More Companies Relying on ESG Strategies

​A focus on environmental, social and governance (ESG) principles is likely to grow in 2023 and the years to come, according to a new report from Seyfarth.

Some companies are hearing from their investors, consumers and employees that they want to see more emphasis on ESG. Companies "are realizing there's so much of a mandate that they need to be proactive," said Ameena Majid, an attorney with Seyfarth in Chicago. "The business case for ESG is stronger and stronger. Your stakeholders and consumers look at ESG as very values-driven."

Environmental stewardship and human capital management, including diversity, equity and inclusion (DE&I) programs, are central to most ESG efforts.

The number of companies that included workforce demographics in their human capital disclosures to the U.S. Securities and Exchange Commission (SEC) increased from 44 percent in 2021 to 59 percent in 2022, Seyfarth noted. Along with race and gender, some companies disclosed veteran status, disability status and age.

"Organizations are now more likely to publicly disclose both wage gap numbers and aggregated EEO-1 reporting totals than ever before," said Joanna Colosimo, a consultant with DCI Consulting Group in Washington, D.C.

There's more pressure on employers to conduct civil rights audits with the key results and action items from those audits often being included in ESG disclosures, she explained.

"Employers need to be mindful of both internal and external pressures to ensure they are putting forth actions to move diverse representation forward, and they are not just claiming they are a diversity-friendly employer without associated actions to support their statements," she said. 

Companies reported trying to address the Great Resignation and quiet quitting through engagement surveys, flexible hours, remote work, wellness programs, and career development and internal mobility initiatives, Seyfarth noted. Employers also offered new benefits like onsite health clinics, telemedicine, caregiver leave, mental health and mindfulness programs, virtual courses, English as a second language courses, and financial and digital literacy training.

Meanwhile, ESG programs "can no longer be underestimated as a retention tool," the report stated.

Recent Backlash

As ESG programs have gained more prominence, they've been criticized by some conservative politicians and business leaders.

"In several states, including, most notably, Texas, Florida and, recently, Kentucky, ambitious politicians have targeted so-called woke investing and practices," said Howard Fischer, an attorney with Moses Singer in New York City.

Some critics say ESG "is a way to push a liberal agenda, and it's there to harm the fossil-fuel industry," Majid said. "ESG is deemed politicized and used as a weapon. It's mostly climate-focused. I don't know if the backlash will be long-lived."

The U.S. Senate on March 1 voted to overturn a month-old regulation that allows fiduciaries to consider ESG factors when choosing retirement investments. The resolution will head to President Joe Biden, who promised he would veto any bill that nullifies the ESG rule.

Change to Come

Experts said the SEC is likely to make its human capital disclosure rules stricter in the near future. The current human capital disclosure rule gives companies discretion in terms of what information to share, but "there's an expectation that it won't stay as general as it is and will become more prescriptive," Majid said.

"The changes will likely provide more transparency into the key metrics of a company's workforce, such as turnover and DE&I metrics," Colosimo said. "These more prescriptive and quantifiable metrics may be designed to allow consistency in reporting and transparency into the strength of an organization's workforce, which is important to investors."

Employers should check to make sure the data they submit to the SEC aligns with the data they've submitted to other federal agencies. "Companies are getting sensitive to that [consistency] as they start putting out more robust reports," Majid noted.

"These metrics should be employed consistently, so performance along multiple reporting periods can be more easily compared," Fischer said. "Companies should ensure that their reporting is consistent with peer companies. Outliers tend to draw attention."

When evaluating ESG strategies, employers should bring employees from different departments and levels within the organization to the table, said Megan Toth, an attorney with Seyfarth in Chicago.

Fischer agreed: "There needs to be integration between departments. HR, investor relations and government relations should work together to minimize the potential for disparities in the ways in which human capital metrics are reported as material."

"We are seeing the general counsel's office and legal departments play a more active role in ESG initiatives and strategies. This is important, as legal risks related to ESG continue to develop and evolve," said Elizabeth Cassady, an attorney with Steptoe & Johnson in Washington, D.C.