Environmental, Sustainability and Governance Activities and Disclosure

January 17, 2017

The demands of investors and other stakeholders (e.g., customers, employees, NGOs) for companies to engage and provide information regarding ESG matters has dramatically increased in recent years.  It has also swiftly spread from so-called “socially responsible” investors to the largest fund complexes, asset managers, pension funds and other institutional investors.  These investors now seek ESG information in the context of improving company and investment performance and there is a notable increase in shareholder proposals on ESG matters. 

In addition, the decision to engage on ESG issues has been made by companies globally.  Companies, especially larger companies, receive dozens or even hundreds of questionnaires or other requests for information regarding ESG matters, and they respond to many of them.  One large company is reported to respond to over 600 questionnaires and requests for information annually. 

Board oversight of risk management, SEC filings and other disclosure should extend to oversight of company decisions and responses in the ESG context, including strategic decisions regarding engagement with investors and other stakeholders around ESG matters, decisions as to disclosure and other responses to requests for information in the ESG area and decisions concerning controls supporting ESG-related decisions and disclosure. Board oversight should be adequate to ensure that such a strategic process is in place and is followed.

This oversight, as with other board oversight roles in the ESG area discussed below, can be delegated to a committee and, given the disclosure and reporting considerations discussed below, the audit committee or other committee responsible for those matters is one logical place to lodge the responsibility.

Most information sought by questionnaires and other information requests in the ESG area is not material to a company or its investors, although it may be of interest to other stakeholders.  Often the questionnaires cover a broad spectrum of requested information and do not differentiate by industry, which results in questionnaires that seek information that may be immaterial, unimportant or even irrelevant.  Whenever a company speaks, publicly or privately, there is strategic, legal and reputational risk.  Companies should have a process that involves senior investor relations, finance and legal (including those responsible for SEC reporting and disclosure) functions for making the strategic decision as to whether and how to engage in ESG matters.  In addition, this process should also determine what level and type of controls over such information is desirable for the company and a plan for the application and execution of such controls.  Part of this discussion should also involve disclosure controls and procedures as well as internal control over financial reporting for ESG-related information, even in the absence of a legal requirement to provide disclosure in SEC filings or for other information the company voluntarily provides to third-parties.

Among the disclosure issues that need to be addressed are:

  • Whether the company is making required disclosures in its SEC filings.  ESG matters are only rarely if at all addressed in a company’s specific line item disclosure requirements, but they can be covered by existing general disclosure requirements.  These include in particular:
    • Requirements for additional disclosure of material information the omission of which would make the disclosure that is provided misleading;
    • Disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of forward-looking information regarding known trends and uncertainties that are reasonably likely to have a material impact; and
    • Risk factor disclosure, to the extent any of the ESG considerations could materially affect the company’s business, results of operations, liquidity or financial condition.
  • Whether the company’s disclosures are accurate, balanced and consistent across its various means of communications.  A company should ensure that its responses to ESG and related questionnaires are scrutinized for accuracy and balance and are not characterized by unjustified overstatement.  In addition, communications outside of SEC filings should be consistent with information included in those filings and should not raise questions as to whether additional information should also be included.  Use of words like “material”, “significant” or “important” in ESG-related communications, which are in fact encouraged in some questionnaires and other requests for information, can give rise to questions if the matters so characterized are not addressed in SEC disclosure documents.
  • Whether  the company is in compliance with Regulation FD and its disclosure policies in its non-public discussions with investors regarding ESG matters (e.g., in response to a shareholder proposal).
Finally, in light of the oversight functions suggested above for the board or relevant committee, the board calendar should include periodic reports to the board on the company’s ESG-related activities.  It is management’s responsibility to determine the level and nature of the company’s engagement in the ESG space, however, the board should provide oversight, including in connection with its oversight of reporting and risk management, to ensure that management has put in place and implemented adequate decision-making processes and controls.