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The General Counsel’s role in sustainability
Preparing for global climate-related disclosure rules
Newly enacted or proposed global regulations are a dramatic expansion of mandatory environmental sustainability reporting for US-listed companies. The SEC is widely expected to publish its climate disclosure rule later this year. The European Union has enacted its Corporate Sustainability Reporting Directive (CSRD) that requires listed and large companies, as defined, to follow EU sustainability reporting standards. The CSRD would impact non-EU companies by applying to EU subsidiaries not included in a consolidated report with equivalent reporting standards. So, for US companies with European affiliates, the SEC’s forthcoming rule is not completely novel. Still, these rules can expect to transform the landscape of ESG reporting.
For the board and senior management, the proposed rules would create new disclosure requirements not just for climate metrics but also for the company’s ESG governance processes, including the oversight role of the board. If adopted, these requirements will elevate the importance of having the General Counsel at the table as a strategic collaborator when developing the compliance playbook.
Relevant considerations
- The primacy of “G” and the General Counsel’s role
- Disclosure and liability
- Deeper scrutiny on the way
The primacy of “G” and the General Counsel’s role
Environmental concerns have rightly taken pride of place in the sustainability universe, and they are prominent in the SEC’s proposed approach. But the lynchpin of the proposed rule for the General Counsel is the need to describe the governance process and the board’s role in sustainability strategies and decisions. Possible governance processes to be described and disclosed may include:
- The board’s oversight of climate-related risks, including responsible board members, and whether any directors have climate-related risk expertise
- The process by which the board discusses and is informed about climate-related risk, and the frequency of those discussions
- Management’s role in assessing and managing climate-related risks
In practice, these process disclosures are likely to heighten the level at which boards address climate change in their meetings and deliberations, and many companies will likely be taking steps now to review and bolster board training and documentation of climate risk oversight processes. Companies can be well served by developing a playbook documenting how the board and management have met their obligations for climate-related oversight, and creating the chain of certifications necessary to give the board and executives confidence in signing off on SEC filings. Lawyers will be needed to interpret the requirements of the new rule, to help with drafting descriptions of governance processes in place or adopted, and to evaluate whether the governance playbook adequately meets the oversight expectations implicit in the proposed rule and the board’s Caremark obligations.
Another governance-related concern for the General Counsel will be confirming that the company’s official policies and codes of conduct include environmental and social responsibility clauses. Do employee contracts emphasize adherence to these policies? And given the current emphasis on supply chain, do vendor contracts need to be revised to set an acceptable standard on greenhouse gas emissions, or on diversity and inclusion practices? A leading practice is to employ Contract Lifecycle Management (CLM) tools to automate the review and updating of contracts and documents to alleviate some of the pain in this process.
Disclosure and liability
In addition to governance-related concerns, the General Counsel’s office has a role to play in interpreting what needs to be disclosed. For example, the CSRD obliges executives to take an “inside-out” perspective by looking at their company’s environmental and social impacts and managing the most significant ones. This two-way perspective on what topics matter is known as “double materiality”—and adopting it will involve an evolution in management practice. Interpreting the materiality standard as it evolves will require legal input and analysis.
The proposed rules also include the prospect of forward-looking disclosures, as well as Scope 3 GHG emissions.
Deeper scrutiny on the way
As US policy starts to catch up with European counterparts, companies can expect an evolving, deeper scrutiny of their sustainability strategies and governance structures. Here are some important next steps:
- Review your materiality and risk profile for ESG issues
- Assess and bolster your institutional framework for ESG oversight, reporting and risk assessment
- Increase board training and expertise, with a process to update as the landscape and regulations evolve
- Build a framework of processes and documentation to give the board and executives confidence in signing off on sustainability reports and disclosures
- Confirm you have the right resources and capabilities to support your governance process
With the prospect of public descriptions of ESG governance and management processes, senior executives should have the General Counsel at their side in developing an effective ESG compliance playbook.
10 questions for the Office of General Counsel
In this rapidly evolving regulatory landscape, is your company and legal function prepared? Here are some questions for the General Counsel to consider:
1. Has your company identified which disclosure standards/requirements may apply (e.g., TCFD, SEC Proposed Rule, CSRD)?
2. Do you know where responsibility for ESG compliance/disclosure in your company sits primarily, and is your office engaged to support this function?
3. Does your company have a climate-related governance and risk management strategy in place?
4. Does your company have infrastructure and processes in place to support centralized intake of ESG data reporting from various departments and external sources?
5. Does your company have internal or public sustainability goals, and a plan to achieve them (metrics and milestones)?
6. Does your company have a GHG emissions data framework or model in place for collecting and reporting required GHG disclosures?
7. Does your office have governance controls and processes in place to give the Board confidence in signing off on ESG-related disclosures?
8. Does your company have ESG requirements/sustainability KPIs in your vendor contracts and are you prepared to monitor and disclose related metrics as may be necessary?
9. Where does your company want to be on the performance curve for sustainability initiatives? Early adopter, part of the crowd, laggard? How does the governance structure align with your company’s overall sustainability strategy?
10. Does your company have an established playbook with a defined, repeatable process in place for satisfying regulatory disclosure requirements, and is your office prepared to support this process?
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