March 23, 2022

diversity inclusion ESG sustainability equity collaborate

As the attached article outlines, shareholders who expect progress and economic returns on ESG fronts have concerns that often land on the desks of corporate legal teams. Limited Partners that invest in the funds that invest in companies have stakeholders with investment expectations.

Investors have stakeholders to satisfy, whether it be a state pension fund or a high-net-worth individual. As such, companies have investors to satisfy. Legal teams are in the cross-hairs of these pressures since they often manifest in shareholder activism, such as ESG transparency proposals for shareholder votes. Further, as a company lays out its ESG initiatives, it is critical to demonstrate progress against these goals or risk litigation – sometimes as severe as securities fraud. Questioning surrounds board constituencies as boards are increasingly called upon to be diverse. Nominating and governance committees need to show good faith in recruiting candidates that contribute to this diversity. Further, often pushed by the wayside, initiatives like disability inclusion are part of ESG, and this is an opportunity for law departments to clearly outline their goals for the same, and make them realistic.

So, how can legal teams deal with these pressures? Here are some guiding principles that may be helpful:

• Demonstrate transparency: ESG progress is hard. The issues are multi-faceted and multi-dimensional. No one expects overnight movement. However, it is critical to demonstrate good-faith efforts, meaningfully executed. So, reveal progress and challenges, early and often. Shareholders and investors are your cheerleaders, not your enemies. Bring them into the fold.
• Be rational about your goals: Many companies feel the pressure to outline big, hairy, audacious goals for ESG. Much of this pressure comes from events such as IPOs, where share prices often reflect returns and impact expectations from the market. Don’t overstate.
• Document and collaborate: Ensure clear documentation of an ESG roadmap and name groups within the company stakeholders and participants. Documentation is not a law department initiative but a company focus – make it so.
• Ensure ESG is 360 and holistic: Sustainability, diversity, equity, inclusion, and a host of other elements are a part of ESG. To the best of your ability, state acknowledgement of these dimensions and goals – even if they are not near term. Investors’ understanding of it takes a while. They want to make sure ESG is a focus. Case in point – disability inclusion. Often treated as a footnote, this is an opportunity to articulate realistic objectives in a domain that can demonstrate organizational and industry leadership.
• Don’t be antagonistic: Litigation avoidance principles employed in the normal course of business should also prevail here. Investors are supporters, not enemies. If oppressed, they will take shareholder actions rather than discuss their views offline with management. The latter is preferred.

None of these principles are an elixir but hopefully a reminder of the basics that can enable legal teams to handle pressures from investors on ESG matters rationally.  Back to the basics.