By now it is clear that the progeny of Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023) will have an impact on ESG, with G of course, standing for “Governance.”
We know plaintiff’s attorneys see an opportunity in shareholder derivative litigation in this area as well.
I propose a non governmental body to award “ESG Accreditation” on a shared standards basis.
Such a (United States based) body could accept applications to convey “E” or “S” or “G” accreditation independently (or relevant, consensus assented to derivations thereof), based on its own independent review and analysis.
By outsourcing the parties responsible for making these evaluations, a main benefit is achieved in terms of: 1. Reduction of liability for the publicly traded organizations currently potentially accumulating liabilities, 2. The creation and curation of a more sophisticated body of legally relevant knowledge in this area, 3. A future pipeline of individuals with existing relevant expertise to develop an even deeper understanding of the nuance that powers consensus and discontent in these areas.
Multi national listed entities could seek such accreditation in addition to or as an alternative to their current ESG efforts, and this could improve the perception held by some that all they are doing is “greenwashing.” Further, boards choosing to seek such accreditation as an alternative to current efforts, would be free to continue concentrating more parsimoniously on what is, in their business judgement, best for what they judge are relevant stakeholders. Since we know one size does not always fit all, the accreditation could consider relevant entity metrics such as size, numerosity in terms of headcount and/or the amount of sovereign nations in which the evaluated entities conduct operations.
The NGO could be structured leanly with a volunteer board of fewer than 18 appointed members, a compensated executive, and compensated staff. The volunteer appointed board would draw from three areas: 1/3 academics with relevant technical expertise, 1/3 attorneys or retired judges, preferably with deep relevant expertise, 1/3 directly from the industry, to serve staggered terms.
Previous experience presiding over administrative tribunals, as well as associates at the best legal M&A houses in the world, perhaps those not bound for the partner track, would be ideal candidates for these voluntary roles. Eventually such a model would return an entity with relevant data and insight that even the best M&A firms might not have access to (For excellent insights in this area, please see, for example, Shearman & Sterling’s 21st Annual Corporate Governance Survey: https://digital.shearman.com/i/1512772-2023-corporate-governance-survey/0? , Paul | Weiss Delaware M&A Quarterly: https://www.paulweiss.com/practices/transactional/mergers-acquisitions/publications/delaware-ma-quarterly-winter-2023?id=49721 #NotSponsored) .
The proposed entity could be prohibited from engaging in impact litigation, with its primary mandate as an accreditor.
Experience teaches that innovation is best protected when industry is proactive in governing itself. After one or two or three years of this kind of voluntary board service, we will have individuals with the kind of training that could be an impeccable asset to the boards of what climate activists refer to as the “world’s most polluting companies.” We will protect jobs, profits and innovation.
We can acknowledge that many people genuinely want to progress these issues while also having wildly divergent opinions on how best to achieve desired ends. We can start by operating under the assumption all arrive at the table with good intentions, which is not always assented to when such a broadly divergent set of views and exercise of power exists.
We know diversity is a plus in the boardroom.
We know M&A practice has experienced a pronounced shift in the last two years, and we know how important, as we move toward the future, for example, evaluating governance can be in making consequential decisions when deciding if an entity is a good target for acquisition, and we know the Federal Trade Commission has been vocal about initiating review in this area.
A suggestion for how such an entity could be funded: An initial sum provided by the top 100 public entities with “skin in the game.” Roughly half of that could support the NGO’s operation. The other half could be divided into two funds, which could serve as a sort of laboratory for investment decision/strategy exploration in this area. There could be a fee to apply for the accreditation, and let’s say, once the relevant metrics are developed and deployed (within a year or two, at most) for deciding who gets an “E gold star” or an “S gold star” or a “G gold star,” applicants with a score diverging more than, for example, ten standard deviations from the top scorers, would not have their application fees returned, while highest performing applicants would.
Standard economics would move this construct into relevance rapidly.
Finally, such an independent, non profit NGO could provide an alternative to proxy advisory firms as well, and I would leave it to my very learned colleagues to evaluate how valuable that may be.
Best wishes to all in 2024.
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