June 15, 2021
Five Things General Counsel Need to Know about ESG
By
Spencer Stuart’s Legal, Compliance & Government Affairs Practice
While there has been a growing interest in environmental, social and governance (ESG) issues in recent years, in the wake of the COVID-19 pandemic and social justice movements, there is no doubt that ESG is now a central focus for boards of directors, management teams, shareholders and employees alike.
Spencer Stuart’s Legal, Compliance & Government Affairs Practice in conjunction with PJT Partners, a strategic advisory firm, recently hosted a group of Fortune 500 general counsel for a virtual conversation on the ESG landscape. Speakers included Allison Bennington and Sheena VanLeuven from PJT, and the discussion was moderated by George Anderson, who leads Spencer Stuart’s Board Effectiveness Practice.
Pictured left to right: Allison Bennington, Sheena VanLeuven and George Anderson
Here are five key takeaways from this dynamic conversation:
1. Expectations of public companies have never been higher.
Over the past year, ESG issues have become an area of heightened focus not only for primary stakeholders, but also for employees, customers, government/regulatory agencies, shareholders and the community at large. The top two priorities have focused on climate matters given major environmental crises, and DE&I initiatives and social justice movements, including Black Lives Matter and the increasing level of crimes against the Asian American Pacific Islander community in particular over the past several months. It’s clear that social issues will remain prevalent in ESG conversations.
2. The investment management industry is equally focused on these issues.
With a deeper prioritization of ESG issues, there has been a corresponding shift in investment strategies, particularly in products and organizations that are altruistic. Notably, the CFA Institute, the global association of investment professionals, recently announced it will market the Certificate in ESG Investing, created by the CFA Society of the United Kingdom. The substantial flow of capital into ESG opportunities will only increase over the next few years, with PJT Partners predicting that there will be $53 trillion AUM globally by 2025 in ESG-related opportunities, which is half of the total AUM worldwide.
3. Asset managers and investors expect access to ESG data.
Unsurprisingly, the data surrounding the ESG movement is critical. Asset managers rely on data in portfolio selection, not just for buying and selling equities, but to guide corporations in issuing new shares, access to capital, issuing debt and more. Companies should keep in mind the three S’s when it comes to data: scraping, screening and selection. Corporations can determine what data is publicly disseminated. This data is collected and used to create ratings and rankings, comparing corporations in their progress towards meeting ESG goals and initiatives. Issuers should put out clear, reliable and unassailable information to ensure the resulting data mining will cast the issuer in the best possible position for selection into a fund, opportunity for capital attraction, and for a more successful and proactive engagement between boards/management and their shareholders.
This information has become table stakes for institutional investors. Some ways organizations can effectively use the three S’s to put data into the marketplace include:
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Use robust frameworks (such as SASB and TCFD) that are endorsed by investors.
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Ensure that the data released is clear, reliable and accessible in a singular location for investors and stakeholders alike and easily “scrapable.”
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Data should be harmonized across investor channels (i.e., the sustainability report, company website and the IR materials should deliver the same information).
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While there are many rankings out there, companies should focus on high-impact surveys (like CDP) and monitor key third-party rankings to ensure they appropriately capture the data.
4. The general counsel plays an integral role in facilitating ESG initiatives.
The general counsel plays a critical role in helping an organization highlight and prioritize ESG in both mitigating risk and creating strategic opportunities. The general counsel plays a unique role as a trusted adviser to the board and the executive management team regarding risk and business opportunities, while partnering with other key functions, including investor relations and corporate communications, to ensure proper ESG disclosures, educating shareholders on priority issues and staying on top of ESG trends.
Nearly half (45%) of the general counsel in attendance described their organization’s ESG disclosures as mature, with a cohesive ESG strategy linked to the business and standardized metrics and reporting frameworks to measure progress. The remaining attendees described their company as less mature, with some disclosed information on a corporate webpage or CSR report, or, in a few instances, none at all.
5. Setting the tone at the top.
To achieve real change, leadership needs to set an example and live by it; they must think of ESG as a North Star helping to guide business strategy. Together, the CEO and board can demonstrate the organization’s ideals by keeping ESG matters on the board’s agenda, devoting boardroom dialogue to the topic and reinforcing commitments made externally through internal behaviors of the company. As always, stakeholders are scrutinizing statements and actions and authenticity is crucial; employees, customers, investors and other observers can spot insincerity or “box checking.” The board and CEO play a critical role in setting the right tone at the top and ensuring the organization delivers on its ESG priorities.
Conclusion
With regulators, consumers, investors and shareholders alike prioritizing ESG, corporations must integrate ESG initiatives (including, but not limited to, climate change and diversity, equity and inclusion) into their business strategy to authentically drive results — which will in turn lead to having more engaged shareholders and earning top ESG ratings. The general counsel can play a key role in integrating an ESG mindset throughout an organization, partnering across the business with investor relations, the board and executive management, as well as ensuring proper disclosures.