Kaufman Dolowich & Voluck, LLP
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September 24, 2021: Corporate stakeholders have a new normal to deal with, as influential investors and, more recently, some regulators, have pushed corporate boards and executives to consider their own environmental, social profiles. and governance (ESG) of their companies and implement plans to be more sustainable and impactful. Regardless of the moral imperative, corporate leaders recognize the potential investment, regulatory, and legal risks of doing nothing when addressing issues such as climate change, diversity, and inclusion, or corporate transparency.
The focus on environmental issues (specifically, climate change, the use of energy and sustainable materials, and other environmental management practices) began to receive more attention at least a decade ago. There was also a tendency to extract greater corporate transparency and the adoption of rules and policies to protect oneself from corporate wrongdoing and to protect whistleblowers. But more recently, with numerous social justice events in the news and at the forefront of major policy debates, corporate leaders and risk managers are engaged in understanding their companies ’response to diversity and inclusion, sexual misconduct, consumer protection, working conditions and other human rights issues.
With good reason. Of course, it is first and foremost the important thing to do. But in addition, these ESG factors now weigh more heavily on investors ’decisions about whether to invest or stay invested in a particular company.
In July 2020, the U.S. Government Accountability Office released a report on ESG disclosure among public companies, which showed that of the 14 institutional investors interviewed, 12 said they were actively exploiting information on ESG issues to better understand the risks that could affect the company’s financial performance over time. . This means that companies will continue to see increased demand for broader corporate disclosures about ESG assessments and plans. And as the regulatory landscape expands around various ESG issues, investors now use ESG outreach to control ESG risk management by companies, make stock purchase decisions, report their vote at shareholders ’meetings or even filing lawsuits for allegedly false disclosures.
Increased shareholder interest in ESG factors has led to changes in shareholder activism. Even small activist investors have found success in conducting ESG-focused campaigns with the support of larger institutional investors. In one example, after the annual shareholder meeting of Exxon Mobil Corporation in May 2021, a small activist investment firm that owned only a 0.02% stake in Exxon won three of the 12 seats on the board of Exxon Mobil Corporation. Exxon after a representative fight based on the activist’s claim that Exxon had not developed any appropriate business strategy around climate change. The activist investor seemed to garner the support of many large investors, including BlackRock, State Street, Vanguard, CalPERS, CalSTRS, and the New York State Common Retirement Fund, to name a few.
Regulatory scrutiny of ESG issues is also intensified. On May 20, 2021, President Joe Biden signed Executive Order no. [g]comprehensive-scale strategy “on, inter alia, climate-related financial risk, which expanded on climate-related efforts by federal regulators, including the U.S. SEC, the Federal Trade Commission, the Commission of Commodity Futures Trading, the Office of Consumer Financial Protection and the Federal Reserve Reserve.
Earlier this year, the SEC announced the creation of a working group on climate and ESG in the enforcement division. The SEC said the task force will develop initiatives to proactively identify ESG-related misconduct and coordinate the use of sophisticated data analysis to identify potential violations, in line with increased attention. and investor reliance on climate and ESG-related outreach and investment.
At a keynote address at the 2021 National Corporate Governance Society Conference, SEC Commissioner Allison Herren Lee remarked, “We should consider whether public promises on ESG issues are really backed by action. This is part of my message … this substantial consideration of ESG should be significantly integrated into board oversight … [a]and why I have previously suggested that our disclosure regime should provide investors with the right information to prove public commitments like these. “
Federal officials are not alone. State attorneys general, led by those in New York and California, implore the SEC to address broader ESG disclosures about climate-related financial risks.
California passed a law last year that now requires state-owned publicly owned companies to include members of the underrepresented community board in late 2021. This law followed the 2018 approval of another bill that required California-based public companies to have at least one woman on their boards by the end of 2019, with future increases needed based on the size of the board.
And in early 2021, several years after launching the “Boardroom Project Accountability Project” to persuade listed companies to adopt policies that require the consideration of women and people of color for all open board seats and to at CEO appointments, New York City controller Scott Stringer used the power of the bag to make a loud and clear ESG investment statement. The controller disbursed $ 4 billion in money from the New York City pension fund of fossil fuel companies in what the controller described as “one of the largest divestments in the world.”
ESG-related demands are also on the rise, ranging from diversity, equity and inclusion and #MeToo-related litigation on the social front, to litigation over the role of companies in global climate change in the environmental aspect. According to a database maintained by the Sabin Center for Climate Change Law at Columbia Law School, there are more than 2,100 climate change-related lawsuits pending in courts around the world. Some of them are successful.
In May 2021, for example, a Dutch court ordered Royal Dutch Shell plc (Shell Oil) to reduce its global carbon dioxide emissions by 2030 by at least 45% compared to 2019 levels, which far exceeded the commitment existing to reduce emissions. It is believed to be the first time a court has ordered a private company to comply with the 2015 Paris climate agreement.
Several large public companies have already been sued for diversity derivatives lawsuits at the board, while others have faced supply-side litigation and supply chain risks involving human rights and labor issues. infantile.
With the SEC’s attention to the disclosure of ESG and materiality issues, alleged material inaccuracies and omissions related to the ESG could lead to SEC enforcement proceedings and civil value litigation under section 10 (b ) of the Securities Exchange Act of 1934. And to the extent that companies could incorporate ESG disclosures into public offering documents, any alleged ESG-related inaccuracy in this context could lead to securities actions of the issuer under of section 11 of the Securities Act of 1933.
Corporate risk managers and D&O insurers could expect increased claims activity for ESG-related challenges. Like the event-driven litigation advocates we saw with the opioid crisis and data privacy violations, for example, lawsuits arising from significant natural or environmental disasters, super storms, and social events like the #MeToo movement are about to increase. .
But while these “bad news” events that are not directly related to financial results may be difficult to predict, business decision-making processes that evaluate your ESG could mitigate lawsuits arising from perceived governance standards. , product problems, supply chain exploitation, etc. risks and adopt policies to combat them. With a focus on ESG-related issues, companies and their leaders should be expected to conduct a thorough review of all types of risk that may affect their insurance coverage and review the relevant provisions of their D&O policies. .
Activism generates change, in the boardroom and on the streets. Corporate ESG risks will continue to become more visible as shareholders and regulators pressure corporate leaders to recognize their risk profiles and adopt policies to manage those risks. Dealing with ESG issues will save companies time, money and probably heartache in the long run, and will allow companies to plan successfully and be sustainable and impactful.
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