Esg - It's Not Just Fluffy Bunnies Anymore
| Publication year | 2023 |
| Pages | 44 |
| Citation | Vol. 34 No. 4-1 Pg. 44 |
By Evan Slavitt.
Introduction
Until recently, whenever companies were accused of insensitivity to environmental issues, they would respond as if to a public relations problem. Right away, the PR Department would arrange for a picture of the CEO holding a fluffy bunny in some sylvan glade to demonstrate the corporate commitment to a wonderful environment. Those days are now gone; with the emergence of ESG as a movement, corporate social responsibility requires more than the occasional photo-op with a cute animal.
In a very short time, ESG has transformed into a challenge that not only has legal implications but requires core legal attention. It touches on almost every type of legal practice in which corporate entities are the clients including mergers and acquisitions, environmental, securities, antitrust/com-petition law, customs, trademark, and even straightforward contracting and contract disputes. As described below, ESG is so all-encompassing that no lawyer representing companies in any matter can treat it as someone else's problem. As a result, both inside and outside counsel – generically referred to here as "corporate counsel" – must acquaint themselves with the new reality, develop the requisite expertise, and plan for legal response or even preemptive action.
This article will provide an accelerated view of the history of ESG, the current and developing situation, and make some suggestions on the ways corporate counsel, and the companies they represent, should respond.
What is ESG?
There is no fixed definition of ESG.[1] Taking the letters in order, the "E" stands for environmental concerns but is not limited to compliance with existing laws. Instead, it encompasses all the concerns articulated by the various environmental advocacy groups including climate change, sustainability, environmental justice, and the other constellation of issues that fall into this category. For example, Exxon was sued in Massachusetts not because it violated a specific environmental law, but because it made misleading statement about climate change to investors and consumers, particularly concerning the impact of fossil fuels and the climate-related risks facing its business.
The "S" is even less defined. The social component addresses every aspect of the interaction between the company and people – not just employees but customers, members of its community, participants in the supply chain, and actual or
perceived disadvantaged groups. This includes traditional issues of safety and fair compensation in the workplace, but also covers the focus on diversity, equity, and inclusion (which has its own acronym "DEI"), antislavery, relationships with indigenous peoples, and the open-ended question of the company's responsibility to support society proactively even on non-commercial issues.
To take a few examples, it is increasingly common for United States companies to be expected to take positions on social issues such as Black Lives Matter, the so-called Boycott, Divestment and Sanctions initiative against Israel, issues relating to transgender matters, and, most recently, on abortion. Canadian companies are grappling with the United Nations Declaration of the Rights of Indigenous People. In the minds of the proponents of these matters, they fall squarely into the social obligations of every company even if not directly within the scope of its commercial interests and activities.
The "G," or governance, relates to the policies, structures, and procedures by which a company is operated. This will include its decision-making processes, board composition, risk management, executive compensation, and all the other aspects of the internal operation of the entity. This used to be of interest primarily to those inside the corporate and investment world; now, all kinds of advocacy groups see this as either a focus or a pathway to their ultimate goals. Although currently in abeyance, the California initiatives to mandate board composition presage increasing efforts to impose societal concerns on the internal operations of organizations. These may include not just equity/opportunity but the more general concept of having companies reflect society's composition.
Transformation from aspirational to legal [2]
Somewhere during the 1970s to the 1980s, the modern concept of socially responsible investing became a thing. The general idea was that investors should implicitly support "good" companies over "bad" companies by investing only in the former. The transmission mechanism would be that the stock price of the "bad" companies would be depressed compared to the favored companies which would act as an incentive to change behavior. To the extent that the goal was to directly intervene in specific actions, that was to be accomplished by pressing legislative bodies to pass laws or agencies to issue regulations.
As a result of this approach, most companies viewed these initiatives as either investor relations or public relations problems.[3] Understandably, the lead was taken in larger companies by those departments and in smaller companies by the designated spokesperson; the legal department was uninvolved or only minimally consulted. Even if lawyers had been consulted, the reaction would have been to talk about technical compliance. For example, whether the board was in compliance with exchange rules was a legal question; whether the board should have more women or people of color was entirely up to the board.
It is easy from the present to be critical of that approach knowing all the initiatives that were due to arise. But at the time, the broader scope of compliance and ethics was not sought from legal counsel. Indeed, the Association of Corporate Counsel did not even have a compliance and ethics committee until after 2005.[4]
Nonetheless, in retrospect, the creeping legalization of what was originally a moral crusade was apparent. To take one example that goes back to the 1990s, the concept of "blood diamonds" was mostly a public relations war. The goal was to "name and shame" purveyors of diamonds that were mined by forced labor under various warlords. In response, various players in the diamond supply chain voluntarily implemented a certification scheme to resolve the problem. It was only years later this program was embodied into law.[5] When it came to "blood minerals" (tantalum, tin, tungsten, and gold), the process was largely the same, but the cycle time was much shorter.
As time passed, the process of moving from advocacy and moral suasion to legislation/regulation or litigation became standard. First the proponents of a new ESG issue establish the concern publicly. Sometimes, this includes getting institutional endorsement from some non-governmental organization such as the United Nations. Then the next step is to formalize this initiative into enforceable law. Relatively recent examples include the UK Modern Anti-slavery Act of 2015 and the Uyghur Forced Labor Prevention Act[6] as social initiatives, the panoply of climate change laws such as the Canada carbon tax, and California's attempt to dictate board composition in the interests of diversity.
These trends did not end in 2022, they ramped up. The lesson to be learned is that ESG is here for the long haul, and that what is on the front pages today may very well be law tomorrow, or at least soon.
Current situation [7]
A complete survey of the current ESG landscape is beyond the scope of this article. Instead, the following are a few examples that demonstrate the wide transformation of ESG from moral to legal.
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