Issue link: https://digital.shearman.com/i/1162884
Shearman & Sterling LLP The Climate Changes for ESG | 5 THE CLIMATE CHANGES FOR ESG Stephen T. Giove, Richard B. Alsop, Lona Nallengara, Bill Nelson and Judy Little The focus on ESG matters has increased considerably in the past few years. Most leading companies are now devoting significant resources to developing and refining their approach to addressing, and explaining to stakeholders, the environmental, social and governance (ESG) matters that are significantly related to their business. Despite this increased focus, there is still considerable divergence in how companies define, address and disclose ESG matters for a variety of reasons. First, there are no precise boundaries as to what issues fall within the ESG rubric. No list or single source defines the scope of ESG. Second, ESG issues are not static — new ones emerge and existing ones evolve over time, which requires companies to consider how these issues will be addressed and spoken about with stakeholders on an ongoing basis. Finally, the importance of a particular ESG issue can vary considerably across companies, industries and geographies. What is important for one company may not be as important for another. For better or worse, there is no uniform solution for approaching ESG matters. As a result, each company needs to evaluate and define which ESG issues are core to its business, determine which ESG issues resonate with its stakeholders and establish a plan to address these issues and communicate them to stakeholders. On one end of the spectrum, there are companies that do not factor ESG considerations into their decision-making, do not engage with shareholders and other constituencies on ESG matters and do not make any ESG disclosures beyond those that are required to be disclosed under applicable SEC rules. These companies, for example, include customary disclosures related to climate change and environmental matters as part of their risk factor, business, regulatory and litigation disclosures and may make limited disclosures on diversity as part of director disclosures in the proxy statement. Companies on the other end of the spectrum have fully integrated ESG considerations into their strategic planning and risk management processes, have INSIGHTS dedicated ESG staffing, regularly engage with shareholders and other stakeholders on ESG matters and make sophisticated ESG disclosures, not only in SEC filings but also in specialized reports that receive significant board attention and external promotion. Most companies fall somewhere in the middle of this spectrum. Wherever a company falls on the spectrum, it is becoming increasingly difficult for a board to let the management team ignore the ESG issues that are important to the company. The increased focus of investors, customers and employees, coupled with a growing body of research demonstrating that companies that focus on sustainability and other ESG issues tend to outperform peers that do not, makes it imperative that boards direct management to engage on ESG and ensure that the board does so itself. In this article, we identify some of the common issues faced, and some of the practical next steps to be considered, by companies planning their next steps in their evolving approach to ESG.