ESGRisk Management

Shifting Winds of ESG Policies and Regs Have Risk Managers on Alert

By April 29, 2021No Comments

The prospect of increased regulation and disclosure around corporate sustainability has risk managers preparing.

The likelihood of increased regulation and mandatory disclosure of ESG-related activities and risks under the Biden administration and across the globe has enterprise risk managers trying to get their ESG ducks in a row.

  • “From a risk management perspective, we audit all facts and figures in ESG reports we’re using internally,” said one member at a recent meeting of NeuGroup for Enterprise Risk Management. “The expectation is that sooner rather than later we’ll have to be publicly disclosing those; we want to make sure those are accurate.”
  • “Like many here, we’re trying to formulate how we tackle this issue,” another member said. “Approaching ESG like you do other exposures is a good idea—some companies are setting up steering committees to tackle this.”
  • From a governance perspective, another member said, “Everybody at our company, rightfully, is interested in ESG, but we’re all still trying to figure out how we go about it in a holistic, cohesive manner.”

The lawyers’ perspective. The discussion featured insights and perspective from Holly Gregory and Heather Palmer, partners who lead the global ESG practice at the law firm Sidley Austin.

  • They gave an overview of the rapidly changing ESG regulatory and legal landscape, including what to expect under President Biden, litigation risks and evolving corporate practices.

Frustration with standards. The problem many corporates face is that no single set of ESG disclosure standards exists, leaving risk managers to devise their own practices amid a plethora of standard setters and framework developers.

  • “Both corporate leaders and investors have expressed frustration with a lack of coherent standards in this area,” Ms. Gregory said.
  • Ms. Palmer added, “There have been efforts by standard setters to try and consolidate, but it’s anyone’s guess in terms of how quickly they’re going to be able to do that.”
  • Investor demands for more disclosure of ESG risks and initiatives mean corporates have adopted standards voluntarily. “As regulators have been slow to act, the rate of voluntary standards has grown,” Ms. Gregory said, pointing to sustainability and corporate responsibility reports, and SEC disclosures related to material risks.

Watching the SEC. Now, though, the regulatory wheels are spinning faster and corporates are waiting to see what the new administration’s policies will mean for them. “Climate change, environmental justice and ESG issues are a primary focus of the Biden administration’s ‘all of government’ approach,” Ms. Gregory said.

  • “We’ve had a sustainability report for years,” one member said, but recent attention from regulators and agencies is “a good reminder that we all need to address our reporting infrastructure.”
  • Of critical interest is what action the Securities and Exchange Commission (SEC) will take. Last month, its Division of  Enforcement formed a new Climate & ESG Task Force; later in March, the SEC confirmed an “all-agency” approach and created an ESG landing page on its website.
  • “Some people are waiting to see what the SEC does now, and the approach they’ll take,” Ms. Palmer said. “One approach that some have advocated for is that the SEC will specifically recommend that your disclosures align with [one standard], and that’ll dictate it.”

Risks, corporate practices. In addition to breach of fiduciary duty shareholder lawsuits, Sidley Austin’s list of litigation risks facing corporates around ESG includes federal claims over material misstatements and omissions in securities offering documents as well as SEC enforcement actions.

  • The firm also notes that the FTC is reviewing so-called greenwashing complaints over allegedly deceptive environmental claims.
  • The presentation listed these evolving corporate practices and suggestions to help mitigate the risks:
    • Consider whether the board has the appropriate structure for ESG oversight.
    • Evaluate ESG risks from an ERM perspective.
    • Understand and revisit the existing compliance function and controls in place around ESG disclosure.
Justin Jones

Author Justin Jones

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