US: Companies Should Avoid ESG/ Sustainability Reports Until SEC Rule Release

As published on: forbes.com, Thursday 11 January, 2024.

1% released a thoroughly researched and well written 2023 Sustainability Report and 2024 Advancing Climate Solutions Report. The reports are littered with overly cautious disclaimers, clearly the product of a fellow attorney executing excessive diligence to prevent regulatory and civil litigation issues, and an indicator of the treacherous legal territory of such reports. With the global rise of greenwashing penalties and civil litigation, companies need to question if sustainability reports, and the broader environmental, social, and governance reports are currently worth the legal risk.

A sustainability report is an outward facing document created by a company to showcase their environmentally friendly initiatives. Companies have participated in some form of sustainable reporting for decades, generally focused on green initiatives. However, recently, that focus has expanded to include climate change policy as it relates to the Paris Agreement’s net-zero 2050 goal.

The shift in focus coincided with the rise of ESG investing. ESG is a type of financial investing where non-financial factors are considered. As the name implies, ESG is divided into three reporting categories. Governance refers to the ethical and responsible management of the company. Social varies by jurisdiction, but generally refers to the impacts the company’s policies have on their employees and the surrounding community. In the U.S., the social category also includes diversity, equity, and inclusion policies. The environmental category includes the company’s sustainability report, or at least some version of it.

As a result of rising pressure from fund managers looking for additional information, as well as global initiatives by the United Nations, ESG reports began emerging around 2021. However, the reports were not standardized, and companies could highlight what they choose, making the reports little more than marketing materials directed at fund managers.

As demand for ESG and sustainability reporting grew, so did demand for a regulatory scheme. In 2023, the International Financial Reporting Standards Foundation’s International Sustainability Standards Board released reporting standards for jurisdictions that use the IFRS. At nearly the same time, the European Union announced ESG reporting requirements that incorporated the IFRS Sustainability Disclosure Standards. However, those standards do not apply in the U.S. who sues Generally Accepted Accounting Principles as adopted by the Securities and Exchange Commission.

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The SEC has been poised to release sustainability reporting requirements for publicly traded companies for over a year. Those standards were anticipated to be released in October 2023, but that deadline passed without action. I expect them to be released in the first half of 2024, most likely the first quarter, but the SEC has given no clear timeline and is facing rising political pressure from both political sides with conflicting goals to either strengthen or eliminate the standards.

In anticipation of the forthcoming reporting requirements, and because of demand in the marketplace, companies are putting key individuals into place to address sustainable reporting. However, companies may be jumping the gun on putting out reports while standards are still unclear.

There are independent organizations that have drafted reporting guidance. ExxonMobil followed the Sustainability Reporting Guidance for the Oil and GasGAS +15.7% Industry (4th edition, 2020, revised February 2023) developed by Ipieca, the American Petroleum Institute, and the International Association of Oil & Gas Producers.

For less regulated industries, reporting guidance is not as readily available. This becomes problematic for companies that want to participate in sustainable reporting, not just in format, but due to the threat of legal repercussions.

Globally, regulatory agencies have started to crack down on greenwashing, or a company’s exaggeration of their environmentally friendly actions. Climate washing, a subset of greenwashing, focuses specifically on claims related to climate change. In the U.S., the SEC has announced an increased focus on greenwashing in sustainability reports, ESG reports, and other outward facing documents. However, the SEC’s jurisdiction is limited to publicly traded companies, with a particular focus on documents directed towards investors and fund managers.

The SEC is not the most immediate threat to companies. New state level regulations and legal interpretations include greenwashing under state consumer protection laws. These protections apply not only to publicly traded companies, but also to privately held companies. Other laws, statutes, and regulations may also apply. There has also been a notable increase in climate change litigation from third party organizations seeking to influence climate change actions in the business sector. These legal landmines are problematic for organizations wishing to participate in sustainable reporting at this time. A well-intentioned report drafted internally and reviewed by in-house counsel, instead of an attorney who specializes in this area, could cause tangible legal problems.

There will be a time when sustainability reports are required for publicly traded companies. Reporting standards will also soon apply to some privately held companies. While there may be temptation to preemptively participate in reporting, companies should consider the full legal impact of moving too soon.


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