LAW
LAW
“ ESG ” Requirements Impacting All Companies
By : Agnes Antonian and Anthony J . LoPresti
ESG ( Environmental , Social , and Governance ) is a term that gained global prominence in the early 2000s because of the United Nations ’ efforts to encourage financial institutions to allocate investments to socially responsible endeavors . ESG is many times referred to as “ responsible investing ” or “ impact investing .” The “ E ” or “ environmental ” was largely intended to address climate change , the “ S ” or “ social ” for diversity , equity and inclusion ( DEI ) related issues , and “ G ” or “ governance ” for certain practices including but not limited to management-employee relations and compensation for executives and employees . Specifically , as it relates to climate change , most efforts are aimed at reducing greenhouse gas emissions (“ GHG ’ s ”).
Accordingly , a common goal for companies and other entities is to be “ net-zero ” by a year certain , or , in other words , to reach a point where an entity is responsible for no net GHG emissions . The same entities also establish yearly goals to reduce GHG emissions by certain percentage points . To lower GHG emissions , entities focus on ESG initiatives such as decarbonization , electrification , energy conservation and other GHG reduction measures .
As ESG initiatives move to the forefront of the business world , there will be substantial impacts on companies of all sizes and in all sectors through the new developments in this space . Specifically , as Federal Regulators and State
ESG is also referred to as “ responsible investing ” or “ impact investing .”
Photo : Getty Images / iStockphoto / pcess609
Agnes Antonian , Chair Connell Foley LLP ’ s Environmental Law practice group
Legislatures step-in to proscribe disclosure requirements for ESG initiatives , all businesses within the stream of commerce will be impacted , whether through compliance requirements or the rise in litigation matters .
SEC Regulations
The Securities and Exchange Commission ( SEC ) issued a press release on March 21 , 2022 , with then-proposed rule changes that would require certain climate-related disclosures in registration statements and periodic reports . When proposed , the rule changes would require the disclosure of 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 financial audited statements .”
Specifically , the rule changes would require publicly traded companies to disclose its ( 1 ) governance of climate-related risks and relevant risk management processes ; ( 2 ) how any climate-related risks identified have had or are likely to have a material impact on its business and consolidated financial statements , which may manifest over the short- , medium- , or long-term ; ( 3 ) how any identified climate-related risks have affected or are likely to affect strategy , business model , and outlook ; and ( 4 ) the impact of climate-related events ( i . e ., severe weather or other natural conditions ) and transitions activities on the line items of a company ’ s consolidated financial statements , as well as on the financial estimates and assumptions used in the financial statements .
Anthony J . LoPresti , Associate , Connell Foley LLP
The climate-related risk information included the disclosure of GHG emissions , the subject of many cases coming forth in the rise of greenwashing litigation . Originally , the proposed rules established three ( 3 ) scopes of information related to GHG emissions that a company must disclose :
Scope 1 : Requires a company to disclose information about its direct GHG emissions .
Scope 2 : Requires disclosure of indirect emissions from purchased electricity or other forms of energy .
Scope 3 : Requires disclosure of GHG emissions from upstream and downstream activities in its value chain .
The SEC adopted these rules on March 6 , 2024 . However , Scope 3 was not included in the regulation ’ s roll-out amid public pressure from the publicly-traded corporations that asserted collection of data related to the more-distant emissions in this category would be overly expensive and complicated . Accordingly , companies are now required to disclose only the Scope 1 and 2 requirements – direct and indirect GHG emissions .
The issuance of these regulations resulted in immediate , significant litigation filed against the SEC ’ s new climate disclosure rules in multiple states . These matters are now consolidated in the United States Court of Appeals for the Eighth Circuit . The nine consolidated cases challenge the new SEC rules , claiming that it has gone beyond its statutory authority by pursing “ an environmental agenda .” Meanwhile , environmental groups have argued
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