Debates about ESG are taking place in boardrooms, legislatures and dining rooms across the US. Although the US has been slower than Europe to embrace mandatory ESG disclosures, there has been a notable shift in recent years. Investors, asset managers and other market participants increasingly recognize the importance of ESG data in assessing a company’s strategy, long-term value and risk profile.
Many institutional investors, particularly larger ones, are increasingly incorporating ESG factors into their decision-making and engaging with companies on sustainability matters. There also continues to be growing demand from US investors for ESG-based products and strategies.
At the same time, the SEC has proposed new disclosure requirements on a number of ESG issues, including climate change, human capital and cyber-security, while the US Department of Labor is addressing related issues, such as the duty owed by retirement plan fiduciaries to plan participants in incorporating ESG considerations into their decisions.
Despite these strong tailwinds, growing anti-ESG sentiment has placed the whole concept at a crossroads. Legislation prohibiting the use of ESG investment strategies has been introduced in at least 17 states, while Republican-led states seek to punish companies that take stances on ESG issues. A number of ‘culture war’ issues – including reproductive rights and diversity, equity & inclusion (DE&I) programs – have complicated the ESG landscape as long-standing company initiatives in these areas are being challenged by opponents of ESG through litigation, boycotts and shareholder proposals.
At the same time, plaintiffs’ firms have brought a number of derivative suits against public companies alleging a failure to fulfill diversity pledges. While these cases have been largely dismissed, they still require management time and, in some cases, have led to costly settlements.
ALIGNING ESG AND COMPANY STRATEGY
In this context, how should companies approach ESG matters? ESG should be viewed in the context of a company’s business and its strategy. The first thing any effective ESG program should start with is a materiality assessment, where a company looks at its business and strategy through an ESG lens.
The key question to answer is: what are the top ESG factors that impact a company’s business from the perspective of its key stakeholders – investors, clients, employees, suppliers, regulators and the communities in which it operates? By doing this analysis and structuring ESG programs around the results, a company can respond to the pro and anti-ESG crowds by identifying the critical ESG factors that relate to the company’s business.
I’ve overseen ESG governance, reporting and engagement for two public companies: Uber Technologies and Broadridge. Each company deployed this focused approach differently, but each approached it successfully. At Uber, our top ESG considerations would be obvious to anyone following that company. They included driver wellbeing, safety, privacy, carbon emissions and congestion, topics that impacted Uber’s business strategy and operations on a daily basis. We had a vastly different outcome to the analysis at Broadridge, where cyber-security, privacy, compliance, DE&I and regulatory developments are among our top ESG considerations.
Initiating discussions with investors and key stakeholders at each company about our materiality analysis facilitated comprehension of our ESG reporting and strategy. Important constituents were reassured by incorporation of this analysis into our program.
Identifying and prioritizing ESG factors that are relevant to company operations, industries and stakeholders demonstrates a profound comprehension of strategic objectives but also shows commitment to sustainable business practices. This approach is vastly preferable to blindly adhering to a lengthy list of 389 factors or adhering to a single rating application. It enables companies to align their actions and investments with key ESG principles, fostering long-term value creation and positive societal impact.
ESG issues will continue to be debated in the US by regulators, legislators, companies and investors, many with divergent views. This is a feature and not a bug. Companies that start by focusing on their business strategy and apply an ESG lens will successfully navigate the ESG maze.
Keir Gumbs is Broadridge’s chief legal officer. Previously, he was Uber’s deputy corporate secretary and deputy general counsel
