Addressing Environmental Justice As Part Of ESG Initiatives

The last year has been undeniably transformative on a global scale, sending shockwaves through communities and corporate boards alike.

While a collective sense of vulnerability resulting from the COVID-19 pandemic amplified a global sense of urgency to address climate change, human rights and public health, the murder of George Floyd became a national and international call to action for many to address long-standing issues of racial equity and social justice.

The incoming Biden administration brought these emerging issues of social justice, climate and environmental protection together, giving top billing to environmental justice, or EJ, policy proposals as a key priority across the federal government.

Meanwhile, companies face heightened scrutiny from regulators, investors, employees and customers, who seek greater transparency from industry — no longer satisfied with broad corporate goal-setting, and instead demanding measurable progress from environmental, social and governance, or ESG, programs.

These developments have created a degree of uncertainty for the regulated community, with many unsure of how to assess these risks, adjust internal processes and fulfill disclosure requirements in areas that are relatively novel in corporate settings.

Even so, industry thought leaders have taken proactive steps to incorporate equity and EJ holistically into their operations and across their supply chains, in furtherance of corporate social responsibility goals and as strategies for market differentiation. Others are remodeling voluntary ESG reporting approaches to address social justice and EJ efforts.

This article will review EJ policy as a factor influencing evolving corporate ESG requirements, and will also highlight strategies used to mitigate legal risk, avoid reputational harm and exceed stakeholder expectations in this ever-changing regulatory environment.

Key Takeaways

• Global calls for heightened corporate ESG performance and reporting are occurring alongside domestic efforts to prioritize and advance EJ by regulators.
• Though corporate ESG reporting and performance is often focused on climate, the field is expanding, and mandatory disclosures are becoming more common with respect to supply chain due diligence, modern slavery and conflict minerals.
• This expansion of the "S" in ESG may soon include EJ, as regulatory requirements, enforcement and market demand could make the topic material to corporate stakeholders.
• Companies should proactively assess how these evolving changes might affect their operations with respect to market access requirements, investor expectations, compliance obligations and reputational risk to develop strategies accordingly.

Environmental Justice: Origins and Recent Developments

Though many definitions of EJ exist, the U.S. Environmental Protection Agency has, perhaps, the most common:

Environmental justice is the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.[1]

In the U.S., EJ arose out of the civil rights movement, accelerating in the early 1980s with the protested siting of a landfill in Warren County, North Carolina, a predominantly minority county. A decade of studies correlating the disproportionate siting of toxic waste facilities in minority communities followed,[2] and in 1994, President Bill Clinton issued Executive Order No. 12898, calling for federal agencies to incorporate EJ into their work.

Now, the Biden administration is leading the broadest federal effort on EJ in U.S. history. On his first day in office, President Joe Biden issued Executive Order No. 13990, which explicitly explains that it is "the policy of [the Biden] Administration to listen to the science ... and to prioritize ... environmental justice."

On Jan. 27, Biden signed Executive Order No. 14008, Tackling the Climate Crisis at Home and Abroad, which enhances federal agency accountability, calls for increased EJ-specific enforcement, improves community access to environmental data, creates the White House Environmental Justice Advisory Council, and ensures that disadvantaged communities share in the benefits of climate adaptation and development.

This whole-of-government approach is already the catalyst for change in new ways, encouraging EJ considerations well beyond the EPA, to drive the work of agencies previously reluctant to prioritize it, such as the Federal Energy Regulatory Commission. The Council on Environmental Quality will also play a key leadership role in furthering EJ issues from the White House, including through reshaping the National Environmental Policy Act and updating federal EJ mapping tools.

While the full ramifications of Biden's actions are still becoming apparent, it is clear that this broad approach to EJ is unprecedented, and will have far-reaching impacts for communities and the regulated community alike.

Globally, the term "environmental justice" is less prevalent, as EJ issues often fall within the broader context of human rights. However, increasing use of the term "climate justice" suggests a growing confluence of human rights, climate, environmental protection and equity that more closely aligns with domestic EJ efforts.

In addition, as the Biden administration prioritizes EJ in all aspects of its policy agenda, we may see greater international scrutiny of domestic practices, similar to the United Nations Commission on Human Rights' condemnation of the industrialization of a specific area in Louisiana referred to as "Cancer Alley."[3] 

Current ESG Obligations and Expanding Requirements

ESG began as a nonlegal concept,[4] sparked by pressure from investors, nongovernmental organizations and other stakeholders demanding that companies disclose ESG risks, opportunities and policies.

Over the last two decades, multiple voluntary ESG disclosure frameworks have emerged,[5] such as SASB, GRI and TCFD.[6] These frameworks provide companies with reporting standards that investors can rely on in their overall investment decision-making processes.

Criteria for assessing companies and their supply chains on ESG factors vary. They often include indicators related to climate change (i.e., carbon emissions and energy usage), biodiversity, water consumption, resource use, human rights, health and safety, and conflict minerals.

Such reporting regimes, though not legally binding, have gained attention and influence, driving many corporations to publish ESG reports[7] and make ESG disclosures in regulatory filings[8] — not only to avoid reputational risks and meet investor expectations, but also to create value.[9]

This chart provides a broad regional overview of current and proposed laws with ESG reporting relevance:

Regulators around the globe are taking notice. In 2010, the U.S. Securities and Exchange Commission issued Guidance Regarding Disclosure Related to Climate Change,[10] raising the profile of climate change as an issue for companies to consider in making their disclosures.

Starting in 2014, the European Union's Non-Financial Reporting Directive[11] required large companies in Europe to disclose information on ESG policies, outcomes and risks (introducing the "double materiality perspective"),[12] including details on due diligence processes and identification, prevention and mitigation of existing and potential adverse impacts.

In April of this year, the EU announced plans to amend the NFRD — renamed the Corporate Sustainability Reporting Directive, or CSRD[13] — expanding reporting requirements from 11,000 to approximately 50,000 companies, requiring reported information to be audited, and mandating reporting requirements in accordance with mandatory EU sustainability reporting standards.

On May 19, it was reported that the U.K., which holds the presidency of the Group of Seven, will prioritize pushing adoption of TCFD climate disclosure standards by all G7 members.[14] Disclosure requirements in the U.K., Australia and California have also successfully compelled many companies to publish annual statements outlining efforts to eliminate forced labor throughout supply chains, while conflict minerals disclosure requirements in the U.S. and EU require due diligence related to the sourcing of tin, tantalum, tungsten and gold.[15]

Further, legal frameworks for mandatory supply chain due diligence have been proposed throughout Europe, most notably a proposal by the EU that is expected to require an ESG risk assessment throughout a company's value chain. While details are still emerging, the draft directive[16] would require any company that sells goods or provides services in the EU market to perform due diligence with respect to human rights, environmental and governance risks in their value chain and business relationships.

Additionally, the draft directive includes a civil liability regime for EU member state implementation, whereby a company would have the burden of proof to show it lacked control over an entity involved in human rights abuse. Such mandatory due diligence requirements, in conjunction with emerging restrictions on goods produced in certain regions — e.g., Myanmar or Xinjiang, China — will further complicate the impacts of related ESG disclosures.

Intersections Between ESG and EJ

Though EJ and ESG have largely remained separate — in theory and in law — there is an undeniable synergy. Emerging ESG and EJ policy trends include common elements seeking to protect vulnerable communities from the burdens of environmental harm.

In March, Allison Herren Lee, then the acting chair of the SEC, acknowledged that "[h]uman capital, human rights, climate change ... are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues."[17] Lee linked climate, heightened risks for marginalized communities, racial justice and ESG factors as broader issues that call for collaboration between international and domestic regulators and market participants.

These comments were made in the context of the Biden administration's whole-of-government approach to addressing environmental justice,[18] and early campaign pledge[19] to make climate and ESG reporting mandatory for public corporations.

Biden removed any doubt about the link between EJ and ESG on May 20, when he issued his Executive Order on Climate-Related Financial Risk, directing the development of a governmentwide climate risk strategy to identify and disclose climate-related financial risks to government programs.[20] Notably, the executive order announces the administration's policy of advancing "accurate disclosure of climate-related financial risk," including mitigating that risk and its drivers "while accounting for and addressing disparate impacts on disadvantaged communities and communities of color."

The SEC will play a role in making these connections in two key ways: (1) determining what is and is not material to investors; and (2) determining to what extent environmental justice is written into guidance and requirements for ESG reporting.

In addition, companies in scope of the EU's CSRD will need to report under the double materiality perspective, which could implicate EJ policies, outcomes and risks. Moreover, there may be increased ESG and EJ-based litigation against companies perceived as not implementing the principles they espouse as plaintiffs look for novel ways to raise these concerns.[21]

Managing Risk and Planning Ahead

Should ESG reporting frameworks more directly incorporate EJ, many companies will be caught flat-footed — particularly those solely focused on climate.

With the Biden administration's determination to confront environmental injustice, and investors and customers making similar demands, ignoring EJ-related risks could result in not only reputational harm, but operational disruptions throughout the supply chain — ranging from permitting obstacles to community opposition, including litigation, to regulatory enforcement, including enforcement by the SEC's recently established ESG Task Force charged with proactively identifying ESG-related misconduct. [22]

To avoid negative outcomes and minimize risk, companies should assess the dynamics of their risk exposure. In addition, they should:

• Review any EJ requirements that might be in place in relevant jurisdictions, to understand whether permits will require consideration of specific-facility impacts;
• Understand any environmental and health-related impacts of facilities, to determine whether they can be mitigated and what legal or other risks they might present;
• Ensure that benefits from company operations or programs are distributed equitably;
• Revisit community engagement processes with an EJ lens, to develop relationships with neighbors in advance of conflict;
• To the extent that suppliers have sizable industrial footprints in EJ communities, consider supplier screening and selection that avoids indirect negative impacts; and
• Consider proactively incorporating EJ-related topics as part of ESG and sustainability reporting.

These measures will help to mitigate risk of noncompliance with future EJ-related obligations, and begin to develop positive due diligence practices.

Moreover, even in the absence of legal requirements, incorporating EJ considerations into corporate ESG policies will get ahead of investor and customer demand, driving long-term success and a competitive edge for organizations — much like the early adoption of sustainability and corporate social responsibility policies a decade ago.

©2021. Published in Law360, Online, May 24, 2021, by LexisNexis Group. Reproduced with permission. All rights reserved.

[1] See https://www.epa.gov/environmentaljustice. 

[2] See General Accounting Office, Siting of Hazardous Waste Landfills And Their Correlations With Racial And Economic Status of Surrounding Communities (June 1, 1982), available at http://archive.gao.gov/d48t13/121648.pdf.

[3] United Nations Human Rights Office of the High Commissioner, USA: Environmental racism in 'Cancer Alley' must end — experts (March 2, 2021), available at https://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=26824&LangID=E.

[4] See Betsy Atkins, Demystifying ESG: Its History & Current Status, Forbes (June 8, 2020).

[5] See Catherine Clarkin, Melissa Sawyer and Joshua Levin, The Rise of Standardized ESG Disclosure Frameworks in the United States, Harvard Law School Forum on Corporate Governance (June 22, 2020).

[6] These cited reporting framework authorities include the Sustainability Accounting Standards Board, Global Reporting Initiative and Task Force on Climate-Related Financial Disclosures. Other reporting framework organizations include the CDP, the Climate Disclosure Standards Board and International Integrated Reporting Council.

[7] KPMG, The KPMG Survey of sustainability Reporting 2020 (Dec. 2020).

[8] White & Case, ESG Disclosure Trends in SEC Filings (Aug. 13, 2020).

[9] In addition to disclosure frameworks, various benchmarking organizations have emerged in an effort to rank the progress of corporations with respect to ESG-related issues, including: Dow Jones Sustainability Indices, KnowTheChain, Corporate Human Rights Benchmark, Corporate Knights Global 100, Bloomberg Gender Equality Index and 100 Best Corporate Citizens. These rankings often receive media attention and may be used to name and shame poor performing companies. Conversely, high performance may be helpful to appeal to investors, customers and employee stakeholders.

[10] See SEC Release No. Nos. 33-9106; 34-61469; FR-82, Commission Guidance Regarding Disclosure Related to Climate Change (Feb. 8, 2010).

[11] Directive 2014/95/EU (Oct. 22, 2014).

[12] European Commission, Questions and Answers: Corporate Sustainability Reporting Directive proposal (April 21, 2021), available at https://ec.europa.eu/commission/presscorner/detail/en/QANDA_21_1806.

[13] European Commission, Corporate sustainability reporting, available at https://ec.europa.eu/info/publications/210421-sustainable-finance-communication_en#csrd.

[14] Alex Morales, Alessandra Migliaccio and Alberto Nardelli, U.K. Is Pushing for G-7 to Adopt Mandatory Climate Reporting, Bloomberg (May 19, 2021).

[15] Tin, tantalum, tungsten and gold are sometimes mined using forced labor, and profits may be used to finance armed groups in areas where human rights abuses and widespread violence have been identified.

[16] European Parliament, Resolution of March 10, 2021, with recommendations to the Commission on corporate due diligence and corporate accountability, available at https://responsiblebusinessconduct.eu/wp/wp-content/uploads/2021/03/Corporate-due-diligence-and-corporate-accountability-report-1.pdf.

[17] Commissioner Allison Herren Lee, A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC (March 15, 2021), available at https://www.sec.gov/news/speech/lee-climate-change.
[18] See Executive Order 14008 (Jan. 27, 2021).

[19] S&P Global Market Intelligence, Biden plan to make companies disclose climate risks key to decarbonization (Nov. 2, 2020), available at https://www.spglobal.com/marketintelligence/en/news-insights/blog/esg-in-2021-how-companies-responded-to-the-turmoil-of-2020.

[20] See Executive Order on Climate — Related Financial Risk (May 20, 2021).

[21] Chevron Misleads With Climate-Friendly Ads, FTC Told, Law360 (March 16, 2021).

[22] SEC Press Release, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (March 4, 2021), available at https://www.sec.gov/news/press-release/2021-42.