Published on Jul 7th, 2021 |

 

SEC Release

 

On June 28th, 2021, the 2021 Society for Corporate Governance National Conference took place, where there were large discussions on Climate and ESG. Commissioner Allison Herren Lee provided an in-depth analysis and update on Climate and ESG matters relating to board obligation, risks, opportunities, and more.

As expected, there continues to be an increase of ESG awareness throughout the industry. For example, about 80 percent of directors have reported that focus on ESG covers 80% of their boards. However, in addition to the growth of ESG presence, there is still room for improvement within that reported board expertise.

This SEC Speech was divided into three sections:

  1. Putting ESG into Context in the Recent Proxy Season.
  2. Understanding ESG and Board Obligations.
  3. Mitigating ESG Risks and Maximizing ESG Opportunities.

To learn more about these sections see below:

3 Sections Discussed in the Speech:

 

  1. Putting ESG into Context in the Recent Proxy Season:
    • Throughout the industry, there is overwhelming support for climate proposals.
    • ESG does not limit itself to climate, as it is receiving lots of support recently towards racial equity.
    • The pledge to cut emissions in half by 2030 swings strongly towards the latest confirmation of a change on climate and ESG.
  1. Understanding ESG and Board Obligation:
    • Evidently, a strong connection between ESG and the interests of shareholders is emerging.
    • There is rapid growth of investor demand for climate and ESG disclosures.
    • The boards have increasing oversight obligations related to climate and ESG risks such as assessment, identification, decision-making, and disclosure of such risks.
      • Directors must constantly consider the impact of climate change and ESG matters on the financial statements and their corporate disclosures.
    • Oversight of audits continues to expand regarding climate matters as it bears on the valuation of assets, supply chain, future cash flows, and inventory.
    • An example of board involvement and engagement regarding other types of disclosures made outside of financial statements is the Regulation S-K’s Item 101 identifying human capital as a potentially material disclosure topic.
      • Also, under item 407(h) of Regulation S-K there is a requirement for disclosure of a board’s risk oversight of company which could include climate change risks.
    • Under the duty of good faith, Directors could be faced with taking a more in-depth analysis on climate change and other ESG issues as the regulatory landscape develops.
      • Unaddressed red flags could imply the duty of good faith.
    • Overall, climate change and other ESG matters are going to be consistent topics for the board
  2. Mitigating ESG Risks and Maximizing ESG Opportunities:
    • There are four types of risks that surround climate and ESG: regulatory risk, transition risk, physical risk, reputational risk, and human capital risk.
      • Reputational risk: Investors and consumers will start to make decisions based on company’s sustainability profiles.
      • Human Capital risk: Younger workers place a premium on if there company’s values align with their own.
    • Shareholders and others will hold companies accountable when they come up short of expectations relating to implementing risk management and governance practices for climate and ESG.
    • Boards can alleviate risk when they take charge with integrating climate and ESG into their decision-making.
    • There are three important steps for boards to maximize their ESG opportunities:
      • Enhance Broad Diversity.
      • Increase Board Expertise.
      • Inspire Management Success.

The goal of this speech from Commissioner Allison Herren Lee was to show that there needs to be significant consideration of ESG as it should be indicatively integrated into board oversight. As the specifics of these issues continue to get ironed out and impactful open, thoughtful, and well-researched discussions take place, it will only provide an larger benefit to investors, all stakeholders, and companies.

 

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