As companies look to better understand and integrate environmental, social and governance (ESG) initiatives into their strategic and operational planning and reporting, they must navigate disparate stakeholder expectations, dynamic domestic and foreign policy goals and regulations, numerous and widely varying reporting frameworks and rating systems, and challenges and costs associated with the collection, assimilation and reporting of relevant information.
By way of example, the Securities and Exchange Commission recently proposed rules aimed at enhancing and standardizing climate-related disclosures by registrants. The rules as proposed would mandate disclosure by registrants of climate-related risks, metrics, and related information. While the SEC has expressed its intention to adopt final rules by the end of 2022, the final rules may reflect changes based on public comment and legal challenges. Please see our March 21 alert for more information on the proposed rules.
Even if the final rules are materially curtailed, stakeholders such as investors, value-chain participants and employees are demanding increasing information from companies regarding their climate and other ESG goals, initiatives and results.
Companies that already disclose climate-related information often do so based upon various third-party frameworks. For example, many investors rely on the Task Force on Climate-related Financial Disclosures (TCFD) to assess climate-related risks into asset-allocation and portfolio-management decisions. The lack of standardization impedes data management and climate risk modeling because each reporting framework uses its own surveys, questionnaires, and data points. In addition, the inconsistencies of current climate-related disclosures complicate understanding and comparing the environmental impact of different companies and sectors and their performance in reducing greenhouse gas (GHG) emissions.
In this alert, we suggest several considerations for boards of directors and management teams as they embark on the path to sustainability.
- Establish purpose and a corresponding “tone at the top.” Commitment to sustainability and management of long-term risks such as climate change requires purpose and the buy-in and leadership of the board and senior management. While ESG is evolving and opinions and ideologies regarding it vary widely, the importance and necessity of engaging stakeholders, understanding the topics material to them, integrating those topics into strategic and operational planning and communicating with stakeholders are not going away. Boards and management teams will need to evolve and adapt to successfully manage these realities.
- Engage as a board in the oversight of ESG. A 2021 survey by DLA Piper Corporate Data Analytics found that over half of Fortune 100 companies have designated a board committee dedicated to overseeing ESG initiatives or have expressly delegated ESG initiatives or climate transition oversight to their nominating and corporate governance committee (and, to a lesser extent, audit committee). Our study further found that there was only moderate correlation between board oversight of ESG and high ESG ratings, which suggests that the impact of such overt ESG board oversight is evolving and just one piece of developing a robust ESG strategy. Company may consider such a delegation to a dedicated or existing committee and include ESG oversight in the applicable committee charter, on meeting agendas and in committee read-outs.
- Ensure sustainability competency. Given increasing stakeholder demands and the complex and emerging regulatory oversight and disclosure requirements, companies may consider and, if appropriate, enhance their internal capabilities necessary to discharge their responsibilities, whether at a board or management level. For some companies, it may be appropriate to appoint an individual, such as a chief sustainability officer, whose primary responsibility is to manage the planning, coordination, execution and reporting of the company’s sustainability initiatives in a manner tailored to the company’s goals, stakeholder expectations and regulatory responsibilities.A recent study by DLA Piper Corporate Data Analytics found that in 2021, nearly 75 percent of Fortune 100 companies had appointed a dedicated ESG or Sustainability Officer, and 75 percent of Fortune 100 companies had hired ESG or sustainability staff. Among other things, these professionals can provide substantial assistance to management by participating in industry sustainability initiatives, overseeing the collection, management and reporting of relevant data and setting measurable and appropriate sustainability-related goals and KPIs.
- Seek to understand better the carbon footprint of the company’s products and services and investigate new production and service delivery processes, as well as improvements in the collection and quality of data throughout value chains. Consider creating a cross-functional working group dedicated to understanding and addressing the company’s carbon footprint, energy procurement, sustainability initiatives, internal carbon pricing and target setting.
- Engage experts or develop partnerships to identify, track, and disclose GHG emissions generated directly by the company’s own operations (Scope 1), indirect GHG emissions from purchased electricity or other forms of energy (Scope 2), and, if consistent with the company’s business strategy and industry practices, GHG emissions from upstream and downstream value-chain activities (Scope 3). Measuring a company’s GHG emissions is not purely technical and can be complicated, especially for growing enterprises. Companies must also develop policies, procedures and controls for GHG accounting, measuring, and reporting.
- Map and address physical and economic risks from climate change, like sea-level rise and extreme weather events, that may have a material impact on the company’s business including its operational resilience, financial results, real property assets, value chains, transportation needs, and workplace safety. For instance, assess whether and how the company’s fixed assets and value chains depend on carbon-intensive utilities or natural resources, identify related transition risks, and develop transition and resilience plans. ESG teams should consider not only immediate concerns and risks, like the impact of extreme weather on the company’s current value chains, but also long-term risks, like the company’s ability to absorb long-term increases in carbon prices over the next 30 years or survive a radical shift of capital and investment away from climate and extreme weather “red zones”. This analysis could, strategy and budget permitting, include conducting climate scenario analyses and stress testing. The results of risk assessments are then the basis for setting value chain priorities, allocating budget, and implementing any necessary changes, programs, and procedures to minimize the risks both to and from the transition process. Note that for publicly traded companies, if the SEC’s rules are adopted as proposed, some climate-related actions, like conducting a scenario analysis or setting targets, may give rise to additional disclosure obligations.
- Create processes and controls to collect, manage, and analyze climate-related data, including data from physical facilities, value chains, and customers, and establish internal controls over financial reporting and disclosure controls and procedures related to this data collection, management and reporting. These processes, internal controls and disclosure controls are particularly important for publicly traded companies which may be required to report GHG emissions data and other climate-related information with the SEC.
- Enhance record keeping, auditing, risk control and compliance to support transition solutions, such as accurate and timely documentation for retiring emission reduction credits or renewable energy credits, and involve the legal department when structuring sustainability linked agreements with counterparties to avoid inadvertently violating derivative investment regulations.
- Explore opportunities to collaborate with governments, financial institutions, technology companies and environmental engineering firms on ways to further enable or enhance sustainability initiatives. Examples include the issuance of green bonds, investments in sustainable infrastructure or the adoption of technologies that track, monitor and tokenize raw materials or manufactured goods within value chains.
- Adopt a global perspective when addressing climate change-related disclosures, risks, opportunities and transition plans. Regulators in the US at both state and federal levels and globally are taking increased interest in climate change matters. International treaties or accords will likely factor into consideration as well, particularly given the interconnected and global nature of climate change. Global regulations related to sustainability and climate change, including, among others, the European Union’s proposed rules on sustainability-related disclosures and taxonomy (see our March 29 alert) and proposed rules on value chain due diligence (see our March 31 alert) create an everchanging, dynamic and complex regulatory scheme that will impact not only global companies, but the global economy more broadly. Companies should stay informed on these updates and take a broad, international perspective on any developments.
For more information about the subject of this Commodities Alert, please contact any of the authors of this alert or [email protected]. Please also visit our Sustainability and Environment, Social and Governance portal for our latest information on sustainability and ESG developments.