In recent years, investors have become increasingly focused on the Environmental, Social, and Governance (“ESG”) practices of public companies. To keep pace with evolving investor expectations, public companies are integrating these considerations into their business practices and reflecting such efforts in their periodic reports and other public materials.
Below are the central tenets of ESG and certain practical approaches that public companies may consider in their efforts to harmonize these tenets with their corporate practice.
“ESG” stands for “environmental, social, and governance”
The ESG acronym underscores (i) environmental sustainability, (ii) social and (iii) governance considerations.
- Environmental sustainability: Relevant issues include natural resource usage, energy consumption, greenhouse gas emissions and other related carbon footprint considerations.
- Social: Relevant issues include workplace diversity and workplace safety, labor relations and community relations.
- Governance: Relevant issues include board and management diversity, executive compensation and general corporate supervision and leadership with respect to the “ESG” program.
The Importance of ESG to the Modern Public Company
The issues and concerns that comprise ESG have been “front page news” as of late—though the more precise term today may be “top of the news feed.” Indeed, the contemporary technological landscape should not be ignored in a public company’s assessment of its ESG priorities and practices. Today’s employees, consumers and investors are focusing on companies’ policies and actions with regards to minimizing environmental damage and promoting workplace diversity and safety. In recent times, these concerns have matured from aspirational to functional, from hopes to expectations. Where news can travel from behind boardroom doors to innumerable palms in literal seconds, the potential reputational harm that a company risks in dismissing ESG concerns cannot be discounted.
Practical Considerations For “ESG” Disclosure
As of today, public companies in the United States are not explicitly obligated to disclose their ESG practices or principles. However, while the current disclosure regime does not require them, ESG disclosures can provide companies an opportunity to market their ESG ethos and, to the extent their ESG principles have already been adopted into practice, their ESG efforts.
With a lack of strict disclosure requirements comes intrinsic difficulties for the drafters of ESG statements. Public ESG disclosure thus far has varied in scope, underlining the importance of considering the specific materiality of each ESG point to the company at issue. Any company that chooses to make disclosures relating to ESG should strive to accurately reflect its own practices and its own areas of priority.
Companies are beginning to outline their ESG efforts in their annual reports and highlight ESG-related achievements in other public disclosure. However, companies and their counsel should be reminded that notwithstanding the absence of specific requirements with respect to ESG disclosure, the existing rules and guidelines with respect to a company’s public statements still apply. To that end, when preparing their ESG disclosure, companies and their counsel should continue to endeavor to ensure accurate statements are being made, proper context is being provided, and where forward-looking statements are made, the appropriate qualifications are included. A company’s own particular best practices as it relates to disclosure preparation should continue to be observed; it should endeavor to provide decision-useful information, which may speak to, for example, how its ESG practices and principles could have material long-term value or other impact.
“ESG” and Public Shipping Companies
The heightened investor focus on ESG coincides with recent shipping industry efforts to curb the environmental effect of global trade to the environment. January 1, 2020, for example, marked the effective date for the International Maritime Organization’s reduction of the global sulfur limit for marine fuels to 0.5% (“IMO 2020”).
In addition, the ethical imperatives behind these ESG principles have become socially and even financially incentivized. For example, in recent years financing arrangements have afforded participant companies more advantageous terms (i.e., reduced interest rates) if they meet certain environmental efficiency metrics. The calculation of these metrics is sometimes tied specifically to the de-carbonization trajectory outlined in the Poseidon Principles, which is a global framework aimed at improving the role of maritime finance in addressing global environmental issues and agreed to, and published by, 12 leading banks (ABN AMRO, Amsterdam Trade Bank, Citi, CACIB, Danish Ship Finance, Danske Bank, DNB Bank, DVB Bank, ING, Nordea, Société Générale and Sparebanken Vest) jointly representing approximately 20% of the global ship finance portfolio.
The Poseidon Principles are starting to be incorporated into credit agreements through covenants and are applicable to lenders, lessors, and financial guarantors in connection with credit products secured by mortgages or financing leases over vessels regulated by the UN’s International Maritime Organization (the “IMO”), i.e. vessels of 5,000dwt gross tonnage and higher that are engaged in international trade.
Signatories to the Poseidon Principles that are listed above have agreed to annually report the overall climate alignment of their respective shipping portfolios and supporting information each year. “Climate alignment”, according to the Poseidon Principles, is the degree to which a vessel’s (or portfolio’s) carbon intensity is in line with the IMO’s decarbonization trajectory for the respective ship type and size class.