Although sustainable corporate development has been embraced by virtually every public company, it is increasingly the case that a company's sustainability disclosures may expose it to increased litigation or government investigation risks. Institutional investors, pension funds and endowments, politicians, social activists, academics, the media, and shareholders are all asserting pressure on reporting companies for additional sustainability disclosures, pressure that is unlikely to abate given that millennials are far more likely to be influenced by a company's stance on sustainability issues when making purchasing, employment, and investment decisions. Sustainable Signals: The Individual Investor Perspective, Morgan Stanley Institute for Sustainable Investing (Feb. 2015).
Not surprisingly, however, increasing levels of disclosure around sustainability have become fodder for the plaintiffs' bar and active government investigators and prosecutors. The class action plaintiffs' bar, for example, has filed putative securities class actions alleging that sustainability disclosures, generally as part of other disclosures, were misrepresented or omitted material information that caused a stock price drop and related losses. At the federal level, sustainability disclosures may be subject to review by the Securities and Exchange Commission ("SEC"). Thus, companies are faced with increasing pressure to disclose more about their sustainable corporate development, yet then are potentially exposed to increased risk of litigation or investigation as a result of such disclosures. Corporate management and boards of directors therefore must assess how to balance increased sustainability disclosures with management of corporate risk.
First, senior management and the board should understand the company's strategy around current and future sustainability disclosures. The board and senior management should ensure they are in accord with what the company is disclosing about sustainability and also confirm that the statements on sustainability reflected in such disclosures are part of the broader corporate strategy.
Second, sustainability should not be used as a mere marketing tool and should be carefully considered. While it is clear that a sizeable and vocal group of stakeholders desire corporations to play a larger role in the social issues of the day, the loudest voices on these issues (e.g., social media and activists) do not always represent the interests of even a small number of the company's stakeholders. A potential solution is for the company to view sustainability disclosures as an opportunity to be proactive and thoughtful, rather than reactive.
Third, companies should consider bringing sustainability disclosures within their existing controls and compliance processes. This could be achieved by ensuring that sustainability disclosures flow through the disclosure committee controls, even if such disclosures are not made in an SEC filing, or by creating a sustainability disclosure committee that would serve a similar function. It may also mean having the internal audit function consider sustainability disclosures in developing its audit plan and including sustainability elements as part of the corporate risk assessment and compliance program.
Fourth, in making sustainability disclosures, companies should be accurate, complete, and measured, including making appropriate disclaimers where necessary. The pressure to disclose more about sustainability is likely to escalate in the coming years, so companies should take steps now to ensure those disclosures do not inadvertently expose them to greater litigation or regulatory risks.
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