Wednesday, March 10, 2021
Company disclosures of climate related risks and opportunities will receive increased scrutiny from regulators, and new climate risk reporting rules may soon be on the horizon, in light of recent Securities Exchange Commission (SEC) announcements and other legislative actions.
President Biden has announced climate change as a top priority, and the SEC is likely to be an important tool to achieving the administration’s climate objectives. The SEC has indicated that it will be reviewing the adequacy of existing corporate disclosures of climate-related risks, whether additional SEC guidance is needed, and whether additional prescriptive climate reporting rules need to be adopted.
This paper attempts to provide a definition and context for the term,
Environmental, Social and Governance (“ESG”), explain how and why it is used, demonstrate how investors are driving the proliferation of ESG reporting, illuminate how investor reliance on ESG information creates new risks for reporting companies, and suggest steps attorneys can take to help mitigate the risks. This paper also provides a short summary on some hot topics in the ESG world.
I. The Evolution of ESG Disclosures
A. What is ESG?
In basic terms, ESG is a collection of information about a company’s operations in three broad areas of activity: Environmental, Social and Governance. It is data-based as well as narrative, and typically static or backward-looking. Increasingly, ESG reporting is goal-oriented and aspirational. Oftentimes, ESG is used interchangeably with the term “sustainability.”