Gregory A. Brower is Chief Global Compliance Officer for Wynn Resorts. He also serves on WLF Legal Policy Advisory Board and is the WLF Legal Pulse’s Featured Expert Contributor, White Collar Crime and Corporate Compliance.
As corporate environmental, social, and governance (“ESG”)-related obligations continue to expand under international law, U.S. federal law, and the laws of the various states, so too do the risks associated with such obligations for publicly traded companies across a broad range of industry sectors. Indeed, one sign of this growing set of risks was the SEC’s recent announcement of an ESG Task Force whose mission is to develop initiatives to proactively identify ESG-related misconduct among publicly traded companies. As the threat of ESG-related claims and enforcement actions continues to expand, companies need to be ready. Here are five things that companies can do now to mitigate the risks presented by this trend.
(1) Effectively communicate the company’s commitment to ESG. A company’s senior leadership team must very clearly communicate its ESG strategy. Companies should periodically report on their ESG impact in a way that is easy to understand, uses a standard ESG reporting framework, and includes a message from the CEO. With investors, regulators, and policymakers increasingly focused on companies’ ESG performance, transparent and useful ESG reporting can only serve to enhance a company’s credibility with each of these important constituencies.
(2) Clearly define the chief compliance officer’s role. As the focus on ESG increases, the attendant risks for any company become more significant. It therefore follows that the company’s CCO should play a central role in ensuring the company’s ESG compliance efforts. Whether it’s third-party due diligence or reviewing the accuracy of disclosures or investigating misconduct, ESG-related issues should be fully integrated into a company’s overall compliance program. As guardian of a company’s culture of compliance, and with the growing risk associated with ESG, it simply makes sense that the CCO be a partner in the overall ESG effort.
(3) Beware of enforcement and litigation risks. As noted above, the SEC clearly signaled its intention to significantly ramp up its focus on potential regulatory violations in the ESG space. So too has the plaintiffs’ bar turned its attention to ESG in three general areas—corporate operations, corporate governance, and corporate disclosures—and courts are increasingly allowing such claims. While ESG litigation has so far been mostly focused on climate change and environmental incidents, social issues are growing in prominence as potential targets for claims.
(4) Conduct risk assessments. While anticipating each and every contingency is impossible (see, e.g., COVID-19), it is possible for companies to anticipate and mitigate likely ESG risks. Indeed ESG risk analysis should be incorporated into a company’s overall enterprise risk management (“ERM”) efforts. A company should choose which risk assessment approach makes sense for its unique operational reality, but beyond identifying the right standards, the basic process should be familiar to companies from their experience with Sarbanes-Oxley or FCPA compliance.
(5) Engage with policymakers. Logical and consistent ESG standards and reporting requirements are obviously a matter of public policy, and companies should ensure that they have a seat at the table when such policies are being made. Earlier this year, the E.U. Parliament passed legislation which will allow for new regulations concerning ESG, and most observers agree that ESG policy will be a priority for the Biden Administration’s regulatory agenda. In addition, the U.S. House recently passed the ESG Disclosure Simplification Act, and several states have signaled their own interest in making ESG policy. In light of this clear interest by policy-makers, it will be important for companies and industries to get ahead of these efforts by engaging with legislators and regulators early in the law or rule making process so as to ensure that those making these decisions have the best information available about how such decisions will affect companies including their shareholders, employees, and other stakeholders.
It is now abundantly clear that ESG is a key business issue and mitigating the associated risks should be a priority for any publicly traded company. The myriad challenges presented by ESG issues are only going to grow in complexity in the months ahead. Increasingly, a company’s integrity will be evaluated and judged as much by its ESG strategy and performance as by other, more traditional measures. Companies are well-advised to embrace this new reality as ESG performance becomes ever more important to long-term growth and success.