Rebecca Davis and Caroline Magee Quoted in Corporate Compliance Insights on Future of ESG

AGG Litigation and Environmental partner Rebecca Davis and AGG Real Estate of counsel Caroline Magee were quoted in a May 15, 2024, Corporate Compliance Insights article titled “Alive & Kicking: The Future of ESG.”

The article explored the U.S. regulatory effort to bring clarity for investors regarding companies’ environmental claims and challenges the effort faces amid international directives. The article also provides insight on how companies are responding to regulatory pressures and the impending outcome of legal challenges to the SEC’s new climate disclosure rules. Despite legal challenges to federal environmental, social, and governance (“ESG”) regulations, companies for the most part continue to uphold their ESG commitments due to those international directives on sustainability reporting and stakeholder pressure.

Caroline offered insight on what the SEC’s disputed climate risk disclosure regulation would require, including the mandated reporting of greenhouse gas emissions for certain companies and excluded disclosure requirement for indirect emissions. Including a materiality qualifier introduces subjectivity, but corporate leaders must determine materiality.

“The addition of a materiality qualifier for Scope 1 and Scope 2 GHG emissions disclosures brings this type of disclosure into line with other materiality-based SEC disclosures and is likely to be intelligible to investors for the same reason,” Caroline said. “Companies may be new at assessing materiality specifically related to GHG emissions but are likely well-versed in materiality determinations generally.”

The SEC’s decision to strike a requirement for companies to describe board members’ climate expertise has been viewed positively, ensuring the rules focus on relevant aspects.

“The expertise of the board members do not necessarily implicate the bottom line,” Rebecca said. “Also, there are vast differences in the makeups of boards and their expertise in certain areas. The requirement would have muddied comparability rather than clarified it.”

Caroline agreed and argued that, at least in that instance, the proposed rules were a step too far.

“You could have a board member with a Ph.D. in climate risk, but if the governance structures don’t allow the board and management to leverage that expertise, does the resume of a board member really help investors weigh how a company is handling climate risk?” she said. “In my opinion, the SEC was too prescriptive in the proposed rule, pushing companies to report line items that don’t necessarily provide meaningful information to investors about a company’s data-gathering and actions related to climate risk. The SEC was inching closer to pushing boards toward certain structures and personnel, so pulling back on some of these disclosure requirements re-centers the SEC on its investor and securities markets focus.”

Furthermore, the EU’s Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive, along with pressure from investors and stakeholders, play a pivotal role in compelling companies to report ESG-related data. Despite potential changes in reporting requirements, the future of ESG remains a central concern for compliance, risk, and governance professionals. The discussions surrounding the evolution of ESG and the need for a more honest conversation about the limitations and trade-offs it entails continue to shape the conversation within the corporate landscape.

“The safe course of action is to prepare a company’s internal processes and anticipate any necessary software and training needs to support not only compliance with disclosure rules that are in flux, but to meaningfully assess a company’s climate-related risks.” Caroline explained. “When it comes to tangible climate risk — physical risk, energy transition risk, regulatory risk, investment risk — reporting may be the least of a company’s concerns.”

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