There is an ongoing push by the Biden Administration to engrain climate change awareness into many arms of the federal government that were previously agnostic on the matter. This campaign to inject agencies like the Securities and Exchange Commission ("SEC") with a healthy dose of concern for environmental, social, and governance ("ESG") issues was embodied by the May 20, 2021 Executive Order on Climate-Related Financial Risk. With such statements, President Biden is attempting to accomplish a merging of what some consider to be disparate interests by emphasizing the financial aspect of the risks posed by environmental cataclysm and also by framing the situation in terms of the traditional duties and responsibilities of corporate actors.

The title of former acting chair of the SEC Allison Herren Lee's June 28 Keynote Address at the 2021 Society for Corporate Governance National Conference was: "You Cannot Direct the Wind, But You Can Adjust Your Sails." This poetic sentiment ties into the Biden Administration's approach of tweaking the attitude of the federal government toward certain issues that transcend mere short-term profit-making to compel an understanding of longer-term threats to sustainability. Commissioner Herren Lee cited two factors that make this adjustment especially relevant now: first is the greater-than-ever power of corporations to influence things large and small, including social issues and matters of existential importance like climate change; second is the constantly-evolving utilization of social media platforms to increase transparency and heighten the public's response to all manner of changes that previously occurred behind closed doors. Commissioner Herren Lee communicates how these two phenomena have collided to effectuate a concerned demand by investors for disclosure surrounding ESG matters.

However, it is not solely the placation of shareholders that makes serious engagement in ESG issues necessary. Commissioner Herren Lee also invoked the classical duties of care and good faith to be transparent wherein board members will be held directly responsible for the harm their businesses are causing to delicate social and environmental conditions which ultimately will circle back and eat at their much sanctified bottom-lines. Within Commissioner Herren Lee's vision, it is thus legally, financially, and ethically essential for the business world to comply with efforts like the Task Force on Climate-Related Financial Disclosures and integrate both ESG disclosure mechanisms and ESG risk-mitigation systems into their companies.

In order to demonstrate efforts to live up to these expectations, companies should formalize an inclusion of ESG risk-mitigation into their business models, a process which includes designing accountability mechanisms for managers. They should also focus on shaping and equipping the board and management in order to address these problems competently. Increasing diversity of expertise and experience of board members would result in better informed decision-making. Issues relating to climate change are fundamentally scientific and often quite technical. Management bodies composed of individuals versed solely in business and finance might find themselves ill-equipped to assess and prepare for such problems.

Although the regulatory regime of socially conscious risk-mitigation and disclosure is still nascent, and as such, companies are still left to take action based on general principles instead of detailed rules, the ESG campaign does appear to be growing teeth. For example, a new Climate and ESG Taskforce was installed in the SEC's Division of Enforcement in March 2021, and, shortly thereafter, the agency's Rulemaking Agenda highlighted 'Climate Change,' 'Corporate Board Diversity,' 'Human Capital Management,' and 'ESG Considerations for Investment Companies and Investment Advisers' as fertile grounds for concrete regulatory action.

Such efforts have not been free from political opposition. In June 2021, 16 Republican attorneys general submitted a letter pushing back against the SEC's call for public comment on the formation of ESG disclosure rules. Based on this letter, the root of the disagreement still hinges on the perception of climate change as a social issue that, if emphasized, breaks an unspoken rule regarding partiality. This group views it as a stretch to treat the possibility of environmental cataclysm as a government interest. Following this logic, the mandated disclosure of climate change risks is an unconstitutional violation of free speech. Despite the frequently vaunted vision of the free market as a realm driven by investor demand, the Republican attorneys general think there should be limits to what this demand can influence.

It is important to note, however, that given the current Democratic majority in Congress and the fact that non-partisan trade groups such as the Securities Industry and Financial Markets Association have backed climate change disclosure, the sincere attention to the development of the ESG mechanisms underscored by figures such as Commissioner Herren Lee would be wise. To do otherwise might be to journey forward unprepared and ill-equipped for a regulatory reality that could arrive with incredible speed.

CONCLUSION: Companies should begin, or continue if already in process, designing and instituting disclosure, risk-mitigation, and accountability mechanisms related to ESG concerns and guided by the ongoing discussions of the federal government on these matters. Furthermore, boards should be prepared for a future wherein the serious confrontation of such issues is monitored and enforced.

This Kelley Drye client advisory was written with the assistance of summer associate Frank J. Tamberino.

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