Key Areas for GCs Advising the Board of Directors on ESG

By Aba Acquaah

Today’s increased corporate focus on climate change, social justice, diversity and inclusion, and overall employee wellness corresponds with an added company stakeholder push to strengthen environmental, social and corporate governance (ESG)—with particular emphasis on an organization’s stance on its corporate responsibility and sustainability.

For example, in 2011 approximately 20% of the largest 500 companies in the U.S. published a sustainability report, according to S&P Global’s “State of Green Business 2021” report. That number rose to 75% by 2014, crossed the 90% threshold in 2019, and continues to grow.

In light of this trend, companies must consider ESG across the range of their operations and their responsibility to various constituents, including shareholders and investors, as well as employees, customers, suppliers and the communities in which they operate.  

If your company is public, it is likely that your investors include asset management firms, institutional asset owners and individual investors who now employ strategies that examine ESG issues as they consider which companies they wish to own in their portfolios.

The US SIF Foundation’s 2020 biennial “Report on U.S. Sustainable and Impact Investing Trends” found that sustainable investing assets now account for more than $17 trillion of the total U.S. assets under professional management. This represents one in three dollars invested and is a stunning 42% increase since their 2018 report.

As institutional shareholders invest record amounts in ESG-conscious funds, boards of directors of companies and other organizations are looking for ways to design and implement business strategies addressing the ESG interests of this important category of stakeholders. Corporate legal professionals have a central role in advising their executive teams and corporate boards in pursuit of this goal. As general counsel or lead in-house counsel, you are well positioned to be a key voice in the development of your company’s ESG program.

Here are 10 key focus areas to consider when advising your company’s board on the company’s ESG program in light of the rising, and seemingly ubiquitous, focus by stakeholders on ESG. These areas are drawn primarily from a checklist created by LexisNexis Practical Guidance contributors Jon Ocker, Mona Dasani and Sheila Harvey, of Pillsbury Winthrop Shaw Pittman LLP.:

1. Oversight

If you are not the lead person managing your company’s ESG program, be sure to  assign management responsibilities to the appropriate company executive. Coordinate with your company’s directors and executive team to identify the correct person. Although the general counsel is often the best candidate for this role, other popular choices are the head of investor relations, chief financial officer or a dedicated ESG officer.

2. Appropriate Committees

Determine which board members have relevant expertise on ESG and which board committees may have overlapping responsibilities for ESG issues. Some public companies are forming a dedicated ESG Board Committee. Be sure to consider a few important action items before adopting this approach.

3. Governing Documents

It may be necessary to amend your company’s governing documents to add any new board committees or sub-committees, and to appoint appropriate members to such committees. Review the LexisNexis Practical Guidance article, “Five Steps to Achieve an Effective ESG Board Committee” for important insights. The company might also adopt a set of ESG guidelines, policies or principles to structure its ESG program.

4. Diversity Programs

Diversity is more than a catchphrase; it is a business imperative. Create Diversity & Inclusion programs to ensure that you have a workforce that is representative—at every level—of the diversity of your customers, investors, communities and partners. This may require you to advise the board and/or executive team of the need to address the diversity of the company’s executives and the board itself.

5. Tracking Progress

Track and review ESG metrics that are measurable and relevant to your business. Then advise the board of its duty to periodically assess the overall success (including costs and impact) of the company’s ESG activities and general ESG program across all business units.

6. Independent Measuring

Advise the board of the value of retaining a reputable third-party ESG measuring firm (e.g., Sustainalytics, MSCI, etc.) so you have a credible, independent barometer to measure your company’s progress on ESG initiatives. It may also be useful to access third-party ESG data tools, such as Intelligize®️, to benchmark your progress against peer companies and better evaluate your company’s ESG risks and opportunities.

7. Compensation

Companies are realizing the importance of aligning executive incentive compensation plans with ESG business objectives. You should advise the compensation committee to consider whether to add ESG progress (e.g., diversity and inclusion, employee and customer satisfaction, community responsibility, etc.) as one of the performance factors in the company’s annual short-term incentive plan for executive officers.

8. Shareholder Engagement

Craft guidelines with the board regarding how your company can better engage with shareholders around ESG themes, including guidance with respect to shareholder activism preparedness. For specific ideas, review our “Board Engagement with Shareholders Policy Checklist” and our template for a board memorandum, which includes shareholder engagement strategies tied to environmental, social, and political issues.

9. Institutional Capital

Major pools of capital in excess of $25 billion are investing in ESG-friendly companies; that institutional capital is expected to grow in the coming years. You should work with your executive team and board of directors to create an outreach program for these investors, who are positioned to move the needle on your company’s market capitalization in a meaningful way.

10. Disclosure Requirements

Federal regulators and Congressional lawmakers are demanding greater transparency on ESG issues from public companies. Earlier this year, the Securities and Exchange Commission (SEC) created a Climate and ESG Task Force to focus on the enforcement of climate-related disclosures, and the House of Representatives approved a bill that would require the SEC to issue new rules requiring every public company to disclose environmental metrics in their financial statements. In September 2021, the SEC’s Division of Corporation Finance issued a sample comment letter providing illustrative comments that the Division of Corporation Finance may issue to reporting companies regarding their climate-related disclosure.

Companies and organizations across the spectrum are now tasked with determining what an internal ESG program might look like. Although regulatory focus is geared more toward public companies, private companies and funds should also consider the impact of their ESG program as an area of growing focus among influential stakeholders and constituencies. General counsel must be well-equipped to advise on ESG issues.

LexisNexis has created an Environmental, Social, and Governance (ESG) Resource Kit comprising practice notes, articles, checklists and templates to provide guidance to you on key ESG issues. This resource kit will be updated as regulatory directives emerge and market sentiment evolves in the months ahead.

In addition, LexisNexis hosted a free webinar on November 3, 2021 (with post-event playback available):“When Compliance Isn’t Enough: Why Companies Must Stay Ahead of the Curve on ESG Issues.” This session will help corporate legal professionals prioritize critical ESG risks and opportunities for their organizations. Register to access the recording here.