environment social and governance

Consortium provides prototype climate-related financial disclosure standards, following earlier pledge to collaborate.

By Paul A. Davies and Michael D. Green

A group of leading sustainability and integrated reporting organisations has published a paper addressing standards for reporting on enterprise value and presenting prototypes of climate-related financial disclosure standards (the Paper). The co-authors include the Carbon Disclosure Project (CDP), the Climate Disclosure Standard Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB) (the Organisations). The Organisations released the paper on 18 December 2020, several months after pledging to collaborate to provide market guidance on sustainability standards.

As Chairman Clayton reaches the end of his tenure, Commissioners Lee and Crenshaw continue to push for SEC action on climate change.

By Paul A. Davies, Paul M. Dudek, Ryan J. Maierson, and Kristina S. Wyatt

Background

In recent years, the market has witnessed a sharp divide both within the US Securities and Exchange Commission (SEC or Commission) itself and between the investor community and the SEC over the regulation of environmental, social, and governance (ESG) disclosures, as discussed in this blog post. The Commission, under the direction of Chairman Jay Clayton, has declined to entertain the regulation of ESG disclosures outside of human capital issues, even upon the adoption of amendments in August 2020 to the provisions of Regulation S-K governing the companies’ business description, risk factors, and legal proceedings. Last week, the Commission adopted amendments to the provisions of Regulation S-K governing Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and, in line with its previous actions, declined to include any provisions related to ESG disclosures.

By Sophie Lamb and Paul Davies

There is an increasing desire amongst PE firms to publicise value creation through the use of bespoke metrics to measure improvements and value derived from (ESG) policies including improved reputational risk management; better and more transparent governance; better health, environmental and safety standards; heightened efficiency; less disruption as a result of sanctions and protest; etc. ESG graphic

These and other opportunities inherent in a robust ESG strategy are generally well-understood by PE firms. However, commensurate appreciation of growing legal risks for buyout firms that communications around ESG strategy and commitments entail, is less evident.

There is more to this evolving area than simply general compliance and being a good corporate citizen. Real reputational, legal, political and financial consequences can arise from failing to align business practice with ESG statements and policies. Such statements and policies often contain laudable public commitments and pledges around ESG, and acknowledgements of control of, and responsibility for, such matters by private equity management and boards. However, these statements and policies have legal content and significance that must not be overlooked; they potentially create misstatement litigation exposure at board, operating and portfolio company levels.

By Paul Davies and Michael Green

dsc20050604_133440_3421In December 2015, world leaders met to negotiate the Paris Agreement. Setting aside whether the Paris Agreement goes too far, not far enough or is just right, one cannot dispute that government commitments to limit an increase in the global average temperature to well below two degrees Celsius will almost certainly impact private equity funds. In particular, regulatory and investor demand are likely to change the way climate-related risks are assessed. As Blackrock notes, “…carbon-heavy industries are not immune from disruption, nor are asset prices from regulatory efforts to mitigate climate change risk. We believe investors should thoughtfully consider these dynamics in order to build sustainable portfolios and take advantage of investment opportunities as we move towards a low-carbon economy”.

The private equity sector is in general paying closer attention to Environment, Social and Governance (ESG) issues throughout the investment cycle, whether voluntarily (for example, KKR’s Green Solutions Platform) or in response to investor pressure. French private equity firms Apax Partners, Ardian, Eurazeo, LBO France and PAI Partners committing to reducing greenhouse gas emissions Private equity goes green across their portfolio companies is perhaps the most recent illustration of this shift in focus.