SPECIAL FEATURE – The Coming Impact of ESG
Recent months have seen institutional investors and other stakeholders, notably BlackRock and State Street, stressing the importance of comparable and decision-useful ESG disclosures by their portfolio companies. Such calls follow in the wake of growing interest among investors and other stakeholders in understanding and assessing the performance of companies based on ESG metrics. While the exact system by which companies will report on ESG issues remains to be determined by the market, it is clear that beginning in 2020, and in the years to follow, companies will be disclosing significant amounts of quantifiable information on a basis that will permit comparisons within and across industries. This information will be used by companies, investors, asset managers and other stakeholders in real-world business decisions and contexts of all sorts, including relating to M&A, litigation, compensation, public disclosure, competition and antitrust, capital structure and credit markets, and taxation.
The series of memos linked below, recently published by Wachtell, Lipton, Rosen & Katz, touches on many of these critical implications of the growing ESG movement for companies, their boards of directors and management, and all stakeholders. The memos also examine the growing global push, particularly by major asset managers, and more recently, the World Economic Forum, for standardized ESG reporting metrics and highlight considerations for companies looking to disclose ESG performance.
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The Coming Impact of ESG on M&A
“The impact of the growth in ESG disclosures on M&A cannot be underestimated. In the near-term, ESG performance will be incorporated into company valuations and risk assessments, and acquirers and targets will be expected to factor in ESG performance when evaluating the impact of potential transactions.” – Click here to read more.
Editors’ Note: This memo was authored by Andrew R. Brownstein, Steven A. Rosenblum, David M. Silk, Mark F. Veblen, Sabastian V. Niles and Carmen X.W. Lu at Wachtell, Lipton, Rosen & Katz.
ESG Disclosures — Considerations for Companies
“Recent months have seen institutional investors and multinational organizations emphasizing the importance of comparable and decision-useful ESG disclosures. Despite the growing recognition of the need for standardized reporting metrics, companies continue to face a myriad of choices as to how and where to present ESG disclosures. To date, the largest US public companies that disclose this information often report against some portion or combination of the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-Related Financial Disclosures (TCFD) standards. Other significant frameworks include those developed by the International Integrated Reporting Council (IIRC), the UN Global Compact and related Reporting on the Sustainable Development Goals (SDGs), the CDP (formerly the Carbon Disclosure Project) and the Climate Disclosure Standards Board. Some or all of the common metrics proposed in the World Economic Forum’s (WEF) consultation draft will also likely become part of this landscape.” – Click here to read more
Editors’ Note: This memo was authored by David M. Silk, Sabastian V. Niles and Carmen X.W. Lu at Wachtell, Lipton, Rosen & Katz.
ESG Disclosures and Litigation Risk
“Recognizing that there is growing momentum towards the development of a common framework for ESG disclosures, companies should evaluate the potential litigation and regulatory risks of proposed metrics and how they would adapt to a regime in which such metrics became a widely accepted standard.” – Click here to read more.
Editors’ Note: This memo was authored by David B. Anders, Lauren M. Kofke and Karen Wong at Wachtell, Lipton, Rosen & Katz.
“As investors continue to deeply engage in ESG issues, companies should monitor developments and prepare for more widespread use of ESG metrics in compensation programs.” – Click here to read more
Editors’ Note: This memo was authored by David E. Kahan and Erica E. Bonnett at Wachtell, Lipton, Rosen & Katz.
“Proponents of enhanced environmental, social and governance (“ESG”) disclosure have identified corporate income tax as a relevant metric. While it is premature to predict how ESG standards in this regard will evolve, a key area of focus is tax arbitrage, including profit-shifting among jurisdictions.” – Click here to read more.
Editors’ Note: This memo was authored by Deborah L. Paul and T. Eiko Stange at Wachtell, Lipton, Rosen & Katz.
“Recently, the World Economic Forum (“WEF”) released a Consultation Draft of proposed common standards for corporate disclosure of environmental, social, and governance (“ESG”) factors. The draft proposal highlights the need for a common framework from which to evaluate corporate actions and their impact on ESG factors.” – Click here to read more.
Editors’ Note: This memo was authored by Damian G. Didden and Christina C. Ma at Wachtell, Lipton, Rosen & Katz.
ESG Performance and the Credit Markets
“In his much-publicized letter to CEOs, BlackRock founder Larry Fink augured “a profound reassessment of risk and asset values,” noting “climate risk is investment risk.” The statement can be generalized: ESG risk is credit risk. Recognizing this reality, investors have increasingly demanded from companies ESG disclosure alongside traditional financial metrics, with profound implications for corporate credit.” – Click here to read more.
Editors’ Note: This memo was authored by Joshua A. Feltman and Emily D. Johnson at Wachtell, Lipton, Rosen & Katz.
The Road to Glasgow: Integration of Climate Change Metrics into Business Decisions
“Yesterday, as part of a kickoff event for COP26, which will be held in Glasgow in November, Bank of England Governor Mark Carney outlined the role of finance in transitioning to a net zero economy. As much of the climate-related disclosure that is now being made by US companies was originally driven by Carney’s seminal 2015 speech, yesterday’s speech may be seen as a good guide to what will be expected from European, and eventually American, companies in terms of climate action.” – Click here to read more.
Editors’ Note: This memo was authored by David M. Silk at Wachtell, Lipton, Rosen & Katz.
Accelerating ESG Disclosure—BlackRock Nudges Companies Toward a Common Standard (SASB + TCFD)
“Companies that have not yet disclosed against SASB and TCFD standards are well-advised to familiarize themselves with these frameworks and develop their rationales for not making those disclosures, deciding upon a reasonable time frame for making new disclosures or adhering to a different standard. The resources and primers prepared by the Society for Corporate Governance are useful for issuers seeking to understand this landscape, as are industry-specific resources.” – Click here to read more.
Editors’ Note: This memo was authored by David M. Silk, Sabastian V. Niles and Carmen X.W. Lu at Wachtell, Lipton, Rosen & Katz.
State Street Global Advisors Sharpens Voting Push on Financially Material ESG Matters
“The upcoming year will see continued efforts to consolidate the many different metric- and framework-related initiatives. If an agreed-upon set of ESG and sustainability-related long-term value metrics were to be widely adopted and embraced by public companies and institutional investors alike, that could have a profound impact on company business strategies and approaches to sustainable investment and growth.” – Click here to read more.
Editors’ Note: This memo was authored by Martin Lipton, Sabastian V. Niles and Carmen X.W. Lu at Wachtell, Lipton, Rosen & Katz.
“The proposed framework is driven by the growing belief that ESG and other sustainability factors are critical to long-term business viability and that a company’s performance must be measured not only on the return to shareholders, but also on how a company achieves its environmental, social and good governance objectives. Accordingly, material metrics and disclosures set forth in the proposed framework would be provided by companies in their mainstream investment disclosures, such as annual reports and proxy statements, in addition to supplemental sustainability or social impact reports.” – Click here to read more.
Editors’ Note: This memo was authored by David M. Silk, Sabastian V. Niles and Carmen X.W. Lu at Wachtell, Lipton, Rosen & Katz.
Click here to access a PDF compilation of these memos for easy access, printing and downloading.
