Anyone who thinks that the environmental, social and governance (ESG) movement is just a human resources trend, environmentalist crusade or a do-gooders' investment plan is blind to ESG's potential long-term impact on multinational corporations amid the Business Roundtable's decision to shift the focus of corporate purpose from shareholder interests to stakeholder (employees, communities, customers, etc.) wellbeing.
Flush with new power, activist stakeholders see ESG as their first opportunity to influence and transform corporate operations. Luckily, savvy corporations can avoid ESG hazards by deploying proactive measures. At its core, ESG is a stakeholder tool that allows shareholders, consumers and employees to leverage environmental and social sentiment to change corporate operations.
Getting ahead of the ESG curve requires corporate leaders to recognize that business movements — especially those led by consumers and shareholders — attract regulatory attention, and heightened regulation triggers company-risking litigation.
ESG's emergence follows this pattern: massive growth of environmental investments, corporate proclamations exalting commitment to corporate-consciousness. Overall the worldwide trend increasingly includes regulation, compliance ratings and activism. For example:
- The U.S. Securities and Exchange Commission formed a Climate and ESG Task Force and has begun promulgating proposed rules.
- BlackRock has clarified that it will use the power of institutional "votes" against boards of directors not aligned with its ESG imperatives.
- ESG focused hedge funds have forced board turnover through the proxy process.
ESG-related lawsuits and regulatory actions often attack leadership's misrepresentations about their commitment to ESG principles, misleading stakeholders and decreasing corporate value. Corporate leaders who don't recognize ESG "truths" risk their roles as fiduciaries and increase their litigation risk. For example:
- Attorneys general have sued companies for allegedly misleading shareholders by not appropriately disclosing the companies' understanding of climate change risks.
- The Federal Trade Commission challenged misleading green statements about products being biodegradable or otherwise sustainable.
- Greenwashing claims also have triggered state laws and the federal Lanham Act, which prohibits companies from using advertising that misrepresents "the nature, characteristics, qualities or geographic origin" of goods and services sold.
- At least 10 lawsuits have been filed against public companies across various sectors for failing to maintain diverse boards, despite their proclaimed commitment to diversity.
Once the litigation cycle begins, absent an aggressive defense, governmental protections will not end. Both will take time to emerge.
In the meantime, to limit ESG risk, companies must:
- Monitor ESG disclosures and commitments in filings, reports, communications to employees, social media posts, media interviews and website postings.
- Vet ESG statements for factual accuracy, context and consistency.
- Make sure forward-looking commitments are qualified and subjected to the controls and procedures process for SEC filings.
Because ESG activism often takes the form of legal action, intelligent companies will work with counsel to leverage attorney-client privilege and develop ESG strategies and action plans. Truly effective leaders will shape plans to manage stakeholder expectations and mitigate risk. Those who do not will be the "woke" activists' next target.
Originally Published by Crain's Cleveland.
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