A Future of Mandatory Environment, Social, and Governance (esg) Disclosures: a Review of Public Comments as a Case Study in the Impact of Esg

• Jurisdiction: United States,Federal
• Publication year: 2022
• Citation: Vol. 9 No. 1

A Future of Mandatory Environment, Social, and Governance (ESG) Disclosures: A Review of Public Comments as a Case Study in the Impact of ESG

Jessica Dennis Jackson

A FUTURE OF MANDATORY ENVIRONMENT, SOCIAL, AND GOVERNANCE (ESG) DISCLOSURES: A REVIEW OF PUBLIC COMMENTS AS A CASE STUDY IN THE IMPACT OF ESG

Jessica Dennis Jackson^*

Table of Contents

Introduction.............................................................................................. 121

A. Delta Air Lines Case Study....................................................... 126

I. Market Demand for ESG Initiatives, and How the Market Has Developed ESG Strategies of Its Own, Absent Regulation..................................................................................... 127
II. Former, Current, and Future Timeline for SEC Mandated Climate Risk and Other ESG Disclosure Regulation............ 129

A. Where ESG Fits in the Corporate Governance World: ExxonMobil Shareholder Litigation ......................................... 129
B. SEC Timeline Regarding ESG Disclosures .............................. 130

III. Responses to the SEC's RFPI........................................................ 135

A. SEC Letter Type Responses ...................................................... 136

1. Letter Type A ...................................................................... 137
2. Letter Type B ...................................................................... 137
3. Letter Type C...................................................................... 137
4. Letter Type D...................................................................... 138

B. Public Comments Received in Response to SEC's RFPI Regarding Climate Change Disclosures .................................. 138

1. Corporations ...................................................................... 138

a. Alphabet Inc., Amazon.com Inc., Autodesk, Inc., eBay Inc., Facebook, Inc., Intel Corporate and Salesforce.com, Inc. ...................................................... 138
b. Chevron ....................................................................... 139
c. Delta ............................................................................ 139
d. Walmart....................................................................... 140

2. Investment Managers.......................................................... 141

a. BlackRock.................................................................... 141
b. The Vanguard Group, Inc............................................ 142

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3. Sustainability Accounting Standards Setter, the Sustainability Accounting Standards Board (SASB) .......... 143
4. Other Interested Parties ..................................................... 143

a. Natural Resources Defense Council (NRDC).............. 141
b. Society for Corporate Governance .............................. 144
c. PriceWaterhouseCoopers LLP .................................... 145

IV. Criticism of ESG, Other Issues, and Considerations.............. 146

A. Current Lack of Consistent Measurement Standards, Metrics, and Expectations ...................................................................... 146
B. Republican Criticism of ESG Disclosure Mandates................. 147

1. Republican Members of U.S. House Committee on Financial Services .............................................................. 147
2. Republican Members of U.S. Senate Committee on Banking, Housing, and Urban Affairs ................................ 148
3. Georgia Attorney General Christopher M. Carr................ 148

C. International Action .................................................................. 148
D. ESG Criticism from Former BlackRock Official ...................... 149

Conclusion: What Do the Comments, Criticisms, and Rulemaking Intentions Themselves Tell Us About Where ESG Is Heading? ...... 151

Introduction

What does maximizing shareholder value mean in 2022? Historically, the role of the corporation has been to maximize profits to present the greatest financial return to shareholders.¹ Companies are vessels for profit—after all, is profit not really the endgame of the American Dream? In a May 2020 post on the Harvard Law School Forum on Corporate Governance, Martin Lipton, a founding partner of the renowned corporate law firm Wachtell, Lipton, Rosen & Katz, articulated corporate purpose as follows:

The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long-term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors using its business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation's pursuit of this mission.²

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How, then, should we expect companies to act in the face of public pressure to appear aligned with social progress and sustainability, as opposed to good old-fashioned profitability? This Comment aims to answer this question in the context of corporate social responsibility (CSR) commitments and socially responsible investments. As this Comment highlights, the answer varies depending on who you ask, and such a divergence of thought has caused the market to initiate the emergence of sustainable investment standards-setters, companies, environmental groups, and regulators with wildly different solutions aimed at maximizing the traditional and emerging purpose of the American corporation as a champion for shareholders and social progress.

Environmental, social, and governance (ESG) criteria or metrics "are a "set of standards for a company's operations that socially conscious investors use to screen potential investments."³ Such metrics allow socially conscious investors to evaluate how well or to what extent a company's operations consider the environmental, social, and governance-related impacts of their business.⁴ Environmental criteria measure the extent a company has a positive or negative impact on the natural environment or how the company takes climate change and sustainability into consideration when conducting its business operations.⁵ Social metrics examine how companies interact with the people they employ and the communities they operate in, including community impacts, its employees, and its customers.⁶ Notably, social metrics include consideration of human capital management, or the idea that "workers can be viewed as 'assets' that are crucial to firm performance and that ought to be managed just as carefully as physical and financial assets."⁷ Governance concerns the ethics of its internal operations from the top down, and considers factors like corporate leadership, executive compensation and ethics, and shareholder rights.⁸

Market forces, consumer demand, and investor demand have driven the implementation of corporate ESG initiatives, leaving companies with no option but to be more conscious about the way they do business. Investors use ESG

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disclosures not only to determine a company's alignment with environmental and social progress, but also in part to measure the risk a given investment carries.

Many companies have moved to measure their success in several ESG criteria and have been proactive in disclosing their ESG indicators to the public to compete with a growing number of other future-oriented companies and investments.⁹ A company or brand's actual or apparent consideration of environmental sustainability or social responsibility has become increasingly tied to its reputation and marketability. However, without any current legal duty or regulatory guidance as to what ESG measurements to consider and how to record and disclose them, companies are left to decide what to measure and disclose on their own. Further, such decisions, including materiality judgments, are expensive for companies to come by, as they must frequently respond to shareholder inquiries regarding ESG information.¹⁰

The Securities and Exchange Commission (SEC) has long indicated its plan to focus on ESG disclosure regulation, specifically climate change disclosures, including a company's greenhouse gas emissions and financial impacts of climate change.¹¹ This Comment was written before the SEC released its March 21, 2022 proposed rule changes for The Enhancement and Standardization of Climate-Related Disclosures for Investors¹² that would require registrants to "include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements."¹³ This Comment primarily surveys public participation in response to the SEC's informal March 15, 2021 Request for Public Input (RFPI) on climate disclosures.¹⁴ Responses

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to the RFPI shaped the proposed rule, and they foreshadow what we can likely expect in response to the proposed rule.¹⁵

The business and environmental risks associated with climate change have caused investors and sustainability organizations to advocate for SEC attention to climate change disclosures specifically. While the market has sped ahead of regulators in terms of favoring ESG initiatives and demonstrating knowledge that certain ESG disclosures could very likely be required in due time, there has been less talk around certification frameworks companies can or will be required to use to ensure their disclosures are vetted and accurate.¹⁶

Climate disclosures are increasingly top of mind for companies and the public, as we have seen a recent and abrupt shift from some denying the reality of climate change (ExxonMobil undermined its...