Corporate Governance

Shearman & Sterling LLP 12 | The Climate Changes for ESG ESG DISCLOSURES Most of the ESG reporting by public companies falls into the voluntary category, rather than being mandated by the SEC or other government entities. This has been the source of considerable criticism by institutional investors due to the lack of comparability, the tendency to focus on positive ESG efforts and the lack of metrics that may reflect slower progress. As a result, there have been calls for the SEC to mandate ESG disclosures, which have so far gone unheeded. SEC Perspectives In 2010, the SEC issued guidance on climate change reporting that summarized some of the ways existing rules and regulations could give rise to disclosure obligations under the federal securities laws, including material impacts of climate change-related legislation and regulation, international accords, climate change-related business trends or opportunities and physical impacts, but it stopped short of mandating climate change disclosures. 3 In 2018, a coalition of academics and institutional investors petitioned the SEC for rulemaking 4 to develop a standardized comprehensive framework under which public companies would be required to disclose identified ESG factors relating to their operations. No action has been taken on that petition. In recent public comments, 5 the Director of the SEC's Division of Corporation Finance referenced the 2010 guidance as a useful framework for evaluating a broader category of ESG issues but expressed caution with respect to mandating specific ESG disclosures, noting that to publish rules might interfere with market-driven solutions and stifle efforts to develop useful disclosure frameworks. Despite the absence of SEC-mandated ESG disclosures, companies and their disclosure committees should not lose sight of the fact that in some instances, such as the examples set forth in the 2010 guidance, there are affirmative disclosure obligations under the current SEC framework relating to ESG issues such as risks and trends or the impact of related regulation where that information would be material to investors. "Corporate Social Responsibility" Reports Most large public companies are preparing reports touching on relevant ESG-related topics, particularly in certain public consumer-facing industries and industries with widespread environmental impact. These have most commonly been dubbed "corporate social responsibility" reports but the nomenclature is evolving, with more examples incorporating words like "sustainability," "citizenship" and "impact." Companies have an array of options for these reports — from a single comprehensive report that covers a broad range of ESG issues to a few separate single-issue reports. Understanding how the company will use the report and how investors and other stakeholders will engage with it should dictate the company's approach. If there is a critical issue for a company or industry, it may be advisable to create a separate report or a supplement to the full report to highlight efforts and successes in this area. Delivery of the report should also be an important consideration. As most of the readers of the report will be accessing it online, think about how technology can be used to strengthen and amplify the communication. Video, interactive pages and detailed data output are all becoming more common. 3 See SEC, Commission Guidance Regarding Disclosure Related to Climate Change (2010). 4 See Rulemaking Petition to the SEC (October 1, 2018). 5 See William Hinman, Director, SEC Division of Corporation Finance, Applying a Principles-Based Approach to Disclosing Complex, Uncertain and Evolving Risks (March 2019). 96 4 DOES THE COMPANY ISSUE A CSR REPORT? Yes No IS THE CSR REPORT ISSUED AS A SINGLE REPORT OR IN MULTIPLE REPORTS? Single report Multiple reports 11 85

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