Effectively Navigating the Evolving ESG Landscape

By Lisa Pham and Shloka Gidwani

“ESG” (Environmental, Social and Governance) has become a polarizing term and topic. On one hand, companies continue to face pressure to address the increasing threat of climate change and ensure their operations are equipped to handle growing geopolitical and social challenges. At the same time, certain policymakers, investors and other stakeholders are increasingly questioning financial return on investments and initiatives focused on ESG enhancement and its relevance to companies’ core businesses.

Companies also are subject to heightened scrutiny for the metrics they are putting forward regarding ESG-related commitments and whether these metrics are actually attainable. Amid the 2024 election season, with nearly 50% of the world population heading to the polls this year, the public debate around ESG issues likely will only become further polarized. It’s a delicate dance – and against these diverging pressures, companies must continually evaluate how they communicate (and even refer to) their ESG efforts and priorities, with some having changed the nomenclature around their discussion on the topic to be broadly referred to as “corporate responsibility.”

Below, we have identified notable trends in the evolving ESG landscape and recommendations for leadership teams:

While companies continue to face a record number of ESG-focused shareholder proposals, approval rates remain low, and companies are increasingly pushing back.
Throughout 2023, companies saw a larger number of environmental and social (E&S) shareholder proposals, though these proposals received less support than they have in previous years. E&S proposals had the highest withdrawal levels among all other proposals, indicating that shareholders were open to negotiating with companies on ESG-related topics. Similarly, anti-ESG proposals are on the rise, but these proposals also have not garnered much investor support.

Against this backdrop, companies have started to push back. Notably, ExxonMobil recently sued two ESG-focused shareholders, Arjuna Capital and Follow This, regarding their shareholder proposal demanding that the company set strict Scope 3 targets to reduce greenhouse gas emissions. Exxon accused the shareholders of “extreme agendas” that are “calculated to diminish the business.” Following this lawsuit, the shareholders withdrew their proposal. Despite this, the coming proxy season will still likely feature a high volume of E&S-related proposals.

What this means: Take proactive steps to strengthen your company’s narrative around value-add ESG programs, while also emphasizing director qualifications and governance practices.

Industry-specific dynamics matter more than ever.
We are seeing companies in regulated industries take a more cautious approach to avoid accusations of “greenwashing” and “woke capitalism.” Some are pulling back on active promotion on ESG initiatives, including external DE&I messaging, but still keeping existing policies in place, as criticism toward the E&S components of ESG increase. We have also seen a greater focus from our clients on communicating their governance policies as investors continue to closely monitor these practices.

While not immune to the criticisms of ESG skeptics, other consumer-facing businesses with more progressive stakeholder audiences are continuing to thoughtfully engage on ESG issues that align with their mission and values.

What this means: Closely consider your stakeholders and business priorities when promoting ESG priorities – communicate ESG-related updates directly to priority stakeholders rather than through broad communications and focus instead on the relevant data and achievable KPIs.

The SEC’s long-anticipated Climate Related Disclosure rules carry new implications for companies.
This ruling removed Scope 3 emissions requirements, meaning companies will not be required to report emissions from their supply chains and end-use products. Moreover, the SEC’s disclosure rules provide somewhat of a safe harbor, since the guidelines are forward-looking and do not require companies to disclose past data. This decision highlights the influence of lobbying and business groups in Congress that successfully pressured the SEC to back away from its original, stricter disclosure requirements. Since the ruling, nine petitions have been filed across six different courts, with pushback from both proponents and opponents of Scope 3.

What this means: With continued uncertainty around disclosure rules, continue to monitor regulatory changes and consider initiating internal audit processes for ESG disclosure practices.

With investors, it is essential for issuers to tie ESG priorities to their long-term value proposition.
Investors are increasingly looking for companies to integrate their ESG plans into their overall growth and business strategies, rather than viewing ESG just from a marketing perspective. In line with this effort, companies are moving away from only touting social causes in their ESG frameworks, and instead, emphasizing how ESG initiatives connect to specific, long-term business goals.

What this means: ESG strategies should be integrated into big-picture business strategies —effectively communicating how ESG initiatives and policies support bottom-line results.

New expectations on Board qualifications and awareness related to ESG.
As the market continues to evolve with new economic and emerging tech oversight risks, investors are beginning to critically examine director qualifications, term, and age limits on Boards. Our clients continue to see increased scrutiny related to director expertise, especially related to ESG issues and sustainability. It is more important than ever to assemble a Board that contributes to, informs, and provides critical oversight on ESG strategy.

What this means: Boards should begin to institute greater oversight of ESG programs, including increased involvement around initiatives and the issuance of corporate statements and engagement related to ESG – any Board member who meets with investors needs to be conversant about the company’s initiatives.

A thoughtful ESG strategy – and effectively articulating how and why ESG initiatives are crucial to a company’s mission, culture, performance and long-term opportunity – remains critical to navigating emerging climate-related regulations, particularly through the intense political crossfire ahead of this year’s global elections.