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The General Counsel’s role in ESG
Preparing for the proposed SEC climate-related disclosure rules
The SEC’s recent climate-related disclosure proposal is a dramatic expansion of mandatory environmental sustainability reporting for US-listed companies. Almost a year ago, the European Union proposed its Corporate Sustainability Reporting Directive (CSRD) that would require listed and large companies, as defined, to follow EU sustainability reporting standards. The CSRD would impact non-EU companies by applying to EU subsidiaries not included in a consolidated report with equivalent reporting standards. So, for US companies with European affiliates, the SEC’s proposed rules are not completely novel. Still, if adopted, the SEC rules would transform the landscape of US reporting for ESG.
For the board and senior management, the proposed rules would create new disclosure requirements not just for climate metrics but also for the company’s ESG governance processes, including the oversight role of the board. If adopted, these requirements will elevate the importance of having the General Counsel at the table as a strategic partner when the compliance playbook is developed.
Relevant considerations
- The primacy of “G” and the General Counsel’s role
- Disclosure and liability
- Deeper scrutiny on the way
The primacy of “G” and the General Counsel’s role
Environmental concerns have rightly taken pride of place in the ESG universe, and they are prominent in the SEC’s approach. But the lynchpin of the proposed rules for the General Counsel is the need to describe the governance process and the board’s role in ESG strategies and decisions. Governance processes to be described and disclosed include:
- The board’s oversight of climate-related risks, including responsible board members, and whether any directors have climate-related risk expertise
- The process by which the board discusses and is informed about climate-related risk, and the frequency of those discussions
- Management’s role in assessing and managing climate-related risks
In practice, these process disclosures are likely to heighten the level at which boards address climate change in their meetings and deliberations, and many companies will be taking steps now to review and bolster board training and documentation of climate risk oversight processes. Companies will be well served by developing a playbook documenting how the board and management have met their obligations for climate-related oversight, and creating the chain of certifications necessary to give the board and executives confidence in signing off on SEC filings. Lawyers will be needed to interpret the requirements of the new rules, to help with drafting descriptions of governance processes in place or adopted, and to evaluate whether the governance playbook adequately meets the oversight expectations implicit in the proposed rules and the board’s Caremark obligations.
Another governance-related concern for the General Counsel will be ensuring that the company’s official policies and codes of conduct include environmental and social responsibility clauses. Do employee contracts emphasize adherence to these policies? And given the current emphasis on supply chain, do vendor contracts need to be revised to set an acceptable standard on greenhouse gas emissions, or on diversity and inclusion practices? A best practice is to employ Contract Lifecycle Management (CLM) tools to automate the review and updating of contracts and documents to alleviate some of the pain in this process.
Disclosure and liability
In addition to governance-related concerns, the General Counsel’s office has a role to play in interpreting what needs to be disclosed. At issue here is an emerging “double materiality” standard. Double materiality looks at both the financial considerations for an investor and broader sustainability impacts - both for a company and for the environment itself. The EU and the IFRS Foundation, the international body with oversight of the fledgling International Sustainability Standards Board, have already announced their intent to embrace double materiality, while the SEC has proposed to retain its focus on the needs of investors. However, a global company will have to come to terms with the broader definition given the EU and IFRS positions. Interpreting the materiality standard as it evolves will require legal input and analysis.
The proposed rules also include the prospect of forward-looking disclosures, as well as Scope 3 GHG emissions. Under the proposal, these disclosures would have the protection of the Private Securities Litigation Reform Act (PSLRA) safe harbor for forward-looking statements, but the General Counsel will be important in interpreting the safe harbor rules to ensure that all necessary conditions are satisfied for its protections to be available.
Deeper scrutiny on the way
As US policy starts to catch up with European counterparts, companies can expect an evolving, deeper scrutiny of their ESG practices and governance structures. Here are some important next steps:
- Review your materiality and risk profile for ESG issues
- Assess and bolster your institutional framework for ESG oversight, reporting and risk assessment
- Increase board training and expertise
- Build a framework of processes and documentation to give the board and executives confidence in signing off on sustainability reports and disclosures
- Ensure you have the right resources and capabilities to support your governance process
With the prospect of public descriptions of ESG governance and management processes, senior executives will need the General Counsel at their side in developing an effective ESG compliance playbook.
10 questions for the Office of General Counsel
In this rapidly evolving regulatory landscape, is your company and legal function prepared? Here are some questions for the General Counsel to consider:
1. Has your company identified which disclosure standards/requirements may apply (e.g., TCFD, SEC Proposed Rule, CSRD)?
2. Do you know where responsibility for ESG compliance/disclosure in your company sits primarily, and is your office engaged to support this function?
3. Does your company have a climate-related governance and risk management strategy in place?
4. Does your company have an infrastructure and processes in place to support centralized intake of ESG reporting from various departments?
5. Does your company have internal or public ESG goals, and a plan to achieve them (metrics and milestones)?
6. Does your company have a GHG emissions data framework or model in place for collecting and reporting required GHG disclosures?
7. Does your office have governance controls and processes in place to give the Board confidence in signing off on ESG-related disclosures?
8. Does your company have ESG requirements/sustainability KPIs in your vendor contracts and are you prepared to monitor and disclose related metrics as may be necessary?
9. Where does your company want to be on the performance curve for ESG initiatives? Early adopter, part of the crowd, laggard? How does the governance structure align with your company’s overall ESG strategy?
10. Does your company have an established playbook with a defined, repeatable process in place for satisfying regulatory disclosure requirements, and is your office prepared to support this process?
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