Keynote Address by Commissioner Lee on Climate, ESG, and the Board of Directors

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent Keynote Address at the 2021 Society for Corporate Governance National Conference. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

“You Cannot Direct the Wind, But You Can Adjust Your Sails” [1]

Good morning and thank you for the invitation to speak today at the Society for Corporate Governance 2021 National Conference. I’m impressed with your full and informative agenda over the next few days, and I appreciate the important work you do in supporting company boards and executives.

I also appreciate your engagement in the SEC’s policymaking process, including your recent letter in response to the request for public input on climate change disclosures. In fact, we’ve received thousands of comments in response to that request, but we hardly need that statistic to understand that the subject of climate risk and our financial markets, and ESG more broadly, is top of mind in board rooms and c-suites around the globe.

Increasingly, boards of directors are called upon to navigate the challenges presented by climate change, racial injustice, economic inequality, and numerous other issues that are fundamental to the success and sustainability of companies, financial markets, and our economy. This call, welcomed by some and eschewed by others, is attributable in part to the large and growing influence that corporations hold over the social and economic well-being of people and communities everywhere. A study from 2018, for example, showed that 71 of the top 100 revenue generators globally were corporations while only 29 were countries. [2] In other words, corporations—in many cases U.S. corporations—often operate on a level or higher economic footing than some of the largest governments in the world. That is a dynamic worthy of reflection—and one that drives home the weighty consequences and obligations associated with some corporate decisions.

Small wonder, then, that not just investors, but employees, consumers, vendors, suppliers, and numerous other stakeholders, look to companies to design and implement long-term, sustainable policies that support growth and address the environmental and social impacts these companies have. And these expectations increasingly play out in ways that were far less a part of the corporate consciousness just a decade or two ago. Today, what your business does and says is as likely to be dissected on Twitter and TikTok as it is to be reported in the Wall Street Journal or over a newswire. Consequently, consumers, employees, both current and potential, and a host of others can affect how companies are perceived and how well they succeed.

I know many in this virtual room, including those on boards of directors, understand this dynamic. And understand that these environmental and social issues, once perhaps treated as more peripheral, are now central business considerations. So boards are stepping up their engagement on climate and ESG related-risks and opportunities. For instance, in one recent survey, nearly 80 percent of directors reported that their boards are focused on some aspect of ESG. [3] An analysis of a selection of S&P 100 proxy statements found that 78 percent of companies had at least one board committee charged with overseeing environmental sustainability matters. [4] And 42 percent of companies reviewed in that analysis associated at least one director with expertise in environmental policy, sustainability, corporate responsibility, or ESG. [5] At the same time, while many companies report that they oversee ESG at the board level, some analysis suggests they may lack specific sustainability mandates and do not demonstrate board-management engagement on ESG. [6] In addition, there are some indicators that reported board expertise on ESG may be ill-defined [7] and still lacking. [8] There is more work to be done.

Because, in the words of prominent corporate attorney Marty Lipton, “a corporation ignores environmental and social challenges at its own peril.” [9]

Putting ESG in Context in the Recent Proxy Season

If we needed a more immediate reminder of the significance of ESG, the recent proxy season delivered one.

First, there are the shareholder proposals. Climate proposals received record support. [10] This year, 98 percent of General Electric shareholders approved a resolution asking the company to explain how it intends to achieve net zero emissions in accordance with the Paris Agreement. [11] At ConocoPhillips, 58 percent of shareholders approved a measure requesting Scope 3 emissions reductions. [12] Sixty-five percent of shareholders at United Airlines voted in favor of a resolution seeking more information on how the company’s corporate lobbying aligns with the goals of the Paris Agreement. [13]

The ESG focus isn’t limited to climate. A resolution seeking a racial equity audit nearly won majority support from Amazon shareholders; [14] a similar proposal won almost 40 percent support at JP Morgan. [15] At Duke Energy, a proposal seeking more disclosure of political spending won majority support. [16]

And, not to bury the lede, but it wasn’t just shareholder proposals. Last month, we all watched with varying degrees of astonishment as climate activists won three seats on Exxon’s board during an annual meeting that produced what some have called the proxy “vote heard ‘round the world.” [17] Whatever one’s views regarding activist investors or a corporation’s role with respect to climate or ESG, this turn of events has focused the attention of directors everywhere.

This proxy season is just the latest affirmation of a sea change on climate and ESG. It occurs against the backdrop of the US reentry into the Paris Agreement and pledge to cut emissions in half by 2030, [18] and a broad global reckoning with the need for enhanced transparency on sustainability. [19] It also occurs in the midst of ever-more powerful signals from major institutional investors of their commitment to sustainability. [20] Finally, it occurs as the SEC considers potential rulemaking to improve climate and other ESG disclosures for investors. [21] These developments place ever greater responsibility on companies, and therefore boards, to integrate climate and ESG into their decision-making, risk management, compensation, and corporate transparency initiatives.

Understanding ESG and Board Obligations

So, what obligations do boards have?

Historically, many ESG issues were seen as not within the purview of the board of directors. These matters, referred to as “corporate social responsibility” or CSR issues, were largely treated as if they were separate and apart from the business of generating revenue and earning profits. [22] Debates about director duties around climate and ESG often centered on whether directors were even permitted to consider issues that previously fell under the rubric of corporate social responsibility. [23] In that Milton Friedman era, risks like climate change and many other issues we would now call ESG were characterized as topics that could bear on the public good, but were not relevant to maximizing value for shareholders. [24]

Those days are over. I will set aside for now the debate over whether the shareholder maximization model for corporate governance has continuing relevance or vitality because the connection between ESG and the interests of shareholders has become evident. Our understanding of the significance of ESG and its short-, medium- and long-term relationship to financial performance has evolved to the point that the principal debates are about when, not if, these issues are material. [25] Thus, regardless of whether one agrees with the Business Roundtable’s position on corporate purpose and service to stakeholders and the broader economy, [26] it is clear that the board has a role with respect to ESG.

There is, for example, broad consensus regarding the physical and transition risks associated with climate. [27] SASB (now the Value Reporting Foundation), the Global Reporting Initiative, and many others have clearly set forth financially material ESG risks for companies. There is tremendous and growing investor demand for climate and ESG disclosure. [28] The world’s largest asset managers and other institutional investors have been direct and vocal in conveying that they consider ESG material to their decision-making. [29] No matter the view of regulatory involvement in climate and ESG disclosures, directors must reckon with this growing consensus and growing demand from the shareholders who elect them.

Accordingly, boards increasingly have oversight obligations related to climate and ESG risks—identification, assessment, decision-making, and disclosure of such risks. [30] These obligations flow from both the federal securities laws and fiduciary duties rooted in state law.

Under the federal securities laws, the board plays a critical and mandatory role in the existing corporate disclosure process. This increasingly requires directors to think about and consider the impact of climate change and other ESG matters on the financial statements and other corporate disclosures.

Since the passage of Sarbanes-Oxley in 2002, boards at listed companies directly oversee the audit of financial statements, including responsibility for the appointment, compensation, and oversight of the independent auditor. [31] Exchange rules impose direct requirements with respect to board oversight of audits, including that boards discuss any difficult issues with the independent auditor. [32] Likewise PCAOB rules require auditors to communicate with boards about significant issues arising in the audit. [33] Because matters such as climate change may bear on the valuation of assets, inventory, supply chain, and future cash flows, [34] board oversight of audits increasingly necessitates engagement on those issues.

Boards also play an important role in the oversight of other types of disclosures made outside of financial statements. [35] These disclosures may also implicate ESG considerations. For example, the SEC’s 2010 climate guidance identifies multiple existing disclosure requirements, most prominently Management’s Discussion & Analysis, that may give rise to climate disclosure obligations. [36] The SEC’s recent update to Regulation S-K’s Item 101 specifically identifies human capital as a potentially material disclosure topic. [37] And there is a requirement under item 407(h) of Regulation S-K for disclosure of the board’s role in the risk oversight of a company, which in many instances could include climate change risks. [38] These are just a few of the currently existing federal requirements that implicate board involvement and engagement on climate and ESG.

Under state law, as everyone here knows, directors have fiduciary duties of loyalty and care. [39] A director’s duty of care fundamentally requires that a board must be well informed when making corporate decisions. [40] When those decisions, for example, relate to long-term business strategies, a board may well need to ensure it has relevant information related to the climate and ESG-related risks and opportunities its company faces. [41]

What’s more, under the duty of good faith (considered a subset of the duty of loyalty under Delaware law) directors may need to investigate “red flags” that suggest legal violations or other harm to the corporation. [42] This may require directors to do a deeper dive on climate change and other ESG issues as the regulatory landscape evolves. Unaddressed red flags relating to a violation of emissions regulations, for instance, could implicate the duty of good faith. [43]

All of this suggests that climate change and other ESG matters should be regular and robust topics for the board, whether at meetings of the full board or in key committees, such as the audit committee, the compensation committee, or the risk committee. Or, perhaps, as some companies have already done, handled in a more centralized manner through a sustainability or ESG committee of the board. [44]

Mitigating ESG Risks and Maximizing ESG Opportunities

Growing recognition of the importance of climate and ESG presents both risks and opportunities for companies and their boards. On the risk side of the equation, there is, among other things, physical risk, transition risk, and regulatory risk. There is also reputational risk, as investors and consumers increasingly make decisions based on companies’ sustainability profiles. And human capital risks as well, as younger workers increasingly place a premium on whether a company’s values align with their own. [45]

There is a rising expectation that boards will play a key role in managing these risks. A core component of the framework created by the Task Force on Climate-Related Financial Disclosures is disclosure of the board’s oversight of climate-related risks and opportunities. [46] The World Economic Forum published a white paper last year explaining that boards need to integrate ESG into corporate governance out of a recognition that “business value creation” is increasingly dependent on understanding and managing these risks and opportunities. [47]

This year, BlackRock emphasized that it expects “boards to shape and monitor management’s approach to material sustainability factors in a company’s business model” and will hold directors accountable where they fall short. [48] Similarly, State Street announced that it will start voting against the boards of companies that underperform their peers when it comes to ESG standards. [49] Proxy advisory firms ISS and Glass Lewis have announced new voting policies that include director accountability for ESG governance failures. [50]

As shareholders and others increasingly emphasize the need for climate and ESG to be incorporated into risk management and governance practices, they have mechanisms to hold companies accountable where they fall short of expectations. They can put pressure on boards to act through shareholder proposals. They can replace directors, as we saw with Exxon. And ultimately both investors and consumers can take their capital elsewhere.

Importantly, all of these risks also present great opportunities. Boards that proactively seek to integrate climate and ESG into their decision-making not only mitigate risks, but better position their companies and business models to compete for capital based on good ESG governance.

So what are some key steps for boards that seek to maximize ESG opportunities, message their commitment on these issues, and position themselves as ESG leaders?

Enhance Board Diversity. Despite the progress I mentioned earlier, some evidence suggests that directors have been slow to understand the need to integrate climate and ESG into governance practices. In one 2019 report, only 6 percent of U.S. corporate directors surveyed selected climate change as a focus area for the coming year. [51] The same report found that 56 percent of directors thought investor attention on sustainability issues was overblown. [52] This suggests that some boards may need to refresh and diversify perspectives. There are many reasons for companies to seek to enhance the diversity of their boards, not least because investors increasingly expect them to do so. Indeed recent proxy seasons have reflected investor focus on both board refreshment and greater diversity. [53] Board refreshment introduces opportunities to put new directors on boards, and emphasizing diversity increases the likelihood new directors will actually bring new thinking. This, in turn, could facilitate more current and proactive approaches to climate and ESG governance.

Increase Board Expertise. To effectively address climate and ESG risks, boards need adequate expertise on these subjects. Investors are increasingly emphasizing their expectation on this point. For instance, Vanguard in its recent comment letter to the SEC on climate change disclosures expressed its view that corporate disclosure should allow investors “to assess the climate competency of a company’s board.” [54] Yet research shows that, while boards have made strides in recent years, directors may still fall short in terms of ESG credentials. [55] Companies should consider ways to enhance the ESG competence of their boards. These efforts could include integrating ESG considerations into their nominating processes in order to recruit directors that will bring ESG expertise to the board; training and education efforts to enhance board members’ expertise on ESG matters; and considering engagement with outside experts to provide advice and guidance to boards. [56]

Inspire Management Success. Directors’ decisions on compensation can spur progress on corporate strategies and approaches to address the risks associated with ESG matters. In fact, our economy is built on, and responds directly to, financial incentives. Executive compensation is thus a powerful tool for achieving strategic company goals. This dynamic is not limited to simply linking executive compensation to certain corporate financial goals. In fact, compensation works for any number of more specific goals or targets a company may set. Consider for instance academic research from 2019 demonstrating that airlines offering their executives bonuses for on-time flight arrivals did in fact achieve more on-time flight arrivals. [57]

In addition to helping achieve strategic goals related to issues such as reduced carbon emissions or increased diversity of the workforce, tying executive compensation to ESG metrics can offer an important way to deliver on a company’s commitment to issues that matter to investors and consumers.

For example, in the wake of racial injustice protests, companies have made numerous pledges regarding their commitment to racial diversity. Going further, some companies have tied executive compensation to relevant ESG metrics. Companies like Starbucks, McDonalds and Nike, for example, have all recently said they will tie executive compensation to diversity metrics. [58]

Boards that tie executive compensation to ESG metrics are using one of the most powerful tools they have to make real progress on ESG goals, and at the same time signaling the strength of their commitment to these issues.

* * * *

Let me close with a thought about the range of views and opinions regarding the right course for companies to take. There is no one right answer for each individual company on how to mitigate risks and maximize opportunities with respect to climate and ESG issues. They are complex, evolving and, in some cases, highly charged issues. This can make collaborative discussion more difficult.

In that regard, I note that a focus on these issues is sometimes labeled “woke washing” or even woke policymaking. We should consider whether public pledges on ESG issues are actually backed up by corporate action. That’s part of my message today—that substantive consideration of ESG should be meaningfully integrated into board oversight. And why I’ve previously suggested that our disclosure regime should provide investors with adequate information to test public pledges like these. But the use of labels that might be considered dismissive rarely adds value or contributes meaningfully to solutions in policy debates. In addition, as a valued colleague recently pointed out to me, these terms carry significant histories in Black vernacular and are thus all the more ill-suited for purposes of dismissing attention to issues that have serious economic and social consequences, often disproportionately so for communities of color.

The more we can have open, thoughtful, and well-researched dialogue on the specifics of these issues, the more companies, investors, and all stakeholders will benefit. It’s more critical than ever for boards to explore how to integrate sustainability into their governance practices, and consider specifically what is best for the companies they oversee. That’s because (if you’ll forgive me one last quote), as Yogi Berra put it, “if you don’t know where you are going, you might wind up someplace else.”

Thank you and I look forward to taking questions.


1Some version of the quote in the speech title has been attributed to numerous individuals going back to at least 1859, but I prefer to highlight the attribution to the incomparable Dolly Parton. See Quote Investigator.(go back)

2See Who is more powerful—states or corporations?, The Conversation (July 10, 2018).(go back)

3See Leah Rozin, Understanding the Board’s Role in ESG, NACD BoardTalk (Sept. 22, 2020).(go back)

4See Kellie Huennekens, ESG Disclosure in 2020 Proxy Statements, Nasdaq (May 13, 2020).(go back)

5See id. (“In terms of director skills, 42% of reviewed companies associated at least one director with expertise in environmental policy, sustainability, corporate responsibility or ‘ESG.’ While this is an increase from last year’s 30%, the nature of this expertise may not be clearly defined.”).(go back)

6See Ceres and KKS Advisors, Systems Rule: How Board Governance Can Drive Sustainability Performance (2018) (“While most large companies state that they oversee sustainability at the board level, only a minority have formal mandates and demonstrate board-management engagement on sustainability.”).(go back)

7See Huennekens, supra note 4.(go back)

8See Ceres, supra note 6, at 5 (“Most boards do not have directors with demonstrable sustainability expertise.).(go back)

9See Martin Lipton and William Savitt, Directors’ Duties in an Evolving Risk and Governance Landscape, Harvard Law School Forum on Corporate Governance (Sept. 19, 2019).(go back)

10See As You Sow, Record Breaking Year for Environmental, Social, and Sustainable Governance Shareholder Resolutions (June 24, 2021) (“Eight climate change proposals earned more than 50% and resulted in the two highest votes of the year.”); see also Jackie Cook and Lauren Solberg, Hints of Sea Change in Big Fund Company ESG Proxy Votes, Morningstar (May 12, 2021) (“From the beginning of January, and with about seven weeks of proxy season to go–average shareholder support for ESG resolutions is up by 12% over the same period last year, at 44%.”).(go back)

11See As You Sow, 98% of Shareholders Want GE to Take Climate Action (May 4, 2021).(go back)

12See Ceres, In historic votes, shareholders demand strong climate action from the U.S. oil and gas industry (May 12, 2021).(go back)

13See Interfaith Center on Corporate Responsibility, Shareholders Approve a Climate Lobbying Proposal at Delta, Continuing a Winning Streak that Shows the Importance of Paris-Aligned Climate Policy (June 17, 2021).(go back)

14See Ross Kerber, Amazon pressed for racial equity review after strong vote tally, Reuters (May 28, 2021).(go back)

15See Ben Maiden, Almost 40 percent support JPMorgan Chase racial equity audit, Corporate Secretary (May 25, 2021).(go back)

16See Eleanor Laise, Shareholders fight to rein in risk by demanding transparency into public companies’ political spending, MarketWatch (May 19, 2021).(go back)

17See Matt Phillips, Exxon’s Board Defeat Signals the Rise of Social-Good Activists, The New York Times (June 9, 2021); Gwen Le Berre, Not-So-Silent Spring: Exxon and the Vote Heard Round the World, Parametric (June 17, 2021).(go back)

18See The White House, Fact Sheet: President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target Aimed at Creating Good-Paying Union Jobs and Securing U.S. Leadership on Clean Energy Technologies (Apr. 22, 2021).(go back)

19See, e.g., IOSCO, IOSCO sees an urgent need for globally consistent, comparable, and reliable sustainability disclosure standards and announces its priorities and vision for a Sustainability Standards Board under the IFRS Foundation (Feb. 24, 2021).(go back)

20See, e.g., Robert Tuttle, Maine Becomes First State to Order Public Fossil-Fuel Divestment, Bloomberg (June 17, 2021); Ross Kerber and Kanishka Singh, NYC pension funds vote to divest $4 billion from fossil fuels, Reuters (Jan. 25, 2021).(go back)

21See Acting Chair Allison Herren Lee, Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021); Office of Information and Regulatory Affairs, Securities and Exchange Commission Agency Rule List—Spring 2021.(go back)

22For a summary of the evolution of Corporate Social Responsibility, see Mauricio Andrés Latapí Agudelo, Lára Jóhannsdóttir & Brynhildur Davídsdóttir, A literature review of the history and evolution of corporate social responsibility, 4 Intl. J. of Corp. Soc. Resp. 1 (2019).(go back)

23See Sarah Barker, An Introduction to Directors’ Duties in Relation to Stranded Asset Risks, in Stranded Assets and the Environment (Routledge 2018) (“Historically, debates around the extent to which directors must, and indeed whether they may, have regard to issues associated with climate change was centred on the first sub-set of duties—those relating to trust and loyalty. This debate largely took place within the context of broader discussions of ‘corporate social responsibility’ (or ‘CSR’).The CSR debate focuses on the scope of directors’ duties and to whom they are owed; specifically, whether the ‘best interests of the corporation’ for which a director must govern are limited to profit and shareholder wealth maximisation (to which social or environmental concerns are peripheral; ‘shareholder primacy’ theory), or, at the other end of the spectrum, whether directors’ duties are owed not only to shareholders but to other stakeholders whose interests are impacted by corporate activities (such as employees, the community and the natural environment; ‘stakeholder theory’). Historically, the CSR literature largely framed climate change (and, by implication, risks associated with it) as an ‘ethical’ or ‘environmental’ issue, whose impact on financial risk/return was either negative or immaterial.”) (internal citations omitted).(go back)

24See Milton Friedman, A Friedman Doctrine — The Social Responsibility of Business Is to Increase Its Profits, The New York Times (Sept. 13, 1970).(go back)

25See, e.g., Bank of America/Merrill Lynch, Equity Strategy Focus Point, ESG Part II: a deeper dive (June 15, 2017) (“Prior to our work on ESG, we found scant evidence of fundamental measures reliably predicting earnings quality. If anything, high quality stocks based on measures like Return on Equity (ROE) or earnings stability tended to deteriorate in quality, and low quality stocks tended to improve just on the principle of mean reversion. But ESG appears to isolate non-fundamental attributes that have real earnings impact: these attributes have been a better signal of future earnings volatility than any other measure we have found.”); see also Mozaffar Khan, et al., Corporate Sustainability: First Evidence on Materiality, 91 Acct. Rev. 1697 (2018) (“Using both calendar-time portfolio stock return regressions and firm-level panel regressions we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues.”); Gunnar Friede, Timo Busch & Alexander Bassen, ESG and financial performance: aggregated evidence from more than 2000 empirical studies, 5 J. of Sustainable Fin. and Inv. 210 (2015) (finding that a majority of studies show positive correlations between ESG and financial performance); Robert G. Eccles, Ioannis Ioannou, and George Serafeim, The Impact of Corporate Sustainability on Organizational Processes and Performance, 60 Mmgt. Sci. 2835 (2014) (“[W]e provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance.).(go back)

26Business Roundtable, Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’ (Aug. 19, 2019).(go back)

27See Basel Committee on Banking Supervision, Climate-related risk drivers and their transmission channels (Apr. 2021) (“Climate related financial risks could impact the safety and soundness of individual financial institutions, giving rise to broader financial stability implications within the banking system. . . . There is broad consensus within literature that climate risk drivers can be grouped into one of two categories: Physical risks, which arise from the changes in weather and climate that impact the economy; and Transition risks, which arise from the transition to a low-carbon economy.”); Network for Greening the Financial System, The Macroeconomic and Financial Stability Impacts of Climate Change (June 2020) (“More frequent or severe extreme weather events and/or a late and abrupt transition to a low-carbon economy could have significant impacts on the financial system, with potential systemic consequences.”); Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission, Managing Climate Risk in the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee, (Sept. 9, 2020) (“A central finding of this report is that climate change could pose systemic risks to the U.S. financial system.”).(go back)

28See, e.g., Climate Action 100+, an investor-led initiative representing more than 540 investors, with over $51 trillion in assets under management, committed to improving climate change governance, cutting emissions, and strengthening climate-related financial disclosures); TCFD Supporters (representing a market capitalization of over $12 trillion); Principles for Responsible Investment (PRI) (representing over $90 trillion in assets under management).(go back)

29See Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles, Amanda S. Blackett, and Kathleen C. Iannon, Wachtell, Lipton, Rosen & Katz, It’s Time To Adopt The New Paradigm (Feb. 11, 2019) (summarizing the views of BlackRock, State Street, and Vanguard, embracing an emphasis on sustainability and ESG issues and their relationship to investment value); Blackrock, Toward a Common Language for Sustainable Investment (Jan. 2020) (“Our investment conviction is that sustainability-integrated portfolios—composed of more sustainable building-block products—can provide better risk-adjusted returns to investors. With the impact of sustainability on investment returns increasing, we believe that sustainable investment will be a critical foundation for client portfolios going forward.”); State Street Global Advisors, The ESG Data Challenge (Mar. 2019) (“Asset owners and their investment managers seek solutions to the challenges posed by a lack of consistent, comparable, and material information. Investors increasingly view material ESG factors as being critical drivers of a company’s ability to generate sustainable long-term performance. In turn, ESG data has increasing importance for investors’ ability to allocate capital most effectively.”); British Columbia Investment Management Coalition, CEOs of eight leading Canadian pension plan investment managers call on companies and investors to help drive sustainable and inclusive economic growth (Nov. 25, 2020) (“[T[hey call on companies and investors to provide consistent and complete environmental, social, and governance (ESG) information to strengthen investment decision-making and better assess and manage their collective ESG risk exposures.”).(go back)

30See Ceres, Running the Risk: How Corporate Boards Can Oversee Environmental, Social and Governance (ESG) Issues (Nov. 2019).(go back)

31See 15 U.S.C. § 78j–1; 17 CFR § 240.10A-3.(go back)

32See NYSE Listed Company Manual Section 303A.07; see also Nasdaq Listing Rule 5605.(go back)

33See PCAOB AS 1301.(go back)

34See FASB, Staff Educational Document, Intersection of Environmental, Social, and Governance Matters with Financial Accounting Standards (Mar. 19, 2021).(go back)

35See, e.g., Commission Statement and Guidance on Public Company Cybersecurity Disclosures, Rel. No. 33-10459 (Feb. 21, 2018) (“Crucial to a public company’s ability to make any required disclosure of cybersecurity risks and incidents in the appropriate timeframe are disclosure controls and procedures that provide an appropriate method of discerning the impact that such matters may have on the company and its business, financial condition, and results of operations, as well as a protocol to determine the potential materiality of such risks and incidents. In addition, the Commission believes that the development of effective disclosure controls and procedures is best achieved when a company’s directors, officers, and other persons responsible for developing and overseeing such controls and procedures are informed about the cybersecurity risks and incidents that the company has faced or is likely to face.”).(go back)

36See Commission Guidance Regarding Disclosure Related to Climate Change, Rel. No. 33-9106 (Feb. 8, 2010).(go back)

37See 17 CFR § 229.101(c).(go back)

38See 17 CFR § 229.407(h).(go back)

39See Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) (“Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest.”); see also William M. Lafferty, Lisa A. Schmidt, and Donald J. Wolfe, Jr., A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law, 116 Penn. St. L. Rev. 837, 840 (2012) (“The fiduciary duties of care and loyalty are applicable to all board decisions.”).(go back)

40The duty of care focuses on the process by which directors exercise their “business judgment” not on the outcome of the decision. It essentially requires that directors act in good faith and with adequate information. See Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).(go back)

41See Lisa Benjamin, The Road to Paris Runs through Delaware: Climate Litigation and Directors’ Duties, 20 Utah L. Rev 313, 356 (2020) (“The duty of care requires that directors make decisions in a carefully considered manner. Courts want to know that directors have considered all material information reasonably available to them, and this now includes climate risks and opportunities based on the best scientifically available information and best industry practice.”).(go back)

42See Lafferty, supra note 38, at 847 (“The duty of loyalty includes a director’s obligation to act in good faith. Although the duty of good faith was once considered a free-standing duty under Delaware law, more recent decisions treat the concept of good faith as a part of the duty of loyalty. A director violates the duty of good faith when that director intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.”); Peter A. Atkins, Marc S. Gerber, Edward B. Micheletti, and Robert S. Saunders, Skadden, Directors’ Fiduciary Duties: Back to Delaware Law Basics (Feb. 19, 2020) (“Particular attention has been focused on oversight of compliance with law and related company protocols in highly regulated mission-critical aspects of a company’s business. As applied there, this duty will be breached if directors (a) consciously fail to implement a board-level system to monitor reasonably company compliance with applicable law and related company protocols, or (b) having implemented such a system, consciously ignore red flags signaling material company noncompliance with such law and protocols.”).(go back)

43See Barker, supra note 23 (“[I]t is at least theoretically possible that a claim under the second (or ‘red flags’) limb of the Caremark test may arise for consideration in a stranded assets risk context. In particular, such a claim may be constructed where a corporation suffers significant harm (such as legal costs, damages awards or loss in stock value) due to a failure to comply with … emissions regulations: for example, due to the technical inability of a company in an emissions-intensive industry to adapt to more stringent emissions controls (as starkly illustrated in the recent ‘Dieselgate’ scandal involving automotive giant VW); … or securities law obligations: regarding the disclosure of climate-related risks. This could include for example, the 2015 settlement between the New York Attorney General (NYAG) and Peabody Coal relating to the selective disclosure of forward-looking demand scenarios, and inconsistency between Peabody’s stated position on the potential climate risks and its internal analysis; or the current Securities & Exchange Commission (SEC) and NYAG investigations into ExxonMobil’s climate risk disclosures and failure to revalue its proven reserves despite a collapse in the price of oil.”) (internal citations omitted).(go back)

44See Nurlan Orazalin, Do board sustainability committees contribute to corporate environmental and social performance? The mediating role of corporate social responsibility strategy, 29 Bus. Strat. and the Env. 140 (2020) (finding that “the presence of a sustainability committee improves the effectiveness of CSR strategies”).(go back)

45See Ceres, supra note 29, at 3.(go back)

46See Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017).(go back)

47See World Economic Forum, Integrated Corporate Governance: A Practical Guide to Stakeholder Capitalism for Boards of Directors, 6 (June 2020).(go back)

48See BlackRock, Our 2021 Stewardship Expectations (2021).(go back)

49See, State Street, CEO’s Letter on Our 2021 Proxy Voting Agenda (January 11, 2021).(go back)

50See Matteo Tonello, 2021 Proxy Season Preview and Shareholder Voting Trends (2017-2020), Harvard Law School Forum on Corporate Governance (Feb. 11, 2021) (“In March 2020, ISS announced the launch of a new specialty voting policy on climate-related factors. Under the new policy, the proxy advisor will recommend adverse votes on the re-election of board members in situations where the company appears (based on signals such as inadequate disclosure, norm violations, or the assessment of sector-specific materiality metrics) to have ‘failed to sufficiently oversee, manage or guard against material climate-change related risks.’ In November 2020, Glass Lewis followed suit with a similar revision to its voting policies for S&P 500 companies, where the inadequate disclosure of environmental issues will first be noted as a concern in research reports and then, starting in 2022, trigger a recommendation to vote against the governance committee chair.”).(go back)

51See Ceres, supra note 29, at 6.(go back)

52See id.(go back)

53See Jeffrey Karpf, Sandra Flow, and Mandeep Kalra, Board Composition and Shareholder Proposals, Harvard Law School Forum on Corporate Governance (Jan. 28, 2020).(go back)

54See Comment Letter from Vanguard (June 11, 2021).(go back)

55See Tensie Whelan, U.S. Corporate Boards Suffer from Inadequate Expertise in Financially Material ESG Matters, NYU Stern School of Business (forthcoming) (Jan. 11, 2021) (“We reviewed 1188 individual Fortune 100 board member credentials to determine whether companies with material ESG risks and opportunities had relevant expertise on their boards. We found that very few sectors and very few companies were adequately prepared at the board level for issues that were already affecting their performance—for example one property and casualty insurance company has no environmental expertise on the board in a year experiencing $100 billion in damage caused by climate change-heightened extreme weather events.”).(go back)

56See Ceres, Lead from the Top: Building Sustainability Competence on Corporate Boards (2017).(go back)

57See Rajesh K. Aggarwal and Carola Schenone, Incentives and Competition in the Airline Industry, 8 Rev. of Corp. Fin. Studies 380 (2019).(go back)

58See Emily Glazer and Theo Francis, CEO Pay Increasingly Tied to Diversity Goals, Wall Street Journal (June 2, 2021).(go back)

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