By Jessyca Henderson, Esq., Owner, The Law Office of Jessyca L. Henderson LLC
April 28, 2022
Traditionally speaking, the primary duty of a corporation is to maximize profits on behalf of its shareholders. A public shift away from that mindset is spreading, represented by the growing popularity of ESG, which stands for Environmental, Social, and Corporate Governance. It is, in a nutshell, the implementation of a governance structure and reporting system that evaluates a company’s performance related to environmental and social factors that go beyond the company’s duty to maximize profits.
Recent societal shifts have called on companies to demonstrate their contributions and eliminate the environmental and social harms they may cause in the communities where they operate (and generally). In the absence of regulation (for now), a company’s reputation is most at stake in these early days of ESG. More and more, companies ignore the role of ESG at their peril, risking being left behind the movement, or worse, perceived as working against it.
As for reputation, the court of public opinion convenes daily (and non-stop) on social media, where decisions in board rooms can become fodder for negative public debate. Missteps become stories that go viral without warning, and investors are more likely to vote with their feet and divest from companies that contribute to adverse environmental or social outcomes. Companies that demonstrate above-and-beyond level performance (such as those that have distinguished themselves as “B” Corporations) stand to benefit from their position as early adopters (as we all benefit from their willingness to do good in the world).
There are many “E” factors to consider in both investing and internal practices. How well a company performs related to conserving energy, water, and other natural resources, protecting ecosystems and biodiversity, reducing carbon emissions, mitigating climate change, and promoting resilience, among other factors — is up for evaluation in ESG. Companies are more often choosing to report on their actions, physical assets, and financial portfolios related to these factors.
Newer to corporate life and perhaps more susceptible to public scrutiny and opinion are the concepts of social and environmental justice. Whether a company is union-friendly, provides fair pay and leave, prioritizes worker health and safety, and proactively seeks a diverse workforce, among others, are some of the ways it may be measured on social issues. Suppose a company disrupts a vulnerable population’s access to clean air, water, or cultural resources. Now more than ever, they may face severe reputational consequences. In this way, environmental and social justice issues dovetail. Increasingly, companies hire diversity, equity, and inclusion managers and consultants to examine their internal practices and improve their social impacts to net positive.
No matter the corporation’s size, the “G” in ESG determines how the company manages both the environmental and social aspects of its policies, programs, and reporting. Avoiding material misrepresentations and fraud is the concern of any corporation. Still, the scrutiny on those that hold out corporate sustainability plans is perhaps under a brighter light. Anti-corruption and whistleblower policies, as well as general transparency, are standard expectations for corporate governance. In an ESG-driven market, as the younger generations come of age as consumers and become more influential culturally, the requirement for social and environmental impact reporting will only grow. In this August 2020 post, Harvard Law School Forum on Corporate Governance advises managers to monitor internal ESG disclosures and commitments, treat ESG statements like any other public statements, educate employees on the risks of ESG disclosures, and establish well-defined procedures for measuring performance.
What’s the Yardstick for ESG?
So how are those measurements to be made? In the case of buildings, voluntary programs and their tools such as EPA’s EnergyStar Portfolio Manager, numerous life cycle assessment (LCA) tools, and voluntary rating systems have provided the means to baseline and measure performance. But what about investments and general business practices? Today numerous private data providers will evaluate and score a company for evaluation by investors and for companies in their ESG disclosures.
These data providers vary widely in what factors and components they evaluate, their level of transparency, and their reputation amid an explosion of interest. Despite these early wild-west days of ESG data collection, once the SEC steps in with new rules, the ultimate regulations will come with a need for evaluation standards. In terms of ESG disclosures, the SEC carries a much bigger stick to compel public companies than the largely market-transformation-focused early green building movement. Fortunately, there is time to weigh in on the future of mandatory ESG. Anyone interested in weighing in on the new SEC rules should plan to submit their comments to the SEC by May 20.
For further reading and a breakdown of some of the corporate legal issues surrounding ESG, consider reading this August 2020 post by Harvard Law School Forum on Corporate Governance.
Jessyca Henderson is an attorney and architect based in Maryland, providing legal services and consulting to design professionals, corporations and government related to sustainable design, building science, and environment in Maryland, California, and the District of Columbia. www.jlhlawoffice.com
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.