In 2020, trillions of dollars flooded ESG funds, and many analysts are expecting this trend to continue in 2021. BlackRock, the largest asset manager in the world, plans to have $1.2 trillion in ESG assets in the next 10 years, and an estimated one-third of all U.S. assets under management are already sustainably invested.  Given the importance of ESG to the securities markets, we herein present an elementary primer, explaining ESG issues and how they are affecting companies and their public disclosures—your ABC’s of ESG, so to speak.

So what is ESG, anyway?

The term “ESG” stands for Environmental, Social, and Governance.   More simply, ESG captures an array of qualitative issues that may be considered by investors/investment professionals and incorporated into an investment analysis.  There is no single comprehensive list of ESG issues, but you can conceptualize them as “hot” topics in the ever-evolving zeitgeist.  For example, if opinion pieces in The New York Times address an issue, you can bet that it will be on investors’ minds, too.  The CFA Institute compiled examples of today’s top ESG issues, as follows:

Although the “soft” issues that fall under this umbrella term are not part of traditional financial metrics and can be difficult to quantify in monetary terms, they have financial relevance as they can affect the risk and return of investments.  ESG issues are thus increasingly being considered by investment professionals in their endeavor to identify and evaluate drivers of the risk and return of investments.

As ESG considerations factor more prominently into investment decisions, companies are constantly seeking to understand how they should (and, sometimes, must) account for ESG issues in their disclosures.

The Birth of ESG

The term “ESG” was introduced in 2004 in the UN Global Compact’s landmark report Who Cares Wins, which outlined recommendations by the financial industry to “better integrate environmental, social and governance issues in analysis, asset management and securities brokerage.”  The report noted that, until then, “the industry [had] not developed a common understanding on ways to improve the integration of environmental, social and governance (ESG) aspects in asset management, securities brokerage services and the associated buy-side and sell-side research functions,” and asserted that more fulsome inclusion of ESG factors in investment decisions would “contribute to more stable and predictable markets.”  A year later, the UN Environment Programme published the “Freshfields Report,” which showed that ESG issues are relevant for financial valuation.  These reports created the foundation for the ever-changing but increasingly crucial ESG we know today.

Initially, ESG considerations manifested as “exclusionary screening of listed equities on the basis of moral values.”  The practice, however, evolved as investors came to understand that ESG issues have palpable financial implications.  Indeed, investment professionals now utilize a range of methods to consider ESG issues, including:

  • best-in-class selection (i.e., favoring companies with better or improving ESG performance relative to sector peers),
  • active ownership (i.e., “entering into a dialogue with companies on ESG issues and exercising both ownership rights and voice to effect change”),
  • thematic investing (i.e., investing that is based on trends, a number of which include ESG issues),
  • impact investing (i.e., “investing with the disclosed intention to generate and measure social and environmental benefits alongside a financial return”), and
  • ESG integration, which is quite simply the “systematic and explicit inclusion of ESG risks and opportunities in investment analysis.”

Legal Risks and Increasing Regulation of ESG Disclosures

There are currently no federal requirements compelling issuers to make ESG disclosures in their public filings, unless they are otherwise material.  However, given the current climate of increasing social accountability and reputational risk, along with the stated priorities of the incoming Biden administration, this may change.

Of course, ESG disclosures are already actionable if they are found to be materially false or misleading.  Thus far, litigation centering on ESG disclosures generally has arisen in two contexts:  (1) securities fraud claims under federal law, and (2) consumer protection or consumer fraud claims under federal or state law.  The below cases highlight key trends in securities litigation with ESG-related disclosures at the heart of the matter.

Intrigued by the ESG landscape?  So are we. To stay up to date on all things environmental, social, and governance, subscribe to Proskauer’s Corporate Defense and Disputes blog and we will keep you appraised of the latest developments.

 

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Special thanks to our litigation paralegal, Emma Dillon for her contributions to the post.

Photo of Erica T. Jones Erica T. Jones

Erica Jones is an associate in the firm’s Litigation Department, where her practice encompasses a range of business, regulatory, and corporate governance matters. She has worked extensively in defense of securities class actions, derivative suits, and white collar criminal matters involving investigations by…

Erica Jones is an associate in the firm’s Litigation Department, where her practice encompasses a range of business, regulatory, and corporate governance matters. She has worked extensively in defense of securities class actions, derivative suits, and white collar criminal matters involving investigations by the SEC, DOJ, and state attorneys’ offices. In addition, Erica has advised on antitrust matters involving allegations of price fixing, restraint of supply, monopolization, group boycott, bid rigging, and collusion across industries that include agriculture and health care. She is also a member of the litigation team representing the Financial Oversight and Management Board in the Commonwealth of Puerto Rico’s bankruptcy proceedings.

Erica maintains an active, diverse pro bono practice, with a focus on immigration law, compassionate release and habeas corpus, and racial justice. She is an associate trustee with the Washington Lawyers’ Committee for Civil Rights and Urban Affairs and has been recognized by the District of Columbia Courts’ Capital Pro Bono Honor Roll. Erica was also one of a few women selected to be a Protégée for Proskauer’s Women Sponsorship Program, an initiative for high performing midlevel lawyers that champions emerging leaders.

Erica strives to stay on the cutting edge of developing areas of law through her membership in Proskauer’s COVID-19 Task Force, ESG Working Group, and Private Credit Litigation Group.  Erica’s ability to advocate for her clients is further bolstered by her recent Master’s Degree in Accounting from the University of North Carolina’s Kenan-Flagler Business School with a concentration in Financial Reporting and Analysis.

Prior to joining Proskauer, Erica was an intern with the Department of Justice in the Constitutional and Specialized Tort Litigation Section. Outside of her career in the law, Erica has been featured on Fox’s So You Think You Can Dance, teaching ballroom dance to students at Lighthouse for the Blind.