It is no secret that the U.S. Securities and Exchange Commission (SEC) has recently ramped up its focus on environmental, social and governance (ESG) disclosures. In February 2021, Acting Chair of the SEC Allison Herren Lee directed the Division of Corporation Finance to enhance focus on climate-related disclosure in public company filings, including reviewing the extent to which public companies address the topics identified in the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change. Then, in March 2021, she requested public comment on climate change disclosures (which has generated over 600 comment letters, the vast majority of which are supportive of mandatory climate disclosure rules), and new SEC rules on climate risk and human capital disclosures are expected to be proposed yet this year. In addition, holding true to its “all-of-SEC” approach to ESG, the SEC has formed a Climate and ESG Task Force (composed of 22 members and led by the Acting Deputy Director of Enforcement), which will use data analytics to look for material gaps and misstatements in climate risk disclosures under existing rules.
This increased focus of the SEC is driven by increased investor interest in ESG, which is perhaps most strikingly apparent in the recent move by investors in getting three directors elected to the board of ExxonMobil, and the heightened public scrutiny of corporate political donations in the wake of the Capitol riot. But it is also evident in the record number of shareholder proposals on environmental and social topics in the 2021 proxy season, which have seen a significant surge in support from institutional investors. Businesses too have signaled a shift in focus, away from a single-minded pursuit of shareholder profit and toward creating value for all stakeholders.
Sidley has been tracking the progression of this focus on ESG, providing a multidisciplinary website that includes insight on the landscape of ESG disclosures and the SEC’s going-forward priorities, industry-specific advice, and offering guidance on how companies can prepare for the potential for increased ESG in shareholder activism. But although these articles caution that companies lagging behind their peers may be more likely to see integration of ESG in shareholder activism campaigns and that outliers may find themselves potential targets for SEC enforcement, there is no clear understanding of what it means to be an ESG “laggard” or “outlier.” This Sidley Update benchmarks what it might mean to be an exception to these undefined ESG “rules” by analyzing the ESG disclosures in the most recent proxy statements of Fortune 50 companies.
How is ESG defined?
The Pieces
As is evident from the name, “ESG” has three prongs: the environmental prong, which covers topics such as climate change, greenhouse gas emissions, air and water pollution, energy consumption, water usage, waste and recycling, and environmental justice; the social prong, which includes workplace and product safety, employee diversity, equity and inclusion, nondiscrimination and fair pay, collective bargaining, human rights, charitable contributions and community programs, cybersecurity and data privacy, and supply chain management; and the governance prong, which encompasses issues such as compliance, corporate purpose and stakeholder interests, board diversity, declassification and independence, executive compensation, and political contributions and lobbying. But it is not at all evident which information of this multitude may be most valuable to a company’s investors or what it means to provide meaningful disclosure with respect to any or all.
The (Major) Players
For U.S. public companies, the SEC is perhaps the most influential authority, but the SEC has only recently become focused on expanding mandatory ESG disclosures, and we do not anticipate formal rule proposals to be made until mid- to late fall. We do, however, have some sense of what to expect based on recent statements made by SEC Chair Gary Gensler.
During his confirmation hearing, Chair Gensler indicated his support for additional disclosures on climate risk, diversity, human capital, and political spending. While early statements by SEC officials reflected support for a global ESG reporting framework, Chair Gensler’s more recent statements suggest that the SEC will propose an ESG disclosure regime specific to the U.S. markets. Chair Gensler has also signaled that the human capital disclosure requirements could address metrics such as workforce turnover, skills and development training, compensation, benefits, workforce demographics (including diversity), and health and safety. Additionally, based on Chair Gensler’s more recent remarks on climate change and in particular on greenhouse gas emissions, it seems likely that the SEC will require Scope 1 disclosures (direct emissions) and Scope 2 disclosures (indirect emissions, associated with the purchase of electricity, steam, heat, or cooling); Scope 3 disclosures (indirect emissions from an organization’s indirect effects in its value chain) could also be required, but perhaps only under certain circumstances.
More generally, Chair Gensler has also said that the framework for disclosures will seek consistent and comparable information that is “decision-useful” (i.e., disclosures that contain sufficient detail such that investors gain helpful information in order to make an investment or voting decision) and that incorporates both qualitative and quantitative data. The framework will also likely include industry-specific metrics and support forward-looking commitments (e.g., “net zero” pledges, or commitments required by the jurisdictions in which companies operate). The SEC may require scenario analyses as well, on how a business might adapt to the range of possible physical, legal, market, and economic changes it could contend with in the future, and general governance, strategy, and risk management related to climate risk. The SEC is also considering where these disclosures belong, for example, in the annual report on Form 10-K — alongside other information that investors use to make their investment decisions — or elsewhere.
In the absence of a finalized comprehensive regulatory framework, however, proxy advisory firms, nongovernmental reporting organizations, state laws, and the continued listing requirements of securities exchanges have been the key players in standardizing ESG metrics. The introduction of the ISS Environmental & Social QualityScore in 2018 helped set the stage for public companies, and both ISS and Glass Lewis have since significantly expanded their evaluation of environmental and social topics. Nongovernmental reporting organizations have also gained prominence as standard setters, in particular the Taskforce on Climate-Related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), and the Global Reporting Initiative (GRI).1 Additionally, we are seeing states pass laws that impose varying requirements with respect to board diversity, such as California’s board diversity requirements and the diversity reporting requirements in Illinois, as well as requirements from securities exchanges that require listed companies to make certain diversity disclosures, such as those from Nasdaq. For a more comprehensive overview of applicable laws, regulations, and other actors, please see our colleagues’ chapter in Getting the Deal Through — Impact Economy 2021, which is available here.
What ESG disclosures are being made?
But within this network of standards, what disclosures are actually being made by public companies in their SEC filings? To answer this question, we evaluated the most recent proxy statements of Fortune 50 companies. We recognize (and indeed, our review confirmed) that most of these companies publish more fulsome ESG disclosures on their websites in standalone ESG reports, and may also have relevant disclosures in other public filings, particularly in their annual report on Form 10-K as it relates to human capital management disclosures. That said, a review of the most recent ESG disclosures that Fortune 50 companies have made in their proxy statements is a useful indicator of what it may mean to be an “outlier” or “laggard” in SEC filings. Based on the expected rule proposals from the SEC, company disclosures are categorized into one of three broad categories — climate change, human capital, and board diversity — and we evaluated trends across the Fortune 50 as well as by industry. The analysis also notes the companies’ ESG governance structure and any areas of frequent disclosure that fall outside of these three categories.2
Governance. Approximately 60% of the Fortune 50 companies reported that two or more committees oversee ESG matters; where there is only one oversight committee, it is most often the Nominating and Governance Committee (7), followed closely by a public affairs committee (6). Only four companies delegated oversight exclusively to a specific ESG committee. Overall, companies reported that they delegated oversight among their Nominating and Governance Committee (60%), Compensation Committee (40%), Audit Committee (24%), public affairs committee (26%), and/or a specific ESG committee (18%).
Climate Change. Overall, 90% of companies made specific climate change disclosures, in particular with respect to reducing or eliminating carbon emissions (65%), use of renewable energy (46%), and on sustainability efforts, both in terms of products (28%) and supply chains (22%), with disclosures regarding water use being more associated with the manufacturing industry. Approximately 90% of companies also stated that ESG disclosures could be found on their website, and three (7%) also indicated that further information was disclosed in their annual report on Form 10-K.
Human Capital. Most companies also made specific human capital disclosures. With respect to diversity, equity, and inclusion (DEI) topics, the most discussed topic was community engagement and/or donations made (52%), followed closely by efforts to increase representation at the company (50%) (although only 26% committed to disclosing EEO-1 diversity statistics). Health and safety disclosures were relatively common, with 39% reporting on specific employee well-being and 37% on COVID-19 matters. Employee resource groups (26%) and educational efforts (26%) were also common topics for disclosure. Less common were racial justice issues (20%) and inclusion training (17%).
Board Diversity. Every Fortune 50 company disclosed board diversity statistics, with 96% reporting as to gender and 91% reporting as to race and ethnicity (three companies reported general diversity statistics that were not subdivided into distinct categories, and two companies reported specific diversity statistics only as to gender).
Other Areas. Shareholder outreach was by far the most common other area discussed (90%), although lobbying and political activity (35%), governance matters (28%), employee engagement (28%), and privacy (20%) were also regular topics. Approximately 20% of companies also made disclosures about ESG-related compensation incentives.
Reporting Frameworks. SASB was the most frequently cited ESG reference framework (35%), although TCFD (33%) and GRI (26%) were not far behind. About 39% of companies also referenced other nongovernmental standards, including the United Nations (UN) Sustainable Development Goals (8), the Science Based Target Initiative (3), the UN Guiding Principles on Business and Human Rights (3), and RE100 (3).
Manufacturing (13)
Governance. There was variation in ESG governance for manufacturing companies. Nearly a third split ESG oversight among three committees: the Nominating and Governance Committee, the Audit Committee, the Compensation Committee, and/or a public affairs committee. Only three (23%) had a dedicated ESG committee.
Climate Change. Climate change disclosures among manufacturing companies was robust, with a strong majority making specific commitments with respect to becoming carbon neutral or negative (92%) or using renewable energy (62%). A few (23%) also discussed supply chain sustainability and/or specific sustainability products, as well as water use (31%), although all cited more detailed ESG information that could be found on their websites and/or their annual report on Form 10-K.
Human Capital. Each manufacturing company provided at least some specific human capital disclosures. Here too, the disclosures were mostly focused on DEI topics, including community engagement and/or donations made (62%) and efforts to increase representation and recruitment of diverse candidates, both at the company (62%) and in suppliers and partners (8%) (although only a few, 23%, committed to publishing EEO-1 diversity statistics). Several companies also discussed their commitments to racial justice (46%), educational opportunities (31%), and the availability of employee resource groups (31%).
Board Diversity. Each manufacturing company included board diversity statistics in their proxy statements, and most (85%) broke out the reporting based on gender and race/ethnicity.
Other Areas. Shareholder outreach (12), changes to governance structures (4), lobbying and political activity (3), and privacy (3) were other areas frequently discussed. Manufacturing companies also considered the ESG metrics from SASB (5), TCFD (4), and GRI (3) in framing their ESG disclosures.
Retail (8)
Governance. For approximately 88% of the retail companies, ESG oversight lies primarily with the Nominating and Governance Committee, although approximately half of retail companies allocate such oversight to two or more committees, with 50% also reporting oversight by the Audit Committee and/or the Compensation Committee. Several companies stated that the oversight by multiple committees was due to the breadth of the ESG mandate, and two companies reported having a dedicated ESG committee.
Climate Change. Only three retail companies provided specific climate change disclosures, although all but one reported that more detailed ESG information could be found on their websites.
Human Capital. A majority of retail companies provided specific human capital disclosures. These disclosures were mostly focused on DEI topics, including community engagement and donations made (4), increasing representation at the company (4) (although only three committed to publishing EEO-1 diversity statistics), and inclusion training for employees (2). A small number (2) also made disclosures regarding health and safety programs and employee engagement.
Board Diversity. Each retail company included board diversity statistics in its proxy statement, reporting both gender and race and ethnicity statistics.
Other Areas. Shareholder outreach (6) and lobbying and political activity (4) were other areas frequently discussed. Retail companies also cited ESG metrics from TCFD (2), SASB (1), and GRI (1) in framing their ESG disclosures.
Technology/Software (8)
Governance. All but one of the technology/software companies delegated ESG oversight to the Nominating and Governance Committee, although a few companies chose to share that responsibility with the Compensation Committee (4), Audit Committee (3), and/or a public affairs committee (1). None reported having a dedicated ESG committee.
Climate Change. Given the significant overlap with the manufacturing industry,7 it is no surprise that most technology/software companies provided specific climate change disclosures, including making specific commitments with respect to using renewable energy (7) and becoming carbon neutral or negative (7). A few also discussed supply chain sustainability and/or specific sustainability products (3) and water use (2). All cited more detailed ESG information that could be found on their websites.
Human Capital. Each technology/software company made specific human capital disclosures. With respect to DEI, the largest number discussed their community engagement and/or donations (63%), increased representation (both at the company (75%) and in suppliers and partners (25%)), and racial and criminal justice efforts (50%) (although only one committed to disclosing EEO-1 diversity statistics). A few also made disclosures with respect to the availability of employee resource groups (38%), education (25%), and homeownership (25%). Health and safety was discussed fairly often as well and mainly focused on COVID-19 (75%), although some (38%) also discussed employee health more generally.
Board Diversity. All technology/software companies reported on board diversity statistics in their proxy statement, although only 63% broke it out by gender and race/ethnicity.
Other Areas. Shareholder outreach (8), privacy (4), and lobbying and political activity (2) were other areas frequently discussed. Technology/software companies also considered the ESG metrics from SASB (5), TCFD (4), and GRI (3) in framing their ESG disclosures.
Healthcare/Pharmaceuticals (6)
Governance. With one exception (which company has a dedicated sustainability committee), healthcare/pharmaceutical companies allocate ESG oversight to two or more committees, typically the Nominating and Governance Committee plus the Audit Committee, Compensation Committee and/or a dedicated ESG committee.
Climate Change. Two-thirds of healthcare/pharmaceutical companies made specific climate change disclosures, with most discussing efforts to reduce emissions and become carbon neutral (50%) (although only one made specific commitments about doing so), and a few (33%) also discussed supply chain sustainability. All but one (83%) referenced more detailed ESG reporting on their websites.
Human Capital. Although each healthcare/pharmaceutical company discussed DEI topics, most focused on health and safety and in particular their efforts with respect to the opioid crisis. COVID-19 initiatives and employee health and safety were also common topics of discussion.
Board Diversity. Each healthcare/pharmaceutical company reported board diversity statistics in its proxy statement, broken down by gender and race/ethnicity.
Other Areas. Shareholder outreach (6), lobbying and political activity (3), and governance matters (3) were other areas frequently discussed. Healthcare and pharmaceutical companies also considered the ESG metrics from SASB (2) and GRI (1) in framing their ESG disclosures.
Insurance (6)
Governance. Insurance companies appeared to be more siloed in their ESG governance structures. Two contain ESG oversight under one committee: either the Nominating and Governance Committee or a dedicated ESG committee. The remainder split ESG oversight between two committees — the Nominating and Governance Committee and the Compensation Committee (although one split oversight between the Compensation Committee and its public affairs committee).
Climate Change. All but one insurance company made specific climate change disclosures, by and large with respect to use of renewable energy (4) and efforts to become carbon neutral (4), although a couple also discussed recycling (2) and reduction in water use (2). All but one indicated that additional information could be found in reports published on the company website.
Human Capital. Disclosure with respect to human capital here was more robust. Each company made disclosures on DEI topics, including community engagement and/or donations made (67%), the availability of employee resource groups (50%), inclusion training (50%) and increasing representation (50%) (both at the company (33%) and with suppliers and partners (33%), although only two committed to disclosing EEO-1 diversity statistics). A few insurance companies also discussed educational efforts (33%). As with the healthcare/pharmaceutical companies, there was also considerable focus on health and safety, of both employees (50%) and nonemployees (50%), although the focus here was more on COVID-19 and not the opioid crisis.
Board Diversity. Each insurance company also reported board diversity statistics in its proxy statement, broken down by gender and race/ethnicity.
Other Areas. Shareholder outreach (6), lobbying and political activity (3), and governance matters (1) were other areas frequently discussed. Insurance companies also considered the ESG metrics from GRI (3), SASB (2), and TFCD (1) in framing their ESG disclosures.
Energy (4)
Governance. Three of the energy companies delegated primary ESG oversight to a public policy and sustainability committee, although one of these also allocated oversight to its three other standing committees. One reported having a dedicated sustainability committee.
Climate Change. Energy companies focused climate change disclosures on their efforts to reduce carbon emissions (3) and use more renewable energy (1) but did not make explicit commitments to do so in their proxy statements. Supply chain sustainability (2) and water use (1) were also mentioned but less frequently, although three made reference to more detailed ESG information on their websites.
Human Capital. Each energy company provided at least some specific human capital disclosures, primarily in relation to efforts to increase representation and recruitment of diverse candidates at the company (3) (and one committed to publishing EEO-1 diversity statistics) and to increase the well-being and safety of employees (3) (including two that discussed the availability of employee resource groups).
Board Diversity. Each energy company included board diversity statistics in its proxy statement, with three out of four reporting statistics for both gender and race/ethnicity.
Other Areas. Shareholder outreach (4) and lobbying and political activity (2) were other areas frequently discussed. Energy companies also considered the ESG metrics from TCFD (2), SASB (1), and GRI (1) in framing their ESG disclosures.
Financial (4)
Governance. Most financial companies reported that two committees oversee ESG matters, although there was variation in which committees (Nominating and Governance, Compensation, and/or Public Affairs). One reported having a dedicated corporate responsibility committee.
Climate Change. Each of the financial companies made specific climate change disclosures, in particular with respect to financial products related to sustainability (100%), their current status as, or specific commitment to be, carbon neutral (100%), and current use of renewable energy (75%). All indicated that further ESG information could be found on their websites.
Human Capital. Each financial company also made specific human capital disclosures. With respect to DEI topics, three discussed increasing representation at the company (although only two committed to disclosing EEO-1 diversity statistics); three also discussed community engagement and/or donations and homeownership assistance. Health and safety disclosures were fewer and mainly related to COVID-19 matters.
Board Diversity. All four financial companies also disclosed board diversity statistics, as to both gender and race/ethnicity.
Other Areas. Shareholder outreach (3) and governance (1) were other ESG areas discussed. Financial companies also considered the ESG metrics from TCFD (4), SASB (3), and GRI (3) in framing their ESG disclosures.
Telecommunications (3)
Governance. Two of the telecommunications companies house ESG oversight under their Nominating and Governance Committees, although one of these two also allocates oversight to its two other standing committees. The third houses oversight within a public affairs committee. All three reported that oversight was collaborative with management as well.
Climate Change. Only one telecommunications company made specific climate change disclosures, in which it discussed supply chain sustainability and recycling generally, and also made specific commitments with respect to use of renewable energy and attaining carbon neutrality. All reported that ESG information was available elsewhere.
Human Capital. One telecommunications company made human capital disclosures with respect to DEI in its proxy statement, although no mention was made with respect to publishing EEO-1 diversity statistics.
Board Diversity. All telecommunications companies did, however, report on board diversity statistics for both gender and race/ethnicity.
Other Areas. Shareholder outreach (3), lobbying and political activity (2), and governance matters (1) were other areas discussed. One company also disclosed consideration of ESG metrics from all three of the data collections and ratings agencies — TCFD, SASB, and GRI — in framing its ESG disclosures.
Logistics/Delivery (2)
Governance. Both logistics/delivery companies house ESG oversight under their Nominating and Governance Committee.
Climate Change. As with energy companies, both logistic/delivery companies’ climate disclosures focused on efforts to use more renewable energy and reduce carbon emissions, although only one disclosed explicit commitments to doing so.
Human Capital. For human capital disclosures, the focus was on employee health and safety. Both companies also discussed increased representation and recruitment of diverse candidates at the company (although neither committed to publishing EEO-1 diversity statistics).
Board Diversity. Both logistics/delivery companies included board diversity statistics, broken out as to gender and race/ethnicity, in their proxy statement.
Other Areas. Both also discussed shareholder outreach, and one company reported that it considers the ESG metrics from SASB in framing its ESG disclosures.
Entertainment (1)
Governance. The sole entertainment company within the Fortune 50 delegates ESG oversight to its Compensation Committee.
Climate Change. No specific disclosures were made with respect to climate change, although it did state that further ESG information could be found on its website.
Human Capital. The company’s human capital disclosures were focused on DEI matters, including community engagement and/or donations, inclusion training, the availability of employee resource groups and increased representation at the company (with a commitment to disclose EEO-1 diversity statistics).
Board Diversity. The company also disclosed its board diversity statistics, as to both gender and race/ethnicity.
Other Areas. No other areas of ESG interest were explicitly discussed, but the company did indicate it consults the SASB standards in considering its ESG disclosures.
What should companies do next?
Understanding the ESG disclosure trends both within in your industry and more broadly is important because we expect that the SEC may propose disclosures of industry-specific metrics and that the rulemaking may be informed in part by current levels of disclosure. Moreover, we expect that the SEC will leverage data analytics to look for material gaps and misstatements in ESG disclosures across companies.
In addition to evaluating industry trends, it is also important to ensure that any disclosures made accurately reflect current ESG practices and are realistic about ESG goals (i.e., companies should avoid “greenwashing”). Companies should also have adequate policies, procedures, and controls in place to ensure they act consistently with such disclosures.
In sum, companies should
- compare their ESG disclosures to the disclosure trends in their industry to identify any gaps;
- evaluate whether and how the company can work to incorporate ESG disclosures into their proxy statements consistent with industry peers; and
- ensure that the company has procedures and controls in place to operate consistent with any disclosures.
1 There is also a push among some nongovernmental standard-setting organizations — TCFD, SASB, and GRI included — to create uniform global sustainability standards in collaboration with the International Financial Reporting Standards Foundation.
2 Note that the aggregation of the data summarized herein was carried out by multiple individuals, and we cannot guarantee complete consistency.
3 Three of the Fortune 50 companies did not publish proxy statements and one had a proxy statement without any ESG information, and thus each was excluded from this analysis.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
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