Regardless of your view of the efficacy of ESG disclosure for publicly-traded companies, investors increasingly are insisting on it, and the advisors that can profit from it the most – proxy advisory firms, large accounting firms and consultants – are heavily promoting it. For the 100 or so largest public companies, adding ESG disclosure to their current disclosure process generally is not a big deal. Many already publish reports consistent with GRI guidelines, and some publish reports that are even broader. For the 6,000 or so other public companies, it can be a tougher task and one that must be managed carefully to avoid becoming ineffective and costly. Below we provide some thoughts on what those other public companies may consider.

Think Backwards

What do you want your ESG disclosure to look like in your Form 10-K for 2021? We believe that if done right:

• Business descriptions will contain two- or three-page discussions of ESG. We recommend avoiding inclusion in MD&As for a range of reasons, including things like the challenges in getting comfort letters.

• The framework for the ESG discussion generally should be consistent with the June 2017 Recommendations of the Task Force on Climate-related Financial Disclosures, even though it is not as broad as ESG. But remember, to most constituencies that want ESG disclosure, their primary desire is environmental impact disclosure more than anything, if not everything, else, and the TFCD Recommendations focus on that.

• This means that the ESG discussion should include four topics: governance, strategy, risk management, and metrics and targets.

• While we can only guess at this point, we expect metrics and targets to cover three or four metrics from each of the areas that are important to your business, e.g., employment, raw materials sourcing, climate change, resource consumption during production, etc., leading to 12 to 20 meaningful metrics in all.

• We expect for each metric, a company would include a sentence describing what it covers, and provide a couple of years of historical data and a target for the future.

While other approaches will work as well, we believe what we propose above is achievable if pursued at a steady pace and, at least for the next couple of years, will be responsive to most needs and demands.

How to Get There

With that goal in mind, the following timeline should serve as a useful guide:

Fall 2020

• Assemble a group with the right expertise to identify the areas that are important to your particular business and to oversee the process. The SASB disclosure standards can provide some insight, but they tend to be narrow and crafted with objectives in mind beyond just good disclosure. More important, we believe, is thoughtful consideration of your own business, and what is critical to you from a sustainability perspective. While understanding what similar companies are focusing on can be helpful, very few have progressed far.

• Craft an ESG policy that covers both your own business as well as your interactions with suppliers. For instance, most large companies should require that their largest suppliers have ESG policies of their own. While the initial objective is not to be able to report on so-called Scope 2 and 3 GHG emissions, a carefully-written ESG policy can emphasize to vendors your attentiveness to this topic.

• Do not overlook your trade associations as a resource. For example, the trade association for investor-owned electric utilities has been a leader in ESG reporting, and others are active as well.

Winter/Spring 2021

• Identify six or seven factors within each of the four topics that are important and assess the availability of reliable data. The goal, as noted above, is to end up with three or four meaningful metrics within each topic, so cast your net broadly enough to reach that goal.

• Draft language for inclusion in your 2020 Form 10-K that covers governance, strategy and risk management in general terms. Describe your process to identify metrics and targets.

• Board involvement is expected by investors and others (and is appropriate in any event). Therefore, talk with your board or an appropriate committee to bring them up to speed and get their sign-on.

Summer 2021

• Finalize your metrics and establish targets. Certain targets should be straight-forward and short-term, e.g., decreasing water usage, packaging or freight by some percent per year, while others will be longer-term, reflecting that some targets, such as diversity or reduced turnover, will take time to achieve.

Fall 2021

• Recraft your Form 10-K disclosure so that you can drop in the 2021 metrics when available and update your targets.

• Update your board or the appropriate committee.

• Allocate responsibility for achieving targets, which may include rewarding the achievement of targets through your incentive compensation system.

Winter/Spring 2022

• Finalize your Form 10-K disclosure with updated information plus the metrics and targets.

Future Years

• Wash, rinse and repeat with incremental expansion and improvements each year.

Rating Agencies

Over 100 organizations now rate ESG reporting and performance, or at least provide reporting guidelines that they believe are the best available and that every company should run to adopt. Even the largest companies cannot do all that is asked.

Pick the two or three that are the most germane to your business and factor their objectives into what you do. For some businesses, such as industrials, GRI and CDP may be important, while for others, such as service businesses, they may be almost irrelevant. We recommend being attentive to Sustainalytics (which has been around for 25+ years) and ISS, and we certainly would be attentive to what the largest institutional investors, e.g., Blackrock and Fidelity, publicly request.

External Resources

They are all over the place. Each of the Big Four as well as the next few audit firms have advisory practices on ESG management and reporting, as do all of the major consulting firms, particularly McKinsey. Several smaller boutique firms are active as well.

With all of these constituencies and the likely SEC focus on ESG disclosure, compliance challenges can seem daunting. We have collected a wide range of materials that can be instructive, and our Environmental, Labor and Employment, and Corporate practices, among others, all can help in different ways. We also have overseen kick-off and working group meetings, both in-person and virtually, to help clients start the process.