Is ESG for Me? The Risks Around Disclosing Environmental Efforts

Welcome to the February 2022 edition of our newsletter!  In this issue, we’ll examine risks to publicly-traded companies concerning the emerging field of environmental, sustainability and governance, or ESG, requirements.

Calls for Action May Lead SEC to Create New Climate Rules

Within the past decade, investors have joined climate activists in scrutinizing the effects of a company’s operations upon the climate.  Metrics like tons of greenhouse gases produced by companies, especially capital-intensive ones, have become a focus of large institutional investors, notably a handful of fund managers whose portfolios collectively contain trillions of dollars.  Those assets under management have given these investors leverage about which climate activists could only dream.

Those large funds have begun wielding their clout, and regulators are considering whether, and how, to create a policy response, most likely by requiring companies to disclose certain data tat some currently do voluntarily.  As with all nascent policy measures, the process will take time and evolve, but in the interim potential investors can take various steps to assess a company’s risk on their own.  Has a company’s operation been sued, at the county or federal levels in the United States in particular, for violation of local dumping or disposal rules, or other workplace conditions?  Have agencies like the U.S. Environmental Protection Agency and Occupational Safety and Health Administration, as well as their more local corollaries, cited the company for improper working conditions, inadequate cleanup measures of any hazardous waste produced, or other relevant violations?  News searches will also help gauge local, and perhaps broader, reaction to any identified transgressions.  This will help your clients determine the severity of any identified problems, and consider any longer-term risks posed.  Finally, although certainly not an objective measure, reading items about a company’s operations written by local or national climate activists can provide insight, albeit from a subjective viewpoint.

The power of activism in any field grows when capital is applied to it, and environmental, substantiality and governance matters are no exception.  Savvy investors can anticipate risks posed, especially in sensitive industries like energy and food production, to stay one step ahead of the trends.