Research from a recent survey of the 100 largest companies in the U.S. shows that a majority of these companies are continuing to make governance changes based on Environmental, Social and Governance principles that shareholders and stakeholders have been advocating for. When the largest companies in the country adopt governance measures, many times they become best practices. Corporate board members should take note of some of the trends around ESG that have emerged this year as they set their agenda for 2023.
Law firm Shearman & Sterling’s 20th annual Corporate Governance & Executive Survey revealed significant findings about the 100 largest companies in the U.S. that have securities listed on the NYSE or Nasdaq as measured by market capitalization and revenue. According to the survey:
• More than half (60%) of surveyed companies incorporated ESG metrics into their compensation programs – a 19% increase from the previous year.
• Nearly three-quarters (73%) of the largest 100 companies have set a net zero carbon/greenhouse gas emissions target.
• Eighty-four of the largest 100 companies have publicly stated that “social purpose” is important to the corporation.
The survey suggests that there will be an increased emphasis on climate change-related disclosures based on materiality and risk management, as well as efforts to pressure companies to disclose corporate strategies to deal with carbon and greenhouse gas emissions.
Additionally, the survey showed an increase in E&S-related (environmental and social) proposals in 2022 among Russell 3000 companies. A record 471 E&S proposals were submitted in 2022—a 15% increase over the previous year; and E&S proposals represented 58% of all proposals filed in 2022, compared to 51% of proposals filed in 2021.
This new research should confirm what many companies have seen developing over the last few years – Environmental and Social issues require greater attention from corporate boards.
As more companies address ESG issues more directly, it is likely that all boards will need to re-examine their response to multiple aspects of environmental and social issues confronting their company next year. Has the board responded to shareholders and stakeholders on these issues? If not, what type of response should be made to avoid being hit with a shareholder proposal? These and many more are the types of questions boards should consider placing on their agenda for 2023. Boards can also:
• Confirm the company climate change and environmental policies with management and determine how they will be communicated publicly. Increased demands for climate change-related disclosures make it imperative that boards show that the company takes environmental issues seriously and is making sure that climate change does not have an adverse effect on the company bottom-line or the communities the company operates in. The SEC’s proposed rules to enhance and standardize climate-related disclosures for investors makes attention to climate change a higher priority now than in previous years. Boards will need to strategize how the company can best meet the SEC’s new proposed requirements while not disclosing information that could hurt the company’s competitiveness.
• Meet with management and come to agreement on how social issues will be handled. The Sherman & Sterling survey identified several “hot button” social issues that many companies may find themselves confronting in 2023. Among these issues are racial justice and civil rights audits, diversity, equity and inclusion issues (including board diversity), political spending and lobbying, and employee health and safety issues. Identifying some of the social issues that shareholders and other stakeholders have advocated for in the past and devising a strategy for addressing them publicly will be helpful in numerous ways. Devising a strategy will at least allow the company to avoid being blindsided by some issues and it will also allow the board to say that it has been responsive to shareholders and stakeholders concerns.
• Create a Corporate Responsibility Report if the company has not already. As more companies adopt ESG disclosures, more investors will begin to ask for those disclosures at companies that do not disclose. The the report says Disclosure of Board Oversight of ESG Matters in the proxy statement and Corporate Social Responsibility Reports (CSR Report) is how most companies are letting shareholders know their commitment to ESG issues.