Legal Watch on the Environmental, Social and Corporate Governance Movement
Davis Environmental Law is paying close attention to legal trends responding to the increasing popularity of “ESG” investing and reporting; and the effect of “ESG” criteria on consumer behavior. (ESG investing is also known as sustainable, impact, or socially responsible investing.) ESG criteria analyze and measure stewardship of Environmental resources, Social relationships between business organizations and their employees, suppliers, customers and communities; and corporate Governance issues like organizational leadership, executive pay, internal and external controls, and shareholder rights. ESG criteria expand on the traditionally narrow focus on the financial performance and solvency of business organizations.
A growing number of persuasive and influential studies show that sustainable ESG practices enhance profitability, equity and resilience; and ESG integrity is raising share prices, attracting trillions into conscientious investment funds and influencing private equity decisions.
Europe has been the world leader in developing ESG reporting requirements and promoting ESG investing. In 2014, the European Union (“EU”) mandated disclosure and reporting of non-financial data, including ESG factors. See Directive 2014/95/EU (non-financial reporting directive requiring ESG information in annual reports). And in June 18, 2020, the European Parliament passed a bold new regulation establishing a framework to facilitate sustainable investment in the EU (the “Taxonomy Regulation”). EU is considering adding further directives to provide more detailed requirements and standards in ESG analysis and reporting, as well as enhanced enforcement.
Switzerland held a referendum on taking the ESG movement even further. Despite corporate opposition, a proposal to amend the Swiss constitution to hold Swiss companies liable for ESG violations committed by foreign subsidiaries won the popular vote on November 29, 2020. While the Amendment failed because it did not receive support from a majority of the particular Swiss cantons, related legislation is nevertheless expected to come into effect tightening ESG reporting requirements for Swiss companies. Meanwhile, Britain and France have already passed liability laws linked to ESG issues.
Despite the ESG movement, here in the United States in the final days of the Trump administration, in October the Department of Labor released a new regulation intended to limit or eliminate socially responsible investing in retirement plans, mandating that their fiduciaries choose investment strategies based entirely on financial performance. This regulation may be short-lived, as proponents of the ESG movement can be expected to influence the new federal administration, State-based initiatives and the common law.
Davis Environmental Law will be publishing a series of insights regarding the ESG Movement.