SEC Commish Talks ESG, Board Governance

SEC commissioner Allison Herren Lee delivered a speech Monday forcefully laying out the need for corporate boards to take ESG risks and disclosures seriously, presumably as a prelude to whatever enhanced ESG disclosure rules the Securities and Exchange Commission will adopt sometime later this year. 

Lee, who has spoken about ESG issues numerous times and launched several climate change initiatives while she was acting SEC chairman earlier this year, was speaking at the Society for Corporate Governance 2021 conference. So the attendees were corporate secretaries, governance officers, compliance professionals, and other fellow travelers who tend to work with the board of directors closely on risk and compliance issues. 

Lee’s big theme: ESG is one of those issues. 


Increasingly, boards of directors are called upon to navigate the challenges presented by climate change, racial injustice, economic inequality, and numerous other issues that are fundamental to the success and sustainability of companies, financial markets, and our economy,” Lee said. 

Why? Because “these environmental and social issues, once perhaps treated as more peripheral, are now central business considerations,” she continued. “So boards are stepping up their engagement on climate and ESG related-risks and opportunities.”

That means more board-level committees overseeing ESG issues, and more boards recruiting directors with ESG expertise. Lee then rattled off a string of notable ESG moments this proxy season:

  • At General Electric, 98 percent of shareholders approved a resolution asking the company to explain how it intends to achieve net zero emissions in accordance with the Paris Agreement.
  • At ConocoPhillips, 58 percent of shareholders approved a measure requesting emissions reductions in the company’s supply chain.
  • At United Airlines, 65 percent of shareholders voted in favor of a resolution seeking more information on how the company’s corporate lobbying aligns with the goals of the Paris Agreement.

And let’s not overlook ExxonMobil, where ESG activists won a proxy fight to secure three seats on the oil giant’s board

Get With the ESG Program

One interesting theme in Lee’s speech is that she has moved past any debate about whether a board should confront ESG issues, to how boards must confront them. Her argument is that the connections between how a company handles ESG risks and its financial performance are clear and compelling — so “the principal debates are about when, not if, these issues are material.” 

And once ESG issues are material, then the board has a fiduciary duty to address them, just like any other risk that might affect the company’s financial performance. Or, to quote Lee at length:

There is tremendous and growing investor demand for climate and ESG disclosure… No matter the view of regulatory involvement in climate and ESG disclosures, directors must reckon with this growing consensus and growing demand from the shareholders who elect them. Accordingly, boards increasingly have oversight obligations related to climate and ESG risks: identification, assessment, decision-making, and disclosure of such risks. These obligations flow from both the federal securities laws and fiduciary duties rooted in state law.

If you agree with Lee’s logic so far, then more boardroom duties related to ESG oversight follow. For example, directors’ duty of care requires that the board is well-informed when making corporate decisions — so the board would need reports about ESG risks and activity, that somehow tie those issues to business objectives. 

Or, under Delaware corporate law, directors might need to investigate red flags that indicate legal violations or other harm to the business. That might require more detailed audits or investigations on ESG issues, especially as new regulations on climate change, diversity & inclusion, or other ESG issues come to pass. 

“All of this,” Lee said, “suggests that climate change and other ESG matters should be regular and robust topics for the board, whether at meetings of the full board or in key committees.”

Lee then closed with three steps boards should consider: enhance board director diversity; increase board expertise on ESG issues; and “inspire management success” by tying executive compensation more closely to ESG performance.

From Boardroom to Operations

I know what you’re thinking: “Cool story bro, but I’m not a corporate board director; I’m a compliance officer (or internal auditor). What am I supposed to do with all this?” 

Well, two thoughts come to mind.

First, this is the latest statement from Democratic SEC commissioners that frames ESG regulation as perfectly normal — that of course the SEC has legal authority to require such disclosures, because materiality isn’t merely confined to financial disclosures. Lee gave another speech just a few weeks ago on this point; SEC chairman Gary Gensler and fellow Democratic commissioner Caroline Crenshaw have voiced similar opinions. New SEC general counsel John Coates is also in the same camp. 

In other words, Lee and others are laying the groundwork to defend the SEC’s forthcoming proposals for enhanced ESG disclosures. They’re building arguments to win over key constituencies, such as board directors across Corporate America, by reminding those groups that a large swath of investors and the public want more aggressive action on climate change and social justice issues. 

So you, the compliance or internal audit professional, can first communicate to the board that more ESG oversight is coming, period. The whole company should start contemplating how it will get ahead of this looming regulatory issue now, rather than play catch-up later. 

Second, compliance and audit professionals should consider the role you want to play yourselves in this emerging governance trend. If the company is going to need stronger ESG policies and procedures, or the board will need better reporting — who is going to own those responsibilities? Could you do it? Do you want to do it? 

My starting point is that ethics and compliance programs can be an excellent starting point for ESG programs, because lots of what ESG management will entail is what you already do: risk analysis, policy development, due diligence, training, reporting. You implement programs to influence employee conduct and reduce the risk of regulatory infractions or unethical behavior. Broadly speaking, ESG tries to achieve the same thing.

Put another way: if the corporate compliance program doesn’t take the lead on ESG programs — who should? 

One might say the legal team, but legal has a day job reducing liability risks for the company and doesn’t immerse itself in the details of how the First Line of Defense actually works. HR’s experience in policy management and regulatory compliance is too narrow. Maybe a procurement function could do it, except lots of companies don’t have one. So there’s an opportunity here for ambitious compliance officers.

And above all, take Lee at her word — that opportunity is coming. Companies will have to address ESG somehow.

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