Clark Hill 2022 Automotive & Manufacturing Industry Outlook: ESG
Outside the United States, particularly in the European Union (EU), the assessment and reporting of Environmental, Social, and Governance (ESG) considerations and risks have already become legal requirements. In the EU, additional ESG requirements are continuing to take form, including the first two chapters of the EU Taxonomy Regulation coming into force on January 1, 2022. For American companies, ESG-related undertakings have more often been driven by investor pressures and transactional obligations to EU customers. In 2022, however, American manufacturers throughout the supply chain can expect direct regulatory and enforcement activity related to ESG.
This year, the “E” and “G” in ESG may stand for Enforcement and Greenwashing. Historically, Greenwashing consisted of false or misleading representations about a company’s or product’s environmental friendliness. Greenwashing claims have been enforced under U.S. Federal Trade Commission (FTC) authority to protect consumers. In 2022, however, the U.S. Securities and Exchange Commission (SEC) will expand the scope of Greenwashing scrutiny to include investor protection. Accordingly, companies should assess and reduce exposure to these two tracks of enforcement:
- FTC Enforcement Focus on Greenwashing: Deceptive, unfair, or unsubstantiated environmental claims to consumers violate Section 5 of the FTC Act, and FTC Greenwashing enforcement is not new. In fact, the FTC is now conducting its ten-year regulatory review of its “Guides for the Use of Environmental Marketing Claims” (known as the “Green Guides”). The FTC describes the Green Guides as non-binding guidance on substantiation of environmental and sustainability marketing claims with competent and reliable evidence, but the FTC uses Green Guides criteria to evaluate the veracity of “green” claims. The 2022 updated Green Guides will likely add guidance on common “green” claims (e.g., “sustainable,” “organic,” or “recyclable”) made by companies to consumers, indicating areas of specific potential liability for companies using these terms. It is also possible that the FTC will pursue formal rulemaking to give the Green Guides the force of law. Either way, companies should be prepared for continued scrutiny and enforcement by the FTC related to environmental and sustainability claims.
- SEC Enforcement Focus on Greenwashing: In March of 2021, the SEC Enforcement Division created a Climate and ESG Task Force, clearly asserting an SEC role in protecting investors from Greenwashing and similarly-misleading ESG claims. The Task Force’s priorities, per the Task Force’s leader, Kelly Gibson, include rulemaking to establish a mandatory ESG disclosure framework and enforcement initiatives “to proactively identify ESG-related misconduct.” Targeted conduct will include “material gaps and misstatements in issuers’ disclosure of climate risks under existing rules” and “disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.” SEC enforcement actions will focus on false or misleading statements related to climate and ESG that carry a high risk of misleading investors. The SEC rulemaking is anticipated to be issued this year and is expected to address climate change and other ESG issues (specifically, cyber risk governance, board diversity, and human capital management). In the meantime, however, companies can look to existing SEC guidance, such as the 2010 “Commission Guidance Regarding Disclosure Related to Climate Change” and the 2021 “Sample Letter To Companies Regarding Climate Change Disclosures,” as they consider disclosure of material impacts from climate-related developments.
Beyond this enforcement focus on Greenwashing, companies can also expect stricter requirements related to the “S” and “G” in ESG:
- More Teeth Coming to DEI Initiatives: Corporate policies and representations regarding diversity, equity, and inclusion (DEI) will also face increased and more formal scrutiny in 2022. As noted above, the SEC’s ESG rulemaking will likely provide for disclosure of human capital policies and risks, including DEI initiatives. Similarly, companies that list on the Nasdaq stock exchange will be required by August 2022 to disclose the composition and diversity of their boards using a standardized template. As consumers and institutional investors embrace ESG branding and metrics, privately-held companies may respond to pressure to “walk the talk” and implement DEI and broader ESG programs.
- Supply Chain Due Diligence & Compliance: Supply chain issues were a key theme of 2021 and are likely to remain in the spotlight in 2022. The Uyghur Forced Labor Prevention Act (UFLPA), effective June 21, 2022, creates a rebuttable presumption that goods from China’s Xinjiang Uyghur Autonomous Region (XUAR) are made with forced labor and are banned from U.S. markets. Importers of record will be required to provide evidence that the imported products were not made with forced labor. To support this burden, companies must implement due diligence, supply chain tracing and supply chain management measures to demonstrate that goods are not “mined, produced, or manufactured wholly or in part with forced labor from the People’s Republic of China, especially from the [XUAR]”. Companies are required to cooperate in responding “completely and substantively” to all information requests from U.S. Customs and Border Protection (CBP). Therefore, companies should carefully assess XUAR (and similar) supply chain risks and whether their ESG programs can satisfy such supply chain due diligence and compliance requirements.
The choice for companies is not whether, but how, to tackle ESG (lest they be tackled by ESG). Through market demands and regulatory requirements, companies face increasing pressure to assess and communicate the ESG impacts of their operations and products, including suppliers’ products. Prudent companies are studying trends and taking proactive steps. They are using existing compliance programs and management systems to document ESG aspects, policies, and programs. They are working with legal and consulting teams to ensure ESG risks are identified, monetized, and mitigated.
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