News & Insights

ESG Excellence

August 29, 2022

Of Note this Summer: Business and Human Rights Updates, Feedback on SEC Comment Letter Process, and More

ESG Top Five - News and Updates
King & Spalding keeps abreast of fast-moving ESG developments to help our clients stay ahead of the curve on risks and opportunities in reporting, ratings, investments, dispute resolution and reputational capital. Our ESG advice spans across industries, reflecting collaboration among our practice areas in Corporate, Finance and Investments, Government Matters, and Trial and Global Disputes, and monitoring of international, regional, and national trends through our global network of 23 offices.  The following are recent examples of ongoing global trends which make ESG issues increasingly key to long-term profitability.

In July, the United Nations General Assembly adopted a resolution recognizing the human right to a “clean, healthy and sustainable environment.”  The vote was 161 to zero.  Only eight countries, including Russia, China, Iran and Syria, abstained.  Although not binding international law, the Resolution is a significant indication of customary international law and will likely be reflected in ways that matter to business, by affecting investor and consumer choices, and informing future legislation, adjudication and treaty interpretation.

In late June, the G7 Leaders announced their commitment to work towards an “international consensus on business and human rights to strengthen compliance with international standards, including through mandatory measures that protect rights-holders, provide for greater multilateral cooperation to address abuses, and support remedy …”  With mandatory measures enacted or proposed at national, regional, and global levels, this high-level political rhetoric may soon translate into legal action through, for example, the proposed EU Directive on Corporate Sustainability Due Diligence and, later, the draft United Nations treaty on business and human rights.

Car Battery Supply Chain
An example of a mandatory measure is the U.S. Uyghur Forced Labor Prevention Act. On the same day the Act went into effect in June, a New York Times report warned that the global car battery industry could face disruptions because of concerns that precious metals mined or processed by forced labor in Xinjiang make their way into car batteries produced elsewhere in China and later shipped to producers in the West.  The Times noted a research firm’s estimate that China produces 80% of the cells needed for lithium ion batteries, widely used in electric vehicles (EVs).  The new Act’s source documentation requirements for importers could help reveal the extent of the problem, while also blocking the import of some batteries and components needed for the EV transition.

Sustainability and Due Diligence
An OECD Note for policy makers addresses the role of sustainability initiatives in mandatory due diligence.  While positive on the whole, sustainability initiatives vary widely in the strength of their “design, levels of transparency and worker engagement, governance and oversight models” — and impact.  In order to rely on these initiatives for mandatory human rights and environmental due diligence, the OECD Note advises governments to set “clear expectations for initiatives, companies and enforcement authorities and, where appropriate, ensuring that companies and governments have robust processes in place to monitor and verify the credibility of initiatives that they use or rely on.”

Surging Climate Change Litigation
The fossil fuel, food & agriculture, transport and finance sectors were targeted in 2019-2020 by a “surge” in strategic climate change litigation, according to a new report by an LSE Research Institute.  Climate cases were filed in six continents and included complaints to OECD National Contact Points and UN bodies.  Over 80% were brought against governments.  In non-US cases, nearly 60% had outcomes favorable to climate change action.  Human rights arguments were increasingly used, as in the successful Urgenda case requiring the Dutch Government to strengthen regulatory and other measures against carbon and other GhG emissions.  The UN Resolution noted above will likely strengthen this trend.

K&S on ESG
SEC Commissioner Peirce Provides Insights into SEC Comment Letter Process and Importance

SEC Commissioner Hester Peirce travelled to Houston to speak, on August 23rd, with members and prospective members of the Texas General Counsel Forum in an intimate setting at an event co-sponsored by King & Spalding. Commissioner Peirce discussed the proposed climate disclosure rule, the importance and best practices regarding the drafting of comment letters, and other matters on the SEC’s regulatory agenda. The event was moderated by Liz Morgan, a partner in King & Spalding’s public companies practice. We would like to thank Jonathan Newton, a partner in King & Spalding’s Houston office, for facilitating the event with TGCF and James Larkin Smith, an associate in Houston, for coordinating with Commissioner Peirce, for whom he interned.

Takeaways included:

  • Though delays are possible, the SEC is working toward releasing a final climate disclosure rule before the end of the year.  If timing of effectiveness is similar to what is contemplated by the proposed rule, this means that parts of the rule will apply for 2023 10-Ks (for calendar year end companies; filed in 2024). 
  • With respect to the climate disclosure proposal, Commissioner Peirce reiterated many of the concerns she has raised in other forums, including concerns with the agency’s authority, the scope and scale of the proposal, and the way the proposal deviates from principles based disclosures and concepts of financial materiality, as well as the potentially broad implications of these concepts on future rulemakings.
  • Commissioner Peirce confirmed that Chair Gensler is committed to meeting the dates set forth in the Commission’s published Regulatory Agenda.  Delays may occur, but this means we should expect to see a new human capital management rule proposal, and a corporate board diversity rule, in the fall, as well as a final rule regarding share buybacks.
  • Commissioner Peirce encouraged companies to submit comment letters, and reiterated that comments letters from companies – as opposed to trade groups – are compelling to the Staff.  She suggested that strong comment letters include an executive summary, hard data and concrete anecdotes.
  • Commissioner Peirce is open to meeting with companies on a one-on-one basis, and is interested in understanding the practical challenges companies are facing as a result of proposed rules.

In Case You Missed It
In case you missed them, linked below are some recent Client Alerts from King & Spalding on particular ESG-related legal developments along with other links of interest.

For a list of Climate Week events in New York happening throughout September 19 – 24, see here.