The GC and ESG: From Great Risk Comes Great Opportunity
August 28, 2023
Keeping up with ever-evolving ESG standards is a daunting task for any organization. This year alone, the Securities and Exchange Commission (“SEC”) either issued, is expected to issue or may issue three separate sets of rules that impact corporate ESG: In July, the SEC published revised cybersecurity disclosure and risk management guidance.1 Later this year, new greenhouse gas emissions (“GHG”) disclosure rules are anticipated.2 And finally, there is talk that the SEC’s long-anticipated revision to its 2020 rules on human capital management may arrive before year’s end.3
As ESG standards evolve, so too does the role of the general counsel (“GC”). Many are already in charge of identifying and tracking certain corporate ESG performance metrics, as indicated by survey results in The General Counsel Report 2023 by FTI Consulting and Relativity.4 Of the GCs surveyed that said they are facing increased risks or capacity strains within their legal departments, every respondent listed ESG as a key area driving rising demand. Meanwhile, 60 percent of respondents reported that their organizations are concerned about ESG as a business imperative.5
GC: The Hub for Company ESG
More than half (57 percent) of GCs surveyed ranked ESG as one of their top five legal risks. Some cited the fact that ESG is impacting the allocation of resources and that the GC is responsible for ensuring ESG coverage, consistency and compliance across the entire organization.6
Relieving the Pressure
These developments are creating new expectations for today’s GCs. And a ton of pressure. As noted in The General Counsel Report, GCs are being tasked with monitoring the regulatory, legal and statutory landscape within their specific industry and operations to identify and manage ESG risk for the foreseeable future. The disparate and complicated nature of that landscape presents significant challenges for any GC, or even a legal department, to adequately oversee.7
GCs do not need to go it alone. One best practice is to assemble an internal cross-functional ESG working group to bring insights to the table and raise accountability. By involving internal leaders from areas such as human resources, supply chain, information technology and sustainability, GCs can address potential issues holistically and proactively. At the same time, a cross-functional group is designed to provide thinking and guidance on linking risk management with business priorities for creating shareholder value.
Supply Chain as an Example
The increasing interconnectedness of global supply chains will be a source of significant ESG risk in the next decade. As such, supply chain compliance offers an excellent model for the ways in which risk management can be linked to opportunities to support an organization’s environmental, social and governance goals. What follows is a brief look at how that strategy can work.
Risk Area: Environmental
As climate change concerns continue to impact the globe, more Scope 3 GHG emission requirements are expected to be enacted, and traceability will continue to be an issue around forced labor and the source of certain raw materials. Even privately owned businesses will likely be subject to these rules if they are a supplier or vendor for companies that are required to make disclosures where supply chain is implicated.
Opportunity: Enhancing core supply chain competencies can place an organization in a better position to incorporate elevated ethical standards that will apply to the future. Assessing supplier effectiveness, for instance, can improve ethical sourcing and procurement practices. Performing stress-test scenarios on assumptions on GHG pathways — including emissions pricing, fuel costs and changing demands — can facilitate rapid, data-driven decision-making.
Risk Area: Social
Establishing and maintaining a diverse, equitable workplace is a social imperative with direct consequences on the success of an organization. In fact, investors are looking more closely at D&I reporting as one determinant for where to allocate funds.
Opportunity: For those organizations still striving to reach their D&I goals, opportunity may exist along the supply chain to advance objectives. By hiring vendors with minority ownership or extending existing contracts with such vendors, for instance, firms can progress their commitment toward greater corporate social responsibility.
Risk Area: Governance
Exposure to greenwashing enforcement and litigation for companies that make unsupported claims about their ESG efforts is rising.8 Greenwashing challenges from global market regulators may also increase as disclosure requirements about future aspects of strategic plans, progress and risks intersect with unknowns about the future availability of resources and new technologies to achieve such plans.9
Opportunity: Data integrity is paramount to avoiding accusations of greenwashing. By combining sound data management, technology, and information governance, the organization can achieve transparent, authentic reporting. (Doing so also potentially improves governance of the ever-escalating volumes of enterprise data that must be preserved to meet legal obligations.) Capturing and maintaining data from the internal team helps identify performance gaps, encouraging everyone on the team to demonstrate progress toward ESG goals.
Managing Future ESG Risk
For companies with large global footprints, external counsel can be instrumental in helping internal groups develop best practices and uncover hidden or unknown risks in new markets. An external perspective can inspire companies to view ESG initiatives not only as risk mitigation exercises, but as growth opportunities that align with business strategies. These opportunities can also support consistency and predictability, allaying another primary concern identified among GCs in the survey.
In the end, having a cross-functional team at the table with accurate and verifiable data can go a long way toward alleviating the pressures faced by today’s GCs to report metrics with integrity.
1: Kelly, Jordan Rae, and Adriana Villasenor. “SEC’s Revised Cybersecurity Rules Have Global Reach.” FTI Consulting. (August 1, 2023). https://www.fticonsulting.com/insights/fti-journal/secs-revised-cybersecurity-rules-have-global-reach.
2: Pike, Oliver. “The Time for Public Companies to Prepare to Meet SEC Climate rules is Now.” Thomson Reuters. (April 19, 2023). https://www.thomsonreuters.com/en-us/posts/esg/sec-climate-rules/.
3: Rothman, Sheri. “What Investors Need to Know About the SEC’s Human Capital Disclosure Requirement.” Quartz. (May 8, 2023). https://qz.com/sec-human-capital-disclosure-rules-investor-forecast-1850412731.
4: King, Wendy and Nick Athanasi. “The General Counsel Report 2023.” FTI Consulting. (July 6, 2023). https://www.fticonsulting.com/insights/reports/general-counsel-report-2023.
8: “Enforcement Task Force Focused on Climate and ESG Issues.” U.S. Securities and Exchange Commission. (April 11, 2023). https://www.sec.gov/securities-topics/enforcement-task-force-focused-climate-esg-issues
9: Wass, Sanne. “Banks Face Mounting Risk of Fines, Regulatory Probes Over Sustainability Claims.” (February 27, 2023). https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/banks-face-mounting-risk-of-fines-regulatory-probes-over-sustainability-claims-74385257.
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