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Harry Cassin
Publisher and Editor

Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Bill Steinman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Shruti J. Shah
Contributing Editor

Russell A. Stamets
Contributing Editor

Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Public ESG disclosures may be more risky than you think

ESG reporting can — and frequently does — involve the public disclosure of sensitive information. Reporting typically includes information related to business and operations that directly address some of the most hot-button issues of our day. Companies have not always anticipated the risks related to a negative response by both the public and longstanding business partners to ESG disclosures.

Over the years, there has been good work done to reduce the potential risks of disclosing information in government  bribery settlements. Probably the most impactful is the use of multi-jurisdictional settlements where several jurisdictions, including those jurisdictions where the wrongdoing occurred, are a party to a settlement agreement with a company. In this case, the government enforcement agencies that could bring criminal or other actions against a company know the issues and can work through their settlements before another jurisdiction makes the information public.

For ESG-related reporting, the potential risks relating to disclosures have increased over the past few years. One main factor is that investors, financiers, and even regulatory agencies continue to expand the scope and detail regarding what ESG elements need to be included in disclosures.

For example, investment giant Blackrock included in its 2021 Engagement Priorities specific ESG key performance indicators (KPIs) to be addressed and disclosed by companies. This document includes a clear statement that whether or not companies address these issues will be a consideration in determining whether Blackrock will support the reelection of board members. In addition, the U.S. Security and Exchange Commission is currently in its comment and drafting period for potential disclosure requirements relating to greenhouse gas emissions and possibly other areas.

Another factor relating to ESG disclosure risk is that ESG reporting historically has been made through annual corporate sustainability reports created by a company’s communications or PR function. Sustainability Reports were in the past primarily aspirational in nature without detailed KPIs, public commitments, or discussions on the materiality of impact.

Today, numerous organizations, including NGOs and government regulators, emphasize that ESG disclosures, whether through sustainability reports or otherwise, need to include KPIs, potential public commitments were warranted, and discussions of materiality. In addition, there are a lot of discussions, particularly in the EU, that sustainability-related disclosures should be brought to the level of financial disclosures in terms of reporting, controls, and auditing.

As ESG reporting increases in importance and scope, the potential risks associated with such disclosures certainly need to be evaluated by a company. For publicly traded companies, what is disclosed can be the subject of or included as part of shareholder lawsuits. Government enforcement agencies can use such information to initiate or support investigations and, for any disclosure that becomes mandated, to pursue actions for failure to comply. Similar to a statement of fact disclosure in a bribery settlement, the reputational impact could be significant. Public reaction to these disclosures can be difficult to gauge and could impact customer and vendor relationships.

The fact that risks exist with public ESG disclosures does not mean that companies should refuse to disclose important information in the right way and at the right time. It’s important that the risks are understood and taken into consideration, especially when the disclosures could trigger a negative response.

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