Companies are experiencing growing pressure to bolster their commitment to environmental, social, and governance (ESG) matters. GCs say they are concerned about disclosure risks as well as CEO and employee-driven activism that could come with ESG, according to a new report.
Reuters reports that 75% of the participants in the Rock Center for Corporate Governance survey at Stanford University said they faced this pressure. That pressure, especially from employees, has been to grow ESG efforts in the past several years.
The survey conducted earlier this year drew responses from nearly 70 general counsel and senior legal officers.
What is ESG?
Environmental, social, and governance (ESG) is a set of criteria and standards for a company’s operations. Socially conscious investors use these criteria to screen potential investments:
Environmental criteria considers how a company performs as a steward of nature.
Social criteria looks at the way in which a company manages its relationships. These relationships are with employees, suppliers, customers, and the communities in which it operates.
Governance pertains to a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
ESG criteria have become a popular way for investors to evaluate companies in which they might want to invest. They have proved to be a growing priority for corporations. Shareholders and employees (notably younger generations) have asked them to be more active on issues like racial injustice and climate change.
Specifically, positive ESG criteria can include:
Publishing carbon or sustainability reports.
Seeking to lower greenhouse gas emissions.
Limiting harmful pollutants and chemical.
Using renewable energy sources.
Operating an ethical supply chain.
Paying fair wages.
Supporting LGBTQ rights and encourages diversity.
Implementing policies to protect against sexual misconduct.
Embracing diversity on their board of directors.
Promoting corporate transparency.
Employing a CEO independent of the board chair.
General Counsel Asked to Guide ESG Efforts
GCs and their corporate legal departments are increasingly tasked with guiding these efforts. In the survey, general counsel respondents said their companies are most frequently pressured to increase their financial commitments to the diversity, equity, and inclusion component of ESG. In addition, they said they also face lesser but considerable pressures concerning companies’ social impact, wages paid to lower-level employees, and environmental and sustainability practices.
The report showed that roughly 72% of general counsel either somewhat or significantly believed that ESG investment would improve their companies’ long-term financial performance. Nonetheless, some expressed concerns that disclosing their environmental, diversity, and social impact data would increase legal and regulatory risk.
Just 27% of the respondents said they make Equal Employment Opportunity data they report to the government publicly available on their websites.
GCs were also divided as to whether their CEO should take a vocal stance on issues not directly related to the company’s core business. About 50% believe CEO activism can produce reputational benefits for the organization; however, more than a third said they fear it could result in reputational, legal, or regulatory harm to the company.
Likewise, general counsel seemed divided on how to handle employee activism. Approximately half the respondents said that employee activism was a workplace-related matter of which employers should actively engage with employees. But over a third disagreed.
Despite the trend toward ESG, stakeholder capitalism, and corporate activism, the report concluded that general counsel are cautious about the uncertainty of its long-term impact.
“It is notable that over half of the people who are responsible for balancing the risk and reward of corporate actions advocate dialing back some of these efforts and recommitting to the central strategic and profit-making purpose,” it said.