In connection with ExxonMobil’s annual meeting held on May 26, 2021, three dissident directors nominated by hedge fund Engine No. 1 were elected to ExxonMobil’s board, beating out the incumbents.
Engine No. 1 had proposed the director nominees (along with one other) to help lead ExxonMobil to long-term shareholder value creation, including through “net-zero emissions energy sources and clean energy infrastructure.”1
The fact that these dissident directors won the election over the incumbents indicates the increasingly broad shareholder support for clean energy to reduce climate change.
Momentum Builds for ESG
ExxonMobil is not alone in facing an investor challenge to its strategy in favor of a more carbon-neutral strategy.
Nadelle Grossman, Tulane Law 1999, is the associate dean for academic affairs and professor of law at Marquette University Law School in Milwaukee. She teaches and writes in the areas of corporate law, corporate governance, and contracts.
On May 26, 2021, Chevron’s shareholders approved a shareholder proposal requiring Chevron to “substantially reduce greenhouse gas (GHG) emissions of their energy products in the medium and long term.”2 As the shareholder proposal expressed, “[t]he policies of the energy industry are crucial to curbing climate change. Therefore, shareholders support oil and gas companies to change course; to substantially reduce emissions.”
In both of these companies, investors clearly signaled to management that they were dissatisfied with the company’s current approach to climate change. In both instances, shareholders took their voices to the ballot box, unambiguously expressing their support for more environmentally-friendly business strategies and practices.
Undoubtedly driven by investors’ interests, the Securities and Exchange Commission is weighing whether to enact regulations focused on climate change. As is the SEC’s typical mode of regulation, it would require disclosure on climate change. The SEC is considering such disclosure requirements despite its 2010 interpretive release indicating that such information was not required because “[s]ince 2010, investor demand for, and company disclosure of information about, climate change risks, impacts, and opportunities has grown dramatically.”3
Consequently, as acting SEC Chair Allison Herren Lee recently stated in calling for public input on any such disclosure requirement, “questions arise about whether climate change disclosures adequately inform investors about known material risks, uncertainties, impacts, and opportunities, and whether greater consistency could be achieved.”
Yet Acting Chair Lee did not limit her remarks to climate change disclosure. She also indicated that various SEC advisory committees had recommended that the SEC consider updating its reporting requirements for all ESG factors. Consistently, the SEC is currently “evaluating a range of disclosure issues under the heading of environmental, social, and governance, or ESG, matters.”4
Current ESG Programs and Requirements
Most public companies have ESG programs that address the environmental, social, and governance impacts of their business. In fact, according to a Navex Global survey, over 80% of surveyed public companies have ESG programs in place, as do over 65% of surveyed private companies.5
An ESG program is a set of company-set standards that address the environmental, social, and governance impacts of the company’s operations. Notably, no law currently requires that a company have an ESG program. Yet companies adopt them for a myriad reasons.
For one, companies believe that ESG programs yield financial benefits. Even in the case of the ExxonMobil proxy contest described above, the primary basis for Engine No. 1’s challenge was that ExxonMobile’s business strategy – of investing in [carbon producing energy] – was putting ExxonMobil behind its competitors. Engine No. 1 pitched its competing slate of directors as a way to generate shareholder returns – not due to a moral concern for the planet.
Relatedly, companies adopt these programs as a way to mitigate risks to which they are exposed. For example, a company with a complex supply chain would have a strong interest in managing the safety of the operations of its vendors, to ensure no disruptions and minimize the risk of legal liability.
As another example, companies have had to focus on the sustainability of their goods and services to retain their customers, as close to 80% of consumers consider sustainability in their buying practices.6
Companies also adopt ESG programs due to pressure from their shareholders and non-shareholder stakeholders. Engine No. 1 is an example of the former, though not all investors distinctly link the ESG policy goals they want a company to pursue and financial performance. The latter includes company customers, suppliers, and employees. Without a doubt, proxy advisors have also prompted some governance changes at public companies.
As more companies adopt ESG programs, pressure increases on all companies to adopt ESG programs, to be “in the norm” and not an outlier.
The challenge, of course, is in the details of the ESG program. Currently, there is little uniformity when it comes to the content of ESG programs. There is no single framework that companies use in adopting an ESG program.
There is also a lack of uniform reporting standards to guide companies in the design of their ESG programs.7 Much of the problem lies in the fact that there is no single disclosure framework for companies to follow. For example, in 2015, the United Nations General Assembly issued Sustainable Development Goals that many companies have used in setting the priorities of their ESG programs.
Then, in 2000, the Global Reporting Initiative (GRI) promulgated sustainable reporting standards with which many companies comply, though which are far from universally followed. And in 2018, the Sustainability Accounting Standards Board (SASB) issued its own sustainability reporting standards for public companies to implement.
The existence of multiple ESG reporting standards and, in turn, non-uniform ESG disclosure, is what has prompted the SEC to ask for input on mandating a uniform set of disclosure rules for ESG programs of public companies.
Therefore, there is likely to be more disclosure rules regarding ESG forthcoming.
Even without such disclosure rules, the SEC recently indicated its intent to examine misconduct in the area of ESG disclosure due to increased investor reliance on climate change and other ESG disclosures.8
Under our principles-based, disclosure-based system of regulation that focuses on materiality, it is possible that ESG factors are increasingly becoming material to investors. Thus, legal counsel can help client evaluate what information is available about their respective ESG efforts and “material” to their investors, in addition to helping clients ensure that what they do disclose about their ESG efforts is correct and complete.
Fortunately, given the business judgment rule, a business has much leeway to design its own process for creating an ESG program, as well as the content of the ESG program itself. In addition to informing the business team of how the business judgment rule protects the decisions made with respect to the ESG system, counsel can serve as a useful resource in helping a client understand key areas of risk and how to help mitigate that risk through the ESG program.
ESG in Your Own Practice
ESG is not merely a concept applicable to your clients – it might be applicable to your practice too. Your clients might start to impose ESG expectations on their outside lawyers. Indeed, many law firms have begun to impose diversity requirements on the law firms they work with.
Moreover, there is some indication that ESG-focused clients want to retain lawyers who work at a firm with a shared value system that supports ESG efforts. As Connor Kuratek, deputy general counsel at Marsh McLennan in New York has stated:
If law firms are going to advise and be successful in advising clients on how to engage in ESG matters, they also need to walk the walk. They can also commit to reduce air travel for example. We want someone who shares the same values as we do.9
Thus, ESG might directly hit your own bottom line in addition to that of your clients.
Learn more about the role of the shareholder and other stakeholders in corporations as well as their ESG programs in the CLE webcast The "Shareholder Primacy" Debate: What is the Purpose of the Corporation, moderated by Nadelle Grossman. This program is from the State Bar of Wisconsin Annual Meeting & Conference in June 2021, and is available via webcast replays on July 26 and Aug. 16, 2021.
This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section webpages to learn more about the benefits of section membership.
1 ExxonMobile Corporation, Proxy Statement of Engine No. 1 LLC, March 15, 2021 (available at Proxy Statement (reenergizexom.com)).
2 Chevron Corporation, 2021 Proxy Statement, April 8, 2021, at 87 (available at Chevron 2021 proxy statement).
3 Acting Chair Allison Herren Lee, Public Statement, Public Input Welcomed on Climate Change Disclosure, March 15, 2021 (available at SEC.gov | Public Input Welcomed on Climate Change Disclosures).
5 Navex Global, Environmental, Social and Governance (ESG) Global Survey Conducted by NAVEX Global Reveals Strong Adoption Across Public and Private Companies, Feb. 20, 2021.
6 Capgemini Research Institute, How Sustainability is Fundamentally Changing Consumer Preferences, July 2020.
7 See Mark S. Bergman, et al., “ESG Disclosures: Frameworks and Standards Developed by Intergovernmental and Non-Governmental Organizations,” Harv. L. S. Forum on Corp. Gov., Sept. 21, 2020.
8 SEC Division of Examinations Announces 2021 Examination Priorities, SEC.gov, Mar. 3, 2021.
9 Dylan Jackson & Dan Clark, GCs: Big Law ESG Practices Must 'Walk the Walk', Law.com Corporate Counsel, May 24, 2021.