By ICR
Environmental, social, and corporate governance (ESG) has been a focal point over the past several years, but it has recently come under scrutiny. As anti-ESG rhetoric grows from both sides of the political aisle, and in light of the Supreme Court decision to strike down race-based affirmative action in higher education in June 2023, companies are left wondering if the push for ESG is coming to an end.
At the ICR Conference in January, we spoke with a panel of experts — Billy Cyr, CEO of Freshpet; Raynelle Grace, Senior Director, Vanguard’s Investment Stewardship program; and Jon Solorzano, Counsel and Co-Head of ESG at Vinson & Elkins — to discuss the future of ESG and what the current environment means for companies today.
While major news outlets have published articles on the death of ESG, research shows that ESG funds have outperformed non-ESG funds in the last year. And, at the United Nations Climate Change Conference (COP 28) in late 2023, nearly 200 countries committed to reach net zero greenhouse gas emissions by 2050.
Amid these mixed signals, how should companies move forward?
According to Solorzano, companies should first understand that ESG is still a priority. “You might be seeing some kind of noise domestically that ESG is dead; it is very much alive,” he says. He explains that more ESG-related regulations are coming out, both internationally and domestically, since the commitments made at COP 28. “We’re even seeing states take initiative, like California on climate reporting. New York is likely to follow, and that’s to say nothing about what’s going on in Europe. …If you look at what’s going on regulatorily, the trend is very much present.”
Those regulations, paired with a company’s unique core values, will guide investor perceptions.
“It is the role of the government to make government policies, and then it is the role of Vanguard to assess companies based on policies that have been enacted,” Grace explains. “It’s ultimately up to the company to determine what’s most material to them.”
If environmental stewardship is fundamental to a company’s mission, for example, “we would be asking questions like, ‘How are you overseeing those risks? How are you prioritizing strategies around ESG topics?’” she says. “But for companies that it is not integral to their strategic objectives, we might focus on other risks.”
Emerging regulations will require companies to be flexible and open-minded about climate-related disclosures. For instance, new regulations coming out of California will require companies to disclose all of their Scope 1, 2, and 3 emissions.
For many companies, disclosing Scope 3 emissions — those not produced by the company itself, but that the company is responsible for up and down its value chain — is particularly challenging.
Cyr explains that Freshpet, for example, purchases thousands of pounds of fresh chicken every day — but only part of the chicken. Because there are other customers involved who purchase the remaining portion of the chicken, it’s difficult to determine the precise emissions that Freshpet would need to disclose. “We have a good grasp on the things that are solely in our scope,” he says. “It’s the Scope 3 things that may be a problem for us.”
In response to challenges like emissions disclosures, some companies are trending toward “greenhushing,” a term for when a company is too quiet about its sustainability goals for fear of repercussions or litigation.
Solorzano advises companies to work closely with counsel to handle these communications. “I think you need to be very well advised by counsel as you’re putting these commitments out there,” he says. “And if you’re walking them back, just understand what the optics of it are going to be and that you’re doing it in a thoughtful way that still lends credibility and confidence to your investor base.”
Also consider consumer perception and how any changes will affect your company’s reputation. “Consumers don’t fault us for setting aspirational goals and going after them,” says Cyr. “But if you put out an aspirational goal and ignore the fact that you made it or don’t put a good faith effort into pursuing it, you will pay a price to your consumer.”
In light of the recent Supreme Court ruling on affirmative action, many companies are reconsidering diversity, equity, and inclusion (DEI) efforts, wondering if they carry new litigation risks.
Solorzano assures companies that the legal risk isn’t as acute as some think it is, “assuming the diversity program is tailored in an appropriate way.”
“You should be describing your initiatives in terms of, ‘How is this driving human capital management enhancements? How is this leading to better employee engagement? Having an inclusive environment is good for our company, which means it’s good for our shareholders,’” he says. “Having a numbers-based quota system starts looking a little bit more skeptical under some of these frameworks.”
Grace agrees, explaining that investors like Vanguard want to understand the appropriate set of diversity metrics or aspirations for each individual company. “We will hold boards accountable, and members of the nominating governance committee accountable, if the board is not reflective of their consumer base and their employee base as described by their disclosure,” she says.
ESG continues to evolve, but based on emerging regulations, it is here to stay. Companies that take steps to make appropriate disclosures and understand the risks that are core to their unique values will be better positioned to look favorably to investors, stakeholders, and consumers.
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