Environmental, social, and governance (ESG) matters are now the subject of significantly greater regulatory scrutiny and are becoming a more prominent part of public companies’ mandatory filings, shareholder proposals, and activist campaigns.
ESG is a many-faceted construct, which makes it challenging for many companies to fully grasp its scope and the requirements around it. Its environmental ambit runs from greenhouse gas (GHG) emissions to deforestation issues. The social component includes everything from corporate philanthropy to diversity and inclusion. Governance topics range from board structure and executive compensation to privacy and cybersecurity.
ESG reporting deals with the public disclosure of data from these silos. Corporations and their boards are now subject to a marked rise in accountability for each in light of the demands of market participants and regulators.
On March 21, 2022, the Securities and Exchange Commission (SEC) issued proposed rules that would enhance and standardize climate disclosure requirements provided by public companies. The proposed rules are extensive and comprehensive, and they represent a significant shift in the perspective of public companies’ disclosure on climate. If adopted, the proposed rules will require those companies to provide relevant data in registration statements and annual reports, including the following:
The proposal also requires disclosure of certain GHG emissions. These are divided into three categories, referred to as “scopes”:
Given the sheer quantity of data that is implicated by this regulatory regime, proactive public companies are implementing a handful of best practices, including the following:
On August 25, 2022, the SEC adopted new rules to require enhanced pay-for-performance disclosure that will apply to 2023 proxies for calendar year-end companies. Registrants are required to comply with the new amendments in proxy and information statements in Item 402 executive compensation disclosures for fiscal years ending on or after December 16, 2022.
A new survey from The Conference Board and ESGAUGE indicates that linking executive compensation to ESG principles is used by the “vast majority” of S&P 500 companies. That figure rose from 66% in 2021 to 73% in 2022. The most common approach is use of diversity, equity, and inclusion-related goals, which rose from 35% in 2020 to 51% in 2021. S&P 500 companies that tied carbon footprint and emissions reduction goals to executive pay grew from 10% in 2020 to 19% in 2021.
However, it’s not one-size-fits-all. Companies factoring ESG into executive pay employ various approaches:
Companies that incorporate ESG measures into executive compensation for any reason may want to consider the following:
Additional hot topics for the 2023 annual meetings and shareholder proposals are discussed in the 2023 Proxy Season: A Recap of 2022 and Trends to Watch presentation, part of the Morgan Lewis Global Public Academy.