Corporate Governance

Shearman & Sterling LLP 15 | The Rise of the ESG Officer Environmental. Social. Governance. Three words that, when read in isolation, have very different meanings. And yet, these three words today are universally associated together and engrained in the corporate lexicon — their acronym, ESG, needs no defining. Until relatively recently, U.S. public companies were obligated to tell their investors very little about their sustainability efforts or the people that work for these companies and enable them to operate and grow. Today, investors, employees and regulators of U.S. public companies demand frequent dialogue and transparency regarding the management, retention, support and sustainability of their human service providers, as well as a commitment to sustainable value creation and the wider societal needs of the people and planet. These days, the regulatory landscape in the ESG space remains in nearly constant flux. Over the last several years, the SEC has enhanced its ESG disclosure requirements, and regulatory focus on SEC disclosure continues. Companies have had to determine ways to collect and integrate ESG data into financial reports and specific human capital resource management disclosure. And regulatory focus continues. In order to meet current ESG disclosure requirements and be prepared for additional disclosure obligations on the horizon, companies must ensure adequate internal processes exist for collecting data. Data collection can span several business units, making coordination by senior leadership critical. Data gathering and analysis, sufficient internal controls to ensure accuracy and sharing of data across business units and with disclosure drafters are key. The oversight and level of skills needed to address these expectations has spurred companies to investigate the need for a new C-Suite member: the Chief ESG Officer (CESGO). Not all companies have begun conducting hiring searches for this new CESGO; with some companies dividing ESG- related responsibilities among several members 1 See 10117 C.F.R. §229.101 (c)(2)(ii) (2020). 2 See SEC, "The Enhancement and Standardization of Climate-Related Disclosures for Investors," 17 CFR 210, 229, 232, 239, and 249, https://www.sec.gov/rules/proposed/2022/33-11042.pdf (March 21, 2022). Although long awaited, litigation challenging the SEC's authority in this space is probable if the proposed rules are adopted. The Rise of the ESG Officer Gillian Emmett Moldowan and Melisa Brower Insights REGULATORY UPDATES RELATED TO ESG DISCLOSURE Human Capital Management. On November 9, 2020, the SEC issued final regulations mandating human capital disclosure by all U.S. publicly traded companies. 1 These rules require a description of a registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as depending on the nature of the registrant's business and workforce, measures or objectives that address the development, attraction and retention of personnel), to the extent material to understanding the registrant's business (or, where relevant, a particular segment of the registrant's business). Sustainability. This March, the SEC also proposed rules that would require climate change disclosure in all U.S. public companies' annual reports and registration statements. 2 If finalized, registrants must disclose information about climate-related risks that are reasonably likely to have a material impact on a registrant's business, results of operations or financial condition and certain climate-related financial statement metrics in a note to audited financial statements. Investment Strategies. This May, the SEC proposed new rules that, if finalized, would require enhanced disclosure of investment funds and investment advisers' ESG investing strategies. 3 Unfinished rulemaking by various regulators, different approaches among regulators and different impacts in varied industries exacerbate the need for sufficient corporate resources to address ESG matters. 3 See U.S. Securities and Exchange Commission, "Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices," 17 CFR Par 200, 230, 232, 239, 249, 274, and 279, https://www.sec.gov/news/ press-release/2022-92 (May 25, 2022). 20 YEARS

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