Top Three Priorities on Your ESG Agenda: Action Items for
What Is ESG?
In its most basic form, ESG stands for environmental, social, and governance. Collectively it represents the ethical, moral, and cultural standards and processes in which a company has committed to operate. For key stakeholders and investors, it’s used to evaluate potential investment in a company; for employees and external vendors, it provides a window into the business’ culture and priorities.
- Environmental. How a company addresses the areas of climate change and sustainability. The underlying criteria might tackle concerns such as energy efficiency, anti-pollution efforts, water management, and other initiatives to reduce its contribution to climate change and preserve natural resources.
- Social. How a company handles employee relations — including diversity, equity, and inclusion (DEI) efforts — working conditions, wellness and safety efforts, consumer protection, and animal welfare.
- Governance. A company’s approach with employee and management ethics, structure and compensation, shareholder rights, and management remuneration.
If it sounds a lot like ESG’s precursor, corporate social responsibility (CSR), it is, though it’s noteworthy to mention that while CSR aims to make a business accountable, ESG focuses on making a business’ efforts measurable.
Business leaders and their general counsel have many priorities competing for the ESG agenda. While each company is different, these three items should be on every Board’s agenda for timely discussion.
Environmental: Make sustainability commitments
Begin by making a list of core sustainability commitments. The more a company's business is tied to environmental issues — and thus has many potential legal and regulatory exposures (such as an energy producer, auto retailer or chemical manufacturer) — the more important it is for stakeholders to be able to assess its sustainability efforts.
But even a company with a relatively limited environmental footprint, such as a law firm, has opportunities to weave sustainability measures with their vendors and business partners.
Additionally, give consideration to both short and long-term sustainability goals, like Dow Chemical’s pledge to a series of emissions and waste-related goals, including:
Carbon emission reductions. Designate target years, such as 2025 or 2030, to achieve a specified percentage of carbon reduction against your company’s current baseline. Dow aims to be carbon-neutral by 2050.
Recycling advances. Commit with your colleagues and in partnership with other business leaders to investing and promoting global recycling efforts around a common goal and timeframe. Dow has pledged to recycle one million metric tons of plastic by 2030. This commitment may address shipping and packaging materials, in-office recycling programs, embracing digital signature capabilities, adjustments to food and beverage supplies provided in office, and other opportunities to minimize waste.
Supply chain partnerships. Evaluate and strengthen contracts with vendor partners, aligning contractors with your company’s stated environment-related efforts. Together you can establish standard contractual clauses for inclusion in future contracts and internal contract playbooks. The recent Thomson Reuters article, How Legal Departments are Responding to ESG Challenges, reports that The Chancery Lane Project offers several ESG-related clauses for possible use, including “cooler plate” clauses. “Cooler plate” refers to generic clauses for every contract — embedding climate issues and net zero targets in the entire contract so that these flow into contract management.
Such clauses also reassure investors by “future-proofing” your company, with contractual protections in place in the event of a supplier being sued for violating a federal environmental policy. By having — in clear writing — how a business will respond to a contractor or supplier violating environmental regulations, this shows stakeholders that you intend to back up your corporate ESG policies in the courtroom.
Social: Strengthening DEI efforts
Social issues, particularly those related to DEI initiatives, should be in the top three of your company’s biggest ESG-related priorities. Legal teams guide the business through workforce improvements, addressing the recruitment and careers of underrepresented groups, establishing a vendor diversity program, and committing to transparency and reporting of measurable efforts to advance DEI through every system and process.
Strengthen your communications policy by putting DEI initiatives in the center of the conversation. Examples of how companies are doing this include:
Salesforce has implemented several initiatives aimed at encouraging conversation among underrepresented groups in different facets of the organization. For example, Equality Circles promote open conversations between employees and management on DEI issues. Its Equality Mentorship Program promotes the advancement of underrepresented groups and established a Chief Equality and Recruiting Officer to further advance DEI and measure progress.
Slack created Rising Tides, a sponsorship program for potential leaders from groups who have historically lacked access to institutional support.
Amazon now tracks statistically significant demographic differences in employee attrition to identify root causes and implement plans to address disparities. It’s committed to increasing hires of Black and female-identifying employees in senior roles and tech and science roles by 30% year over year from 2020.
Holly J. Gregory’s Practical Law article “Addressing Social Justice Issues: Implications for the Board” offers strategies for a company to strengthen its messaging on social issues, including:
Set clear guidelines for the process to follow when making a public statement regarding ESG issues. Allow DEI experts or consultants to review the statements before release. Your company should avoid taking positions and setting policies that it doesn’t follow up with verifiable and measurable actions.
Review current disclosures pertaining to DEI and other ESG matters, both in Securities and Exchange Commission (SEC) and voluntary reports, ensuring that public materiality considerations and other metrics are in line with current industry practices. Back up disclosures with data whenever possible and avoid aspirational statements, such as, “companies should avoid corporate platitudes, virtue signaling, green-washing, and the social equivalent.”
Improve documentation to ensure that your board and committee minutes reflect that adequate attention is given to social justice issues and that goals and action items are documented.
Governance: Management structure
A top ESG priority for corporate governance is to improve diversity in its executive leadership functions and at the management level. Governance reforms are influenced by many stakeholder groups and thankfully it’s a change that a company can make relatively quickly.
The SEC recently approved a Nasdaq requirement mandating that by August 2023, each listed company should have at least one director who self-identifies as diverse, meaning female or “underrepresented minority,” and by August 2025 should have at least two. See the Legal Update in Practical Law titled, SEC Approves Nasdaq’s Board Diversity Rules. Companies must document this or face potential delisting from the exchange. Other organizations such as the New York Stock Exchange (NYSE) are expected to follow suit.
In Helene Banks’ Practical Law article, “Board Diversity: Steering the Ship Under the Watchful Eyes of Shareholders, Lawmakers, and Regulators,” she lists several means by which ESG boardroom reforms can be implemented:
Keep in line with developments. In-house legal teams should keep their board aware of the latest industry and legislative requirements, including ensuring board policies are in sync with major institutional shareholders’ updates for voting guidelines about board diversity.
Link diversity to corporate performance. Legal should facilitate board discussions as to how diversity efforts could improve financial performance and they should review director and officer questionnaires to see if these should have greater diversity-related disclosure.
Forge consensus. Push for your board to reach consensus on a C-suite diversity policy, which could require expanding the board to include more diverse members or seeing if any board members are interested in stepping down.
The first ESG priorities as a springboard
Identifying ESG priorities is a complex task for any company and its legal department. Internal and external stakeholders are closely monitoring your company’s commitments throughout its environmental, social, and governance structures. Approaching these priorities with authenticity, follow-through, and transparency will afford your business the leniency it needs to navigate ongoing change under intense pressure and uncertainty.
With measurable goals and a steadfast commitment toward improvement, your ESG policy will significantly advance your people, protect your world, and promote better business outcomes.