The Verdict on ESG Disclosure: Your General Counsel Holds the Keys

Written By Elizabeth Saunders, Partner

April 29, 2021

By nature, General Counsels (GCs) subscribe to the philosophy of less is more. If you do not have anything 100% legally sound to say, better not to say anything at all.

But this can become a big problem when it comes to ESG-related statements where radio silence almost always does more harm than good.  At a time when investors are increasingly pushing companies to disseminate more information about how ESG issues affect strategy, risk, and long-term return potential, watered-down policies and an absence of any meaningful ESG metrics will not be well received. Companies that are too timid to set aggressive future goals that could potentially go unmet will pay the price today in the form of lower ESG scores and potential alienation of key investors.

Find the middle ground.

Because ESG disclosure can and has opened the door to significant litigation and liability risk for some companies, counselors have to walk a fine line. They must ensure that appropriate care and diligence are exercised in a way that does not overly sterilize the company’s ESG message.  

The good news is, in most cases, ESG disclosures are not concrete or measurable enough to form the basis of a misrepresentation claim. Instead, the court tends to recognize that these statements are made voluntarily, that they are not externally validated, and that the intent is to communicate to customers, investors, and employees that the company acts responsibly.

For example, in the Bondali v Yum! Brands case, words like “our commitment to strict food quality and safety standards” and “food safety is a primary responsibility” were seen as “vague, subjective assertions” and held “no obvious objective meaning to a reasonable investor”. And in Re Sanofi, the court referred to the defendant’s touting of its “trustworthy” culture and commitment to “integrity” as “corporate puffery.” The court ruled that Codes of Conduct are “inherently aspirational” and thus cannot be relied on by a reasonable investor and the subject of securities litigation.

That said, companies can and do still get into trouble when it comes to ESG. Take Massey Energy’s hyperbole around being an “industry leader in safety” when, in fact, its accident and fatality rates were higher than the national average. The courts tend to view such language as statement of existing fact. As such, it can form the basis for securities fraud action litigation.

4 Ways GCs Can Support Legally Sound ESG Disclosure

ESG can be a bit of a grey area, and that can, understandably, make GCs a bit uncomfortable. But ESG cannot be ignored. The SEC is calling for enhanced disclosure around human capital and clearly telegraphing to expect some type of mandated corporate climate disclosures in the near future. Major institutional investors are upping the stakes on climate standards as they work to ensure their own portfolios are net zero by 2050 or sooner. In this environment, GCs must play a role in supporting rather than hamstringing the company’s ESG efforts.

Here are four ways for counselors to do that responsibly:

  1. Push through changes to Board Committee charters to address key ESG issues.
    • As specific ESG issues like board oversight, cybersecurity, and board diversity commitments gain new steam, GCs can help ensure the company’s policies in these areas are clearly reflected in the corporate charter.
    • At a minimum, be sure that the charter clearly states:
      • Which specific committees are responsible for overseeing various ESG efforts along with an overview of the initiatives. See Clorox Company’s Nominating and Governance Charter.
      • An updated IT security policy that addresses recent changes related to COVID-19. This is especially critical for those operating in the retail and technology industries, although Annaly on the financial services side did this well (pg. 25).
      • An overall statement on board diversity and recruiting commitments aligned with mandates like the Thirty Percent Coalition mandate as Centene committed to.
  2. Upgrade proxy disclosures.
    • Now is the time for GCs to encourage a greater level of transparency and detail in the proxy statement. With COVID-19 continuing to impact businesses (specifically those with more European based operations), using the CD&A to provide robust, thoughtful discussion around the pandemic and its ongoing implications for compensation plans remains imperative. At the same time, counselors can help companies stay in front of forthcoming mandates by starting conversations around how to incorporate specific and measurable environmental and social KPIs into a long-term compensation strategy.
    • GCs can also lay the groundwork for climate change policy disclosure. Ultimately, best-in-class disclosures will include quantifiable targets and impact scenarios. But it is okay to begin with a statement that addresses climate change as a real risk, isolates the portions of your business that are truly potentially in peril, and begins to discuss strategy development for addressing and mitigating risks. GCs can help lead these conversations and ensure they stay on track.
  3. Align 10-K and ESG reporting.
    • If you do use a Materiality Assessment in your ESG report, be very clear on what you mean by materiality. According to securities laws and regulations, companies are prohibited from omitting material information from the 10-K and 10-Q. If your company’s ESG Materiality Assessment seeks to report something other than materiality as defined by the SEC, clarify what you mean (e.g., an assessment of key stakeholder perceptions on materiality). Internal definitions and external reporting on ESG and materiality should always align.
  4. Push for off-season engagement.
    • ESG needs to be a priority even when it is not proxy season. First and foremost, the GC can help keep issues front and center by staying current on ESG news, topics, and mandates. Tools like ESG Infinite give counselors a one-stop shop for the latest ESG updates and resources. Counselors can also play a role in understanding industry materiality reporting and the specific ESG factors that are most critical to their companies. And they can encourage board members and executives to follow suite.
    • Arranging or facilitating off-season meetings between board members or senior managers and ESG stewardship and compliance officers from key institutional investors is another good move. These conversations can be great opportunities for company leaders to hear first-hand from their investors and learn where their ESG efforts are strong and, more importantly, where they are lacking. The company can use the engagements to discover what, exactly, investors want to hear and see more of going forward. GCs can help ensure the feedback from these meetings is leveraged to shape company responses to social and political issues and ultimately increase shareholder engagement percentages.

GCs hold the keys to ESG strategy.

In so many ways, GCs are at the heart of a company’s ESG communications. They manage up to board directors, who have a right to be concerned about their oversight responsibilities and their potential personal liability for any ESG claims the company makes. And it is usually the GC who ultimately gives the yea or nay to the HR, operations, and communications personnel as to what they can and cannot say in the ESG statements. Those GCs who take a proactive stance and who commit to the importance of ESG can play an instrumental role in helping their companies share a compelling, transparent, and legally-sound ESG narrative.

If you want to learn more about how Clermont Partners can help elevate your ESG program, contact us.

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