ESG enforcement is on the rise: Are you ready?

Investors and American financial authorities have made it clear that they want to hold corporations and asset managers accountable for their public ESG pronouncements. Many public firms and investment advisers began planning for anticipated enforcement actions when the Securities and Exchange Commission (SEC) established the Climate and ESG Task Force inside the Division of Enforcement with the explicit goal of finding ESG-related misbehavior.

The Task Force is actively identifying "significant gaps or misstatements in issuers' disclosure of climate risks under existing standards, and disclosure and compliance issues relating to investment advisors' and funds' ESG strategies" utilizing a range of techniques and available sources. It collaborates closely with the Divisions of Corporation Finance, Investment Management, and Examinations as well as other SEC Divisions and Offices.

The Task Force applies long-standing principles of disclosure and fiduciary duty, which we have seen play out in a few enforcement actions filed to date. The SEC has proposed new rules to address climate and ESG-related disclosures by public companies and registered investment advisers and funds, but the Task Force does not need to wait for new rules to police this misconduct.

Whether in voluntary comments made, for instance, in corporate sustainability reports, on websites, or in marketing materials, or in SEC-required filings, companies and advisers should take care not to make ESG-related claims that they cannot substantiate. ESG statements must be truthful, consistent, and verifiable in accordance with all applicable laws mandating disclosure of any kind. We provide a number of recommendations for businesses and advisors to assist prevent an inquiry or enforcement action from being sparked by these disclosures.

Public Companies

The ESG disclosures made by publicly traded corporations are being extensively examined by the SEC. Companies must start by creating the appropriate tone at the top in order to guarantee that ESG practises and values are upheld across the organisation and appropriately represented in public disclosures. As a foundation, it's critical that the company gets buy-in and support from those at all levels of the organisation if climate goals or ESG considerations are intended to be woven into the fabric of the organisation.

In order to determine whether adjustments need to be made to risk and disclosure controls and procedures related to climate change, companies should also carefully examine their corporate governance and oversight structures. Consider establishing a framework, such as a board-level ESG committee, to facilitate board monitoring of ESG processes and reporting. The likelihood of shareholder lawsuits and SEC investigations that look closely at the governance and controls that companies have in place to govern ESG-related processes and reporting will be reduced with board-level oversight of ESG-related processes and reporting.

Some public companies are incorporating ESG processes into the scope of internal or even external audit functions for those who choose not to form a separate oversight committee. This can give assurance that the ESG processes outlined in disclosures are followed and can serve as helpful cover if an investigation is launched.

Public firms should also identify high risk locations and evaluate any potential effects that climate change-related tactics may have on their business plans and financial outlooks. Therefore, in order to avoid shareholder lawsuit over ESG disclosures, corporations should think about adding significant ESG-related risk factors in their public disclosures. They should also think about whether to hire outside experts or legal counsel to review disclosures. Last but not least, business leaders should be aware that any public statements they make, including voluntary and oral ones, are fair game for SEC enforcement employees and may subject them to liabilities if they are incorrect or misleading.

(Source : Reuters)