Navigating the ESG Landscape: Proxy Statement Challenges and Opportunities

As interest in Environmental, Social, and Governance (ESG) continues to expand, investors now expect disclosure around ESG topics in proxy statements. Each year more companies are including ESG highlights in their proxy. According to Labrador’s most recent review, more than three-quarters of the S&P BSE 250 Small Cap Index included a discussion of ESG-specific topics in 2023.

In the proxy statement, companies should focus on helping stakeholders understand how their ESG approach aligns with their stated strategy and business model as well as demonstrate how the board’s oversight of ESG is part of the board’s oversight of strategy. In addition, stakeholders are looking for confirmation that companies are evaluating ESG risk and opportunities, adopting sustainable business strategies, establishing appropriate goals and metrics, and committing to regular ESG reporting using appropriate frameworks.

The challenge for general counsel and their teams is to ensure consistency of disclosures across multiple reports and to continually monitor the ever-changing ESG landscape. All of this is made more complicated by the need to consider disclosures in light of recent anti-ESG sentiment and Supreme Court decisions which create additional potential for litigation.

WHERE SHOULD THE ESG SUMMARY LIVE?

According to the Labrador study, the most common locations for ESG disclosures within proxy statements are a summary within the proxy summary (39 percent) or governance section (41 percent), or a standalone ESG section (23 percent). Most disclosures range from two to five pages, and a well-constructed, highly visual two-to-four-page summary can be just as effective as a longer dedicated section.

HOW MUCH IS TOO MUCH?

Because ESG encompasses an ever-increasing list of areas, it can be a challenge to determine what to discuss in a proxy statement and the level of detail to provide. Remember the purpose of the proxy is to provide investors with the information they need to make decisions in connection with the proposals presented, including election of directors.

ESG disclosures that meet stakeholder expectations in the proxy statement typically emphasize the importance of ESG to the company, how it aligns with strategy, and how ESG priorities were determined, measured, and tracked. Stakeholders also want to understand the board’s role in ESG matters – how the board oversees the determination of priorities, goal setting and allocation of resources, as well as how the board engages with the management and holds management accountable.

Therefore, modern best practices suggest that proxy statements should include:

• A highlights/summary that provides an overview of ESG focus areas; graphics or key figures that relate to company priorities and initiatives; ESG reporting status, including use of reporting frameworks; and URL for most recent ESG report.
• A (sub-)section dedicated to ESG oversight, which describes how ESG responsibilities are allocated among management and the board and its committees. Generally, this discussion is included with board oversight of risk and increasingly utilizes a graphic or other visual to depict the distribution of ESG responsibilities.

ESG TOPICS TO CONSIDER

Even within the current practice, there is significant variation in the breadth and depth of ESG-related topics addressed in proxy statements and can vary significantly by industry. Many companies find it beneficial to look at what their industry peers and others are reporting. The Labrador study found that among those that included an ESG highlights/summary section, they most often focused on the following topics:

• 66 percent ESG focus areas/priorities
• 60 percent climate change/GHG/Net Zero goals
• 52 percent environmental goals
• 25 percent progress against goals
• 55 percent URL for their latest report
• 60 percent reporting frameworks

Regardless of what others are reporting, when preparing ESG disclosure in the proxy statement, consider the following:

Explain why ESG is important to the company and how it is connected to strategy. If not otherwise discussed, also highlight the company’s purpose, mission, and values.

Give an overview of the company’s ESG priorities and how they were determined.

Share key quantitative and qualitative highlights for each ESG priority, including goals and progress.

Emphasize the company’s commitment to transparency and accountability, mentioning current reporting practices and recognized frameworks, and provide the location of the most recent report/data.

Consider mentioning any relevant awards or recognition that demonstrate ESG successes.

Describe the board’s role in overseeing ESG matters and the governance structure that supports such oversight.

With the increasing trend to include ESG in proxy statements, general counsel should engage with their colleagues on the appropriate information to incorporate to inform shareholders’ voting decisions. Regardless of what ESG-related topics a company chooses to include in their proxy statement, it is important to ensure messaging is appropriate and consistent across all reports and communications.

That job, which often falls to the general counsel, is the ultimate reviewer of corporate disclosure.