However, the inverse of Einstein’s famous quote may also be true – particularly as it pertains to this era of Environmental, Social, and Governance (ESG) developments. The pace at which companies are implementing initiatives to align with their corporate purpose, values, and stakeholders is laudable. But recent trends in litigation and at the regulatory level also pose increasing reputational risks that must be accounted for in a company’s ESG calculus.
In March, the U.S. Securities and Exchange Commission (SEC) announced that it had established a 22-member task force to investigate and initiate enforcement cases against publicly-traded companies and investment funds participating in misleading marketing tactics about their environmental measures. Because the SEC requires companies to file accurate disclosures about their operations, processes, and performance, the agency will consider whether – and to what extent – a company’s ESG’s promises overstep the truth, exposing companies to a great deal of risk and criticism.
The SEC’s efforts have increased under the Biden administration. It specifically identified ESG investing as a top concern for its examination division. And this focus already has yielded results. Just last month, the SEC announced that it had pinpointed (yet to be named) investment firms that were deceiving investors despite public proclamations about sustainability in their portfolios. In some instances, the SEC said, firms didn’t even have policies or procedures in place to ensure their clients’ ESG-focused investing inclinations were, in fact, implemented.
Of course, the ESG risks for companies extend far beyond the potential for enforcement measures and even just one government agency. In 2021 alone, there has been an increase in litigation surrounding corporate disclosures and reporting, governance positioning, operational shortfalls, claims of breaches of fiduciary duties against board directors, and ongoing climate change allegations as companies implement net-zero carbon targets and pledges.
Based on Argyle’s engagements with lawyers and clients alike, this trend will endure. But the risks are not just confined to legal or operational considerations. C-suite managers and board directors would be prudent to prepare for these risks in advance – even if a company is doing everything “by the book,” as most companies surely are. The reasons for this are simple:
- ESG initiatives, by necessity, go to the core of a company’s purpose, mission, and values. They are essential to its strategy and operational direction. Any risk posed to a company’s ESG measures is likely to have a greater impact on a company’s business objectives, and therefore cannot be managed in a silo.
- ESG issues are typically high-profile and have long-lasting reputational effects if not handled appropriately. In an age where General Counsel rank reputational risk as one of the largest concerns to their organizations. Since it’s estimated that reputation alone can account for up to 70% of a company’s value, not being prepared is a severe risk.
- Now more than ever, stakeholder evaluation is being measured by public sentiment and how a company measures up to their expectations. Because ESG metrics matter to today’s shareholders (and to employees, customers and communities), falling short in this area could have more crippling reputational effects than in other areas. While perhaps most prominent today, this has been a steady trend for years now. Harvard Law School’s Forum on Corporate Governance noted in 2018: “The valuation of corporate ESG performance increases as a function of public sentiment.”
- Claims against a company’s governance initiatives can expose a plethora of other failures within the company that can limit operational effectiveness and require significant resources to correct, as noted by a 2020 report by the World Business Council for Sustainable Development. This is especially true with the correlated focus on social justice, and diversity in the workplace.
- What may have been a long-term trend toward corporate ESG measures has been tremendously expedited by COVID-19. Consumer behavior has changed so dramatically in the wake of the pandemic that corporate strategy has struggled to keep up with stakeholders’ increased ESG expectations.
At Argyle, we understand that litigation-related ESG risk is not only limited to legal exposure. Legal, reputational, and business results must be aligned priorities — and require aligned strategies. A communications strategy must always complement the legal strategy and support the overarching goals of the business. ESG issues can be highly charged, politicized, and binary. Critics will challenge your position, intent, and narrative. That is why it is critical to be proactive in managing reputation with the stakeholders you care most about, and earning their support for both your values and your actions.
To Einstein’s original point: When a challenge presents itself, so will opportunities to tell your story effectively. Eventually, the challenge will pass; and with a strong communications partnership, the opportunity lies in using it to position the company for long-term success.