February 8, 2025

Environmental, Social and Governance (ESG) is a broad and vague term that seems to be related to non-financial factors that investors use to measure an investment or the sustainability of a company.

Companies that may have ignored, resisted or ‘green-washed’ ESG disclosures may be forced into such disclosures by large investors or the government. It may prove impossible not to be involved in the coming wave of ESG requirements, both private and public.

As its name implies, there are three ‘pillars’ of ESG. An exact definition is difficult because each is often described as including any number of factors or behaviors. The environmental pillar relates to the impact that a company can have on the environment, such as its carbon footprint, including direct and indirect greenhouse gas emissions, the chemicals involved in its manufacturing processes, or the general management of natural resources. The social pillar relates to a company’s relationships with its stakeholders or how it treats people within the company and the wider community, including diversity programs, hiring practices and whether it is how a company advocates for social good with its supply chain partners or more broadly. world. The governance pillar refers to how a company is led and managed, including how leadership incentives align with stakeholder expectations and the types of internal controls that exist to promote transparency and accountability of leadership.

Although the use of ESG metrics as an investment tool is relatively new, issues related to the environment and sustainability have been around for a long time. For example, the concept of waste reduction (substituting non-hazardous chemicals for use as solvents or in a manufacturing process) has been around since the advent of federal hazardous waste regulations. In addition, corporate sustainability and corporate social responsibility concepts have existed for decades.

Today, the active use of ESG concepts to force change is emerging. Major capital investment companies develop and use ESG metrics to determine whether to invest in a company or finance a project. Major shareholders of companies seek to enforce compliance with ESG principles in corporate governance. Even some large banking institutions are incorporating ESG criteria into loan decisions. Socially conscious investors factor ESG considerations into making individual investment decisions.

The Biden Administration has also joined the fight to force ESG disclosure. The Securities and Exchange Commission (SEC) has issued a sweeping proposed rule to mandate ESG reporting. According to the SEC, the proposed rule is designed to provide consistent standards for ESG disclosures that will allow investors to make more informed decisions as they compare different ESG investments. Certain funds are required to disclose more information about the greenhouse gas emissions associated with their investments. These funds are required to disclose the carbon footprint and the weighted average carbon intensity of their portfolio, to meet the need from investors for consistent information about greenhouse gas emissions related to their portfolios.

The need for capital investment for a project or government regulation can force a company to pay attention to ESG concepts. Even if a company has a negative view of ESG concepts, the introduction and implementation of these concepts at this time can be beneficial and can favorably influence the decision of an investor to invest in the company or the decision of a bank that will provide a loan. In short, it’s probably better to ride the wave than drown in it.

John B. King is a partner at Breazeale, Sachse & Wilson LLP in Baton Rouge, Louisiana. His practice is primarily concerned with environmental regulatory permitting and compliance. Prior to joining the firm in 2003, he served as chief enforcement attorney for the Louisiana Department of Environmental Quality.

For more information, visit www. bswenviroblog.comor contact jbk@bswllp.com or (225) 381-8014.

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