By Sarah Morgan, Matthew Dobbins, and Jon Solorzano of Vinson & Elkins
Advocates of environmental, social, and governance (ESG) issues endured a difficult 2023: major asset managers pulled back from climate commitments, more than a dozen states passed anti-ESG legislation, growth in board diversity slowed, and fossil-fuel production rose.
Yet despite reports of ESG’s impending doom — including some pushing for a rebranding, perhaps to something less politically charged like “responsible business” — the issues encompassed in the three-letter acronym remain deeply important to consumers, regulators, and shareholders alike. Of the many ESG-related priorities that companies will need to focus on in a complex 2024, three stand out.
1: Climate Disclosure — Getting the House in Order
At the global, national, and state levels, the web of ESG disclosure regimes continues to grow more complicated and conflicting. And in 2024, thousands of companies will need to prepare for compliance.
Consider new laws in California, which will require many large companies “doing business” in the state to verify and disclose their greenhouse gas emissions (Scopes 1, 2, and 3), and to prepare public reports in the coming years on their climate-related financial risks and efforts to mitigate them.
The first reporting under the laws will be due in 2026. And absent successful legal challenges, very few large companies (public or private) will be able to escape them. Indeed, while the laws do not define “doing business,” California’s legislative history — and words from a sponsor of the laws — indicate that the state’s application of the phrase will be expansive. California will also subject companies that participate in markets for voluntary carbon offsets to additional reporting obligations, with first reporting likely to be due by January 1, 2025.
Even companies that seek to sever ties to California might not find much relief. For example, New York and other states could follow California’s lead, the SEC has pegged its final climate disclosure rule for April, and — for companies operating in the European Union — application of the Corporate Sustainability Reporting Directive begins this year.
Complicating matters further, shareholders continue to demand that companies disclose more about their greenhouse gas emissions, and the volume of ESG-related proposals this proxy season will likely remain near an all-time high.
In this pressure-packed environment, companies must ensure that the ESG-related data they report is accurate, complete, and precise — both to satisfy regulatory requirements and to respond to shareholder demands. This means establishing processes for collecting, verifying, and disclosing ESG-related data, as well as managing the associated risks.
Implementing robust internal controls at a company will also be essential, as will collaborating across departments, conducting rigorous due diligence, and negotiating supplier agreements to ensure that validation and indemnification are in place.
2: DE&I — Reviewing Policies and Programs
The Supreme Court’s decision to strike down race-based affirmative action programs in college admissions does not directly impact corporate diversity, equity, and inclusion (DE&I) programs. Yet it has sharpened scrutiny of these programs, and sparked challenges from their opponents, including activist investors, state attorneys general, and private litigants. The anti-DE&I climate has also spilled into other high-profile areas of society, including academia.
In 2024, companies should review their DE&I policies and programs to ensure that they comply with applicable employment anti-discrimination laws. In undertaking these reviews, companies should consider the views of their institutional shareholders, which continue to emphasize the importance of DE&I in creating long-term shareholder value.
The focus should be on tying DE&I policies and programs to strategic human-capital initiatives that enhance the bottom line, and on avoiding practices that look like quotas or preferential employment decisions based on protected characteristics. Looking beyond numeric targets — and leaning into concepts like inclusion, access, and belonging — will be critical.
3: Greenwashing — Evaluating Claims and Statements
Companies’ eco-focused claims have been heavily scrutinized in recent years — including via the California voluntary carbon-offset law noted above — leading to allegations of greenwashing in nearly every major industry. With the Federal Trade Commission (FTC) likely to update its Green Guides in 2024, look for greenwashing allegations to rise.
Last updated in 2012, the Green Guides describe the types of environmental claims that could be deemed misleading, unfair, or deceptive, and plaintiffs rely on this guidance to bring greenwashing lawsuits. If, as is widely expected, the updates more directly sweep in enterprise ESG commitments, companies could find themselves at further risk of legal liability and damage to their brands and reputations.
Many companies have yet to fully vet their ESG-related statements — many of which appear in nontraditional marketing materials such as sustainability reports. These companies would be wise to have counsel give those statements a comprehensive review. Indeed, the FTC’s recent assertive posture suggests that its revised Green Guides may take a prescriptive approach, one that could strengthen the hand of private plaintiffs and expand the FTC’s latitude to bring enforcement actions.
Thinking Long Term
ESG initiatives once drew robust stakeholder support, even if their ambitions were untethered from a company’s long-term strategy. But those days are gone.
With companies’ near-term financial prospects now in sharper focus, companies should approach ESG initiatives as a means of creating long-term value. For companies that are less assertive in their ESG efforts, the calculus is equally clear: take care of business now, but plan for the future.
However a company feels about ESG, understanding how stakeholders think about it will be critical for long-term commercial viability. Companies that are not attentive to these matters may be doing so at their peril.
The authors thank Chloe Schmergel and Kelly Rondinelli for their contributions to this article.
Editor@CorpGov.com
