One of the more controversial and contentious legislative issues addressed by various state legislatures in 2023 concerned ESG-related legislation. But what actually is ESG? It stands for environmental, social and governmental. It is a concept used by investors in capital markets to measure the sustainability and ethical impact of an investment in a company. According to Kyle Peterdy, vice president at CFI, “ESG is a framework that helps stakeholders understand how an organization is managing risks and opportunities related to environmental, social and governance criteria. ESG takes the holistic view that sustainability extends beyond just environmental issues. While the term ESG is often used in the context of investing, stakeholders include not just the investment community but also customers, suppliers and employees, all of which are increasingly interested in how sustainable an organization’s operations are.” Environmental criteria examines how a business performs as a steward of the natural environment, focusing on: • Waste and pollution. • Resource depletion. • Greenhouse gas emission. • Deforestation. • Climate change. Social criteria looks at how the company treats people and concentrates on: • Employee relations and diversity. • Working conditions. • Local communities — seeks explicitly to fund projects or institutions that will serve poor and underserved communities globally. • Health and safety. • Conflict. Governance criteria examines how the company is governed and focuses on: • Tax strategy. • Executive renumeration. • Donations and political lobbying. • Corruption and bribery. • Board diversity and structure. The Federal government has been active in the ESG space recently. The August 2022 passage of the Inflation Reduction Act infused significant investment into ESG-related initiatives, with a particular focus on clean energy. Earlier in 2023, the Department of Labor also passed a final rule permitting the use of ESG factors in corporate retirement plans. The SEC has worked through new ESG-related disclosure rules. The Commission finalized cybersecurity risk management disclosure rules, requiring companies to make timely disclosure of cybersecurity incidents and to offer more robust information about risk oversight and management. While the SEC has not yet finalized the significant climate disclosure rules proposed last March, they remain on the Commission’s agenda, and indications are that they will reach finalization. The SEC’s agenda also includes finalization of proposed rules requiring additional information from investment funds regarding their ESG investment practices, and changes to the “Names” Rule to ensure that ESG investing strategies are appropriately disclosed. Proposals for new rules relating to corporate board diversity and human capital management also remain on the SEC’s short-term agenda. Other agency activity includes the Federal Trade Commission’s current undertaking to update its “Green Guides” on the use of environmental claims. As noted by Leah Malone, an attorney with Simpson, Thacher & Bartlett LLP, “The backlash against ESG in the United States has been unmistakable in 2023. More than one-third of states have passed anti-ESG laws in 2023, most ESG-related shareholder proposals failed to garner majority support, new lawsuits have been filed challenging companies’ ESG-related activities and decisions, and some companies seem to be distancing themselves from the term ‘ESG’ itself.” 9
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