Earth Day Series 2022: Environmental, Social & Governance Part 2 – The Birth of Environmental, Social and Governance as Sustainability Metrics | Bradley Arant Boult Cummings LLP

On Friday, April 22, the United States and the rest of the world will mark Earth Day 2022. With the theme “Invest in Our Planet,” Earth Day 2022 will have an additional focus on environmental, social and governance (ESG). important indicator for evaluating activities that may affect human health or the environment. This is the second in a series of publications from Bradley’s environmental law team in recognition of Earth Day 2022. In the first article, we looked back at the more than 50 year history of Earth Day and the progress made in addressing environmental issues in the US In this second article, we will discuss the birth of the ESG metric and the current status of various efforts to standardize the way ESG issues are measured. The concluding article provides practical guidance on setting up or refining an ESG program.

In 2000, the United Nations established the Global Compact as a non-binding organization of companies, cities, foundations and other entities committed to implementing sustainability principles and supporting the goals of the United Nations. There are currently over 800 participants in the US and 15,000 participants worldwide. The members of the Global Compact are committed to a way of working that lives up to their fundamental responsibilities in the areas of human rights, labour, the environment and the fight against corruption. The basic responsibilities form the ten principles of the Global Compact and were derived from the Universal Declaration of Human Rights, the International Labor Organization Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development and the United Nations Convention against Corruption .

In 2004, the Global Compact published “Who Cares Wins – Connecting Financial Markets to a Changing World” and ESG measurement was born. According to the message, “[t]The institutions supporting this report believe that in a more globalised, interconnected and competitive world, the way environmental, social and corporate governance issues are managed is part of the overall management quality of companies, required for a successful competition. Companies that perform better on these issues can increase shareholder value, for example by properly managing risks, anticipating regulatory measures or entering new markets, while at the same time contributing to the sustainable development of the societies in which they operate. Additionally, these issues can have a strong impact on reputation and brands, an increasingly important part of corporate value.” This report also includes a list of key recommendations, represented by the chart below:

In 2015, the United Nations agreed on a plan called Agenda 2030. Seventeen Sustainable Development Goals (SDGs) were set as part of the 2030 Agenda plan and include a range of ambitious goals (e.g. no poverty and zero hunger) and others that are less defined (e.g. affordable and clean energy and climate protection). A number of these goals are reflected in the Biden administration’s focus on environmental justice and climate change initiatives. For example, earlier this month the EPA released an “Equity Action Plan” designed to implement President Biden’s Executive Order 13985 and assess whether underserved communities and their members face systemic barriers to accessing benefits and opportunities through the federal government are faced.

The increased focus on ESG issues has also led to more interest in how such issues are measured and reported, particularly among publicly traded companies and financial institutions. In March 2021, the Securities and Exchange Commission (SEC) requested public comment in 15 separate areas to solicit public input on how climate disclosure information should be reported and evaluated. Also in March 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The task force has been instructed to develop initiatives to proactively identify ESG-related misconduct – particularly in relation to the accuracy of climate-related disclosures and statements reviewing investments based on ESG issues.

In March 2022, the SEC proposed a rule requiring publicly traded companies to disclose climate-related information, including climate-related risks, that are reasonably likely to have a material impact on business, operating results, or financial condition and certain climate-related financial statement metrics in a note to their audited financial statements. The comment period for the proposed rule is May 20, 2022. According to the SEC press release, disclosures would be required with respect to “(1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how climate-related risks identified by the registrant have had or could have a material impact on its business and consolidated financial statements, which may materialize in the short, medium or long term; (3) how all identified climate-related risks have affected or are likely to affect the strategy, business model and prospects of the registrant; and (4) the impact of climate-related events (storm events and other natural conditions) and conversion activities on the items in a registrant’s consolidated financial statements and on the financial estimates and assumptions used in the financial statements.”

Regardless of whether the proposed rule is adopted, it is clear that ESG issues will continue to evolve and play an important role in how organizations respond to the widespread interest in climate-related activities. Next week we will discuss a framework for developing or refining an ESG program and address steps that can be taken to develop an ESG strategy.