The federal Securities and Exchange Commission (SEC) announced on March 21, 2022, that it is launching a landmark proposal that would require publicly traded companies to disclose some environmental impact information, such as greenhouse gas emissions, as part of the Administration’s effort to combat climate change. Initial approval was given during a public meeting, and once published will provide a 60-day comment period for the public.
The new rule would set up a reporting framework that would require disclosure of specified information in annual reports and corporate stock registration statements. Some speculate that this could be the “new Sarbanes-Oxley” in terms of impact on risk-based internal audits for ESH and other organizational and regulatory areas that influence Environmental, Social & Governance (“ESG) disclosures to shareholders and potential investors. The SEC reported that about one-third of corporate annual reports already include some climate impact disclosures. Although business groups have signaled opposition to the initiative, investor groups have supported enhanced disclosure and argue that this better protects investors against risk that a company’s value will plummet due to consumers rejecting investments that contribute to global warming.
ESG disclosures are not just a United States’ initiative. The United Nations adopted 17 sustainability goals relating to ESG, and representations about ESG performance can have a multifaceted impact on multinational employers. There are a range of factors that can be considered when evaluating a company’s track record on ESG including:
Environmental: company’s impact on environment; risks and opportunities associated with climate change, and its impact on org, its business & industry,
Social: org’s relationship with people/society (DEI, safety and health, human rights, community investment), and
Governance: How company is run (transparency and reporting, ethics, compliance, shareholder rights) and composition and role of board (DEI).
A publicly traded corporation’s track record on the governance component reflects its compliance with environmental, occupational safety and health, and employment laws, and so a history of violations, discrimination or whistleblower complaints can tarnish the company’s reputation when scrutinized by investors who purchase stocks and other commodities regulated by the SEC.
Green is apparently Gold: over $30 Trillion (USD) in investment assets are already under management in ESG-linked products (up 525% between 2015-2019 – Morningstar statistics), and have a superior return on investment. The trend is expected to continue, but more scrutiny is being given now as to representations made by corporations professing to have strong “ESG” performance, so the new rules will be a way of policing such representations. Significantly, the anticipated rule is expected to have a downstream impact outside the public corporate sector, because those covered by SEC rules will have to disclose not only their own gas emissions, but also those of their suppliers and partners – “Scope 3 emissions.”
For more information on this rule as it develops, contact the Law Office at 301-595-3520. We also assist with mandated SEC reporting of certain citations/orders issued by the Mine Safety and Health Administration to publicly traded companies.
