to the expanding responsibilities of boards with respect to risk oversight and disclosures involving ESG issues. Lee, who focused on ESG issues during her time at the SEC, provided focus to board members about the obligations they have. It is worth highlighting her thoughts:
“Boards also play an important role in the oversight of other types of disclosures made outside of financial statements. These disclosures may also implicate ESG considerations. For example, the SEC’s 2010 climate guidance identifies multiple existing disclosure requirements, most prominently Management’s Discussion & Analysis, that may give rise to climate disclosure obligations. The SEC’s recent update to Regulation S-K’s Item 101 specifically identifies human capital as a potentially material disclosure topic. And there is a requirement under item 407(h) of Regulation S-K for disclosure of the board’s role in the risk oversight of a company, which in many instances could include climate change risks. These are just a few of the currently existing federal requirements that implicate board involvement and engagement on climate and ESG.”
As Lee pointed out, these are only some of a board’s obligations. The S-K Item 101 update mentioned above is an excellent example of just how broad ESG obligations can be. These broad ESG obligations can lead to novel liabilities.
Liability for directors
In addition, novel litigation around directors’ liabilities for failing to follow their statutory ESG duties is just starting to appear. Just this year, ClientEarth, an NGO and shareholder in Royal Dutch Shell, gave notice of a derivative claim — one on behalf of the corporation — against the board members for failing to act in accordance with their general duties found in Sections 170 through 177 of the UK’s Companies Act 2006.
ESG keyword frequency in S&P 500 company filings
HSBC Holdings published an interesting analysis of the references to certain ESG keywords in the annual filings of S&P 500 companies and the changes between 2014 and 2020. As expected, references to ESG keywords have gone up. The “E” references are substantial, “G” references are less so and “S” references are only a fraction of the overall keyword references. The keyword search in the annual filings reveals that “E” references are more substantial but that companies and their boards may need some additional focus around social and governance issues.
Lee’s comments around human capital reminds the industry that “S” and “G” deserve the same treatment as “E.” These issues may just have harder-to-define metrics that the accountants and engineers have more difficulty qualifying and quantifying.
Parametric insurance, which has long been popular in disaster recovery, is gaining steam as a proxy for proving the effectiveness of ESG programs. Nir Kossovsky and Denise Williamee of insurer Steel City Re explore details of this novel ESG solution.
Parametric insurance, which has long been popular in disaster recovery, is gaining steam as a proxy for proving the effectiveness of ESG programs. Nir Kossovsky and Denise Williamee of insurer Steel City Re explore details of this novel ESG solution.Read more
History of ESG enforcement
Although the SEC founded its Climate and ESG Task Force in the Division of Enforcement in March 2001, examples of SEC’s enforcement around ESG goes back almost 15 years. SEC’s enforcement was traditionally focused on fraud, more recent charging papers relate to omissions and misstatements concerning ESG issues. While many SEC enforcement actions involve less sophisticated broker-dealers, some of the largest companies have also found themselves subject to charges for ESG issues.
Social media and further discussion
The examples above are certainly not the only ESG areas the SEC finds interesting. The Nikola rolling truck video and its CEO Trevor Milton’s social media activities drew the ire of the SEC. Interest in how a company interacts with the public on social media has resulted in the SEC providing guidance for both the companies themselves and the registered investment advisers that routinely interact with the public. Ultimately, the SEC’s focus on ESG enforcement and the related board obligations will be sure to keep ESG issues at the forefront of high-level corporate discussions.