The Situation: Intensifying public interest in companies' Environmental, Social, and Governance ("ESG") information has prompted many to make voluntary ESG disclosures.
The Result: The Project for Growth and Opportunity ("Project GO"), a new initiative from the U.S. Chamber of Commerce ("the Chamber"), has released a set of Best Practices to support companies in making voluntary ESG disclosures. Project GO delivers a message that sweeping government mandates or other "one-size-fits-all" standards are not necessary and can be counter-productive.
Looking Ahead: Project GO's Best Practices guide provides helpful considerations for companies that choose to make ESG disclosures. Highlighted Best Practices include ways to make ESG disclosures accessible to stakeholders, and to ensure that disclosures are tailored to reflect companies' particular growth and risk-management strategies.
Amidst growing political debate over the role corporations should play in solving the myriad of socio-economic challenges present today, the U.S. Chamber of Commerce has published helpful guidance designed to assist companies in becoming constructive, creative agents of change without heavy-handed government intervention.
In October 2019, the Chamber launched the Project for Growth and Opportunity, which is a multi-year campaign to identify practical, sustainable ways to address socio-economic challenges and reinvigorate the American commitment to free enterprise. In announcing Project GO, Chamber of Commerce President Suzanne Clark emphasized that companies should lead best practices in key areas such as growing board diversity, expanding investment opportunities for "Main Street" investors, and voluntary ESG reporting. Project GO is a welcome initiative and a useful counter-weight to calls by some politicians and activists for greater government control over corporations.
Summary of Best Practices
In November 2019, Project GO released a Best Practices guide, prompted, in part, by the increasing public interest in corporate sustainability and company approaches to relevant ESG topics. These best practices champion a commitment to ESG reporting that is voluntary and variable: voluntary because companies can handle their ESG reporting without additional regulation and variable because ESG disclosures should fit the needs of particular companies and industries. The Best Practices guide operates from the premise that a mandatory or "one-size-fits-all" approach to ESG reporting is inefficient and does not serve a company or its investors.
With these principles in mind, Project GO highlighted the following Best Practices that companies should consider:
- Stay Focused. ESG disclosures should focus on long-term value creation and risk management.
- Consider the Intended Audience. Tailor the ESG disclosure according to the intended audience(s), and pay particular attention to information that would be most useful for investors and other stakeholders.
- Own ESG Reporting. Preparers of ESG disclosures should work with relevant in-house subject matter experts, including legal counsel, to collect all relevant material information and ensure a diversity of perspectives.
- Use Plain English. Define in plain English any jargon or terms that do not have well-understood definitions.
- Make ESG Disclosures Readily Accessible. Make ESG information easy for users to find, such as through dedicated web pages.
- Maintain Flexibility. Modulate disclosure based on ESG factors and metrics that are genuinely relevant to the company and meaningful for stakeholders. Companies should not necessarily defer to what is identified in various third-party frameworks and standards.
- Explain the Rationale. Articulate why the company selected the metrics and topics it ultimately discloses and why management believes those metrics and topics are important to the company and its stakeholders. Consider including in reports peer-reviewed quantitative information and engage with peers or investors to shape ESG disclosure frameworks and baselines.
- Describe the Internal Review and Audit Process. When appropriate, include a description of the company's internal review and audit process or any external verification that the company received of its ESG-related information.
As the Best Practices suggest, companies should confer with legal counsel regarding the potential risks associated with specific ESG disclosures. For listed companies, the Best Practices guide particularly notes that ESG disclosure should not be incorporated into SEC filings or required in SEC filings unless the disclosure is "material" under the United States Supreme Court's definition of materiality in federal securities law cases.
It is crucial to keep in mind that voluntary ESG disclosures that are misleading or false could form the basis of a lawsuit under securities, consumer protection, and antifraud statutes. The Chamber's guidance provides a useful starting point for minimizing that risk. For further information about minimizing potential legal risks from voluntary ESG disclosures, see Jones Day's July 2019 White Paper.
As the Best Practices guide notes, public interest in companies' ESG disclosures is rising. Issuing thoughtful disclosures can help companies respond to their stakeholders' interests and concerns, but companies should take precautions to minimize the attendant legal risks in today's social and political climate.
Three Key Takeaways
- Project GO's Best Practices are largely in line with existing guidance, although the guide highlights in particular the increasing interest that investors, as opposed to other stakeholders, have for this information. This investor interest raises the bar for companies seeking to respond to this rising demand for ESG reporting in terms of potential legal and reputational liability.
- Companies should be aware that voluntary ESG disclosures can form the basis for a lawsuit under securities, consumer protection, and antifraud statutes. Companies should therefore put careful thought into the content and context of their ESG disclosures, treating them as part of the company's overall strategy.
- Project GO's Best Practices demonstrate the U.S. Chamber of Commerce's position that ESG reporting should be voluntary and tailored to the particular needs of each company and industry-specific, in contrast to directives in other jurisdictions, such as the European Union, which has adopted various significant ESG disclosure requirements.
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