A critical aspect of the Center on the Legal Profession’s September 2022 conference “Reimagining the Role of Business in the Public Square” was a series of seven concurrent thematic discussions, each of which highlighted a specific component underpinning environmental, social, and governance (ESG) debates. Each of the discussions was led by substantive experts, who framed the interactive session with real-world examples and case studies. The sessions were held under the Chatham House Rule; however, student scribes in each room captured the unattributed substance of the sessions. The following summaries and Q&As with session organizers provide insight into the seven groups: (1) Sustainable Finance, (2) Workforce Equity, (3) ESG Metrics and Indicators, (4) ESG Innovations in Emerging Economies, (5) The Role of the Government as a Partner and a Regulator, (6) Public Statements and Engagement, and (7) The Role of the Board in ESG and Diversity.
Unless otherwise indicated, session descriptions are written by the Center on the Legal Profession based on scribe notes. Given the interactive nature of the sessions, these descriptions provide but a snapshot of the in-depth conversations.
Transparency and accountability in sustainable finance: lessons from around the globe
By Mandy DeFilippo, chair, International Capital Market Association (ICMA), and COO of risk and operations, Citadel Securities
Overview and Summary of Discussion
If our collective goal is to create a more sustainable future for all, the financial sector must be engaged as a key piece of the solution. The financial sector contributes to solutions in ESG by promoting funding for, and procuring investment in, sustainable financing products, businesses, and initiatives.
Sustainable finance is defined as funding or investment decisions that take into account the ESG factors of an economic activity, initiative, business, or project.
In promoting investment in and for sustainable activities, finance can be a key lever to influence sustainable outcomes. This is why we felt it was important to have a panel session dedicated to sustainable finance.
For finance to promote sustainable outcomes successfully, however, investors must be able to discern which investments are in fact “sustainable”; otherwise, how would they be able to ensure that the funding they provide to companies is being put toward ESG initiatives?
In Europe, industry standards have developed that require issuers or sellers of sustainable financing products to disclose information and metrics (both at issuance and on an ongoing basis) regarding the relevant ESG projects or initiatives to which the products relate, including quantification of impact.
These standards—which over the past decade have been developed through market-driven initiatives and adopted voluntarily—are intended to ensure accountability of companies and financial institutions to investors and the public at large.
As investors and the public have increasingly sought to put their money in sustainable investments, accusations of misleading information from companies (also known as “greenwashing”) have been raised repeatedly by public and press. Regulators in the United States and Europe have responded by proposing very detailed disclosure requirements, intended to increase transparency by requiring companies to quantify and report on the impact of their ESG-related projects and activities.
Our panel session sought to discuss the basis and role of corporate and financial information related to ESG, and then to explore approaches that could create greater transparency and accountability in the marketplace. We started the discussion by having the panelists present a high-level case study around the development of standards in the European market over the past decade.
The panel comprised industry experts from the United States and Europe, led by the head of sustainable finance at the International Capital Market Association (ICMA), the European industry association most associated with helping the industry set standards in ESG for over a decade.
To begin the session, the panel discussed:
- The role of market-based voluntary standards (promoted by ICMA in Europe) in creating a de facto global issuance standard in the international sustainable bond market that incorporates detailed reporting frameworks and practices
- The status and progress of regulatory disclosure on sustainability with a focus on the European experience
- Ongoing efforts at the International Sustainability Standards Board to develop international corporate sustainability reporting standards
What were some of the big takeaways? What did you find surprising?
- Regulatory initiatives in sustainable finance—especially in Europe—are ambitious but complex, and in some cases uncoordinated or conflicting (especially across jurisdictions). The regulatory framework needs further calibration and maturity to ensure accountability and avoid unintentional impediment of market development.
- Mandatory disclosure or reporting requirements that are not globally coordinated and/or unduly complex could have a stifling effect on further market growth without solving the accountability problem.
- Knowledge and understanding of investors and the public are key to enabling transparency and disclosure to provide accountability. The group discussion highlighted that the broader public is generally not familiar with sustainable finance disclosure in any technical detail or with the history of development in sustainable financing markets.
What are some key questions going forward that were identified in the discussion?
- How can we engage the public more broadly in developing a greater understanding of the sustainable finance market and products?
- As a related question (raised by audience members): Should financial education be provided at precollege level in America’s schools?
- How can we get governments and regulators from different countries and regions to agree on a set of transparency standards that are coordinated and well understood across markets?
- What should be the role of governments in stepping into the sustainable finance markets? Should the focus be on transparency and disclosure, or on other incentives (e.g., economic incentives or penalties)?
In 2020 only 14 percent of companies in the S&P 500 spoke publicly about diversity, equity, and inclusion (DEI) work; in 2022 that figure reached 80 percent, according to Bloomberg Law. Pushes from the SEC, as well as the public and investors, means that DEI is at top of minds for organizations and businesses, who may have previously avoided the topic altogether. In a session devoted to the topic of workforce equity, participants dove into corporate action around diversity. In order to see real change, participants argued, boards must take charge and companies must be held accountable. But how? The session explored four items that are essential to see change:
- Audits. Companies must set priorities, appoint people whom they trust to manage those priorities, and be clear about the process for implementing diversity. They must report on their numbers and create a system for documenting those reports, even when those reports show unfavorable statistics.
- DEI ownership. In the past five years, there has been a 107 percent increase in DEI officers. But having officers is not enough. Companies must create expectations, assign responsibility, and have processes in place when bad situations occur.
- Recruitment and differential treatment. To move the needle, you have to meet people where they are. Companies that recruit diverse candidates must develop intentional retention strategies that acknowledge the different circumstances different candidates encounter.
- Adequate measurement. After all that, companies must figure out if their strategies worked. Programming without purpose and accountability is a waste of time and resources. Companies must set goals and prepare to measure and report on if they met those goals.
Four questions remain when assessing a DEI initiative:
- What is the DEI goal of the program?
- How has the program been intentionally designed to meet that goal?
- Has the program demonstrated the outcome you’re looking for?
- Are you prepared to make a change when you realize it’s not working?
The session examined two nonprofits attempting to rethink diversity and inclusion issues—Year Up and OneTen. Year Up, an organization that helps place young adults of color in promising careers no matter their degree status, asks: What do companies need to do to create more access for those coming from underrepresented communities? How do companies adopt a skills-first hiring approach, recognizing that a concentration on degrees excludes qualified candidates? Throughout its organization, assessment remains critical to Year Up’s success. They analyze whether or not jobs require four-year degrees in actuality. Researching 600 companies, for instance, Year Up found out that when you require a degree for a job that doesn’t really need it, you pay 11 to 30 percent more, take longer to hire, and create less diversity.
OneTen’s mission is to hire, promote, and advance 1 million Black individual without four-year degrees into careers over the next 10 years. They aim to cultivate an ecosystem of committed companies alongside talent developers, community partners, and support service providers to enable Black talent to thrive. OneTen sprung from a committed group of CEOs who, during the pandemic and the uprisings about police violence, came together to ask if they were doing everything they could to promote and uplift Black people. In the past five years, OneTen has trained more than 50,000 Black individuals without four-year degrees, and they have an ambitious agenda for the next five years.
One important aspect that both organizations highlighted was employee retention. It’s not enough to hire diverse individuals. Companies must also recognize the structural support necessary to ensure their success—wraparound support like providing childcare, for instance, or making the pathway to promotion more transparent. Taking such steps should, the participants argued, be beneficial to the companies—different perspectives mean different approaches to problem-solving mean teams that are equipped to tackle different types of problems. If a diverse candidate leaves because of DEI issues within the organization, it is up to the company to tackle the problems that forced such individuals out in the first place. Companies must approach DEI systemically and structurally and with honest, earnest integrity and a willingness to listen.
ESG Metrics and Indicators
By Jen Chow, director of external engagement, Harvard Science Data Institute
Why are metrics and indicators a critical topic of discussion as it relates to ESG?
ESG efforts ambitiously align shareholder value with societal value. At the same time, a poorly conceived or executed ESG strategy can have the opposite effect through negative impacts on shareholder value, brand perception, or broader unintended consequences, to name a few. How can firms track progress toward goals? How can they predict the outcomes of their efforts? How can they validate the efforts they undertake?
What you cannot measure, you cannot change. At heart, metrics and indicators are a response to the question: How are we doing? While universal ESG ratings remain elusive, it is important to take stock of what data does exist, because how we treat that data can bring us closer to understanding the value of ESG commitments. Measurement is critical to answer some hard and overlapping questions, such as:
- How do ESG measures impact financial performance?
- What externalities can we anticipate?
- What will happen if we do NOT undertake these measures?
- How are we doing toward our stated goals?
Unless firms are able to credibly answer these questions and more, ESG commitments will not have the impact they are intended to have.
At the Harvard Data Science Initiative, we unite the data science community from across Harvard to grapple with issues that require multidisciplinary and multistakeholder solutions. We extend beyond algorithms and methodologies. We look at how data is collected, how it is treated and interpreted, and what stakeholders do with that knowledge. Data and impact are intertwined; what data you use and how you treat it cannot be an afterthought.
This philosophy can be applied toward evaluating firms’ ESG strategies. For the conference, we assembled a group of Harvard faculty and industry practitioners to consider the complex challenges of measuring impact—how data is collected (“measurement”), synthesized (“complexity”), and understood (“causality”), and ultimately, how those metrics and indicators are communicated back to leadership and the public.
How did you think about the design of your session? What were the big topics under discussion?
We first considered each of the dimensions: environmental, social, and governance. As one speaker explained, these are not a unitary concept; each is a different domain. And for each, the data challenges are different.
Environment is perhaps the most “mature” of the domains. Firms have long recognized that their activities have environmental impacts, and as such, there exist many attempts to detail, for example, greenhouse gas emissions. However, there is more work to be done. We focused our discussion on emerging theories for carbon accounting, especially those challenging scope 3 emissions.
Social is a more fluid concept, with each organization approaching its social obligations in a unique way, depending on industry, sector, stakeholders, resources, and so forth. A universal framework for measuring S is unlikely, so we asked, How do we understand the unique challenges each organization faces? Can we learn from fields that examine broad and complex impacts, such as health care or education? We explored two dimensions of applying data science to understanding ESG commitments—primarily S—in which we can draw from case studies in other fields:
- Measurement and complexity: How do we measure the unmeasurable? How do we take different sources of data and make them work together?
- Toward causality: How do we know we’ve done what we intended to do? How do we avoid misinterpreting indicators? How do we resist the temptation of convenience in measurement?
Governance comprises the process and standards by which a firm’s decisions, including around E and S, are made. In some sense, you might say that “good governance is the outcome” (paraphrasing one of our speakers). G-related decisions must be made using insights from data that is well understood. For this reason, we also devoted time to exploring the intersection of decisions and behavior with data.
What were some of the big takeaways? What did you find surprising?
- Data are inherently imperfect. Consider what the opportunities in your data are, but also be aware of your data’s limitations.
- Because of what is at stake, objectivity in measurement is critical. How can other objective tools (e.g., administrative data, behavioral experiments, or causal inference frameworks) validate what you might attempt to measure directly?
- ESG questions are causal questions: “What will happen if we do this, not that?” When you have a rigorous understanding of cause and effect, you gain clarity on how to act. Causal inference is a powerful tool in the affirmative but also in establishing the counterfactual (e.g., “What happens if we don’t act?”).
- One participant demonstrated the affirmative case, using causal inference techniques to evaluate the effectiveness of a third dose of mRNA COVID-19 vaccine to prevent severe outcomes, showcasing how this can be a tool in decision-making for government and health ministries.
- Another participant demonstrated how counterfactual frameworks for causal inference can evaluate environmental policies, answering, “What would CO2 emissions have been in the absence of an intervention?”
- We must pay attention to how data is used to communicate goals and norms.
What were some of the key questions going forward?
This session was only the very beginning of articulating frameworks for measuring progress toward ESG goals and understanding the impact of those goals on corporate performance. As such, the key questions are broad:
- How can firms articulate good data strategies to support their ESG efforts?
- What level of transparency should stakeholders demand in ESG-related data?
- While a universal data framework for ESG impact is unlikely, what can be standardized moving forward?
- It is apparent to us that firms cannot embark on ESG commitments without a nuanced understanding of their complex stakeholders. At what point and how do firms include stakeholders’ voices in designing their strategies?
ESG Innovations in Emerging Economies
Until recently, conversations around ESG often centered on major industrialized countries, between and among major geopolitical capitals and the businesses headquartered in them. However, as investment has increasingly flowed to emerging markets in Africa, Asia, the Caribbean, and elsewhere, it has become clear that these jurisdictions are frequently on the front lines of issues ESG is positioned to tackle, namely, the effects of climate change.
This session focused on ESG innovations in emerging economies, with a particular focus on three countries: Jamaica, Nigeria, and Brazil. Framing thoughts on Asia, home to the majority of the world’s population—which sits on the front lines for many ESG concerns, particularly around climate—were made. Individual economies in Asia have generally set their own ESG rules and standards. China, for instance, the regional and global behemoth (and world’s largest emitter of CO2), recently introduced disclosure standards for corporations looking to trade in the Chinese market. In India, the other key regional power, ESG is often still thought of as corporate social responsibility, where section 135 of the Companies Act requires that 2 percent of average net profits go to such efforts.
Diving into the other regions discussed:
- Jamaica. The simple fact is one climate emergency has the potential to cripple the entire economy. Despite being on the literal oceanfront of climate change, the key question is, What can a small country do? The UN is quite clear about mitigation: stop greenhouse gas emission as swiftly as possible and electrify the economy. Adaptation is a more difficult challenge: the country must consider resilient resourcing and architecture, protect the coastline, and support internal migration. Still, Jamaica faces an inequitable horizon, and they can only do so much internally. Their contributions to climate change have been relatively small, so how should the global economy provide for climate economic preparedness in a way that makes up the distribution between those who have, historically, produced the bulk of the emissions and those who have been forced to bear the brunt of those emissions?
- Brazil. The country is a land of contradiction. On the one hand, it has well-developed environmental regulations. Laws show a conservationist stance, including ones that protect the Amazon rain forest, an area frequently described as the lungs of the planet. On the other hand, speakers noted that many state-owned companies often take anti-ESG stances. While formal regulations often exist, vague ownership can make the laws hard to enforce, and one-off advances from private companies are easier to flag. Session participants explored how ESG played out in practice through the lens of one private investment banking company, which saw ESG as both “the right thing to do” and a business opportunity that would ultimately increase shareholder value. As such, the company went further than adhering to formal rules, deciding to invest in the communities in which they operate and the future of Brazil. Recognizing a lack of engineers that could move the economy forward in a sustainable manner, they endowed a university and made special dispensations for scholarships, thereby creating a pipeline of experts.
- Nigeria. The focus is on energy—can solar help replace a focus on fossil fuels, and how can government and the private sector propel this strategy? A key point of discussion was ensuring that developing countries are not part of the ESG problem but part of the solution. But to be part of the solution, the participant noted, these countries need money. As case in point, only 5 percent of the $100 billion pledge made at a UN Climate Summit in 2009 has gone toward the continent of Africa. Nigeria is attending to do its part—in fall 2022 it rolled out a $400 billion plan to transition to net zero. The country, the speakers argued, is ready: the cost of energy is high, meaning renewables present a good commercial case. Moreover, a decentralized energy production culture exists. The critical question going forward for Nigeria is how to move ESG from a risk-mitigation to a value-creating mindset.
The Role of the Government as a Partner and a Regulator
Participants discussed the role of the government as a partner and a regulator in ESG, zeroing in on how we collectively push corporations to change (sometimes through rulemaking) to make progress. Participants argued for “divergent” as opposed to “incremental” change (change that requires true collective action). They offered a three-part change process: (1) agitators bring attention; (2) innovators propose alternatives; and (3) orchestrators implement. Within this framework, the session focused on the role of the government and which departments, branches, and individuals can fulfill each role.
In the most direct sense, participants noted that in the United States, government has typically set some standards for environmental protections, asking corporations to comply with a basic framework. While administrative agencies like the EPA have attempted to use the administrative process to create new rules, recent court decisions have limited that authority. More recently, Congress has begun imagining new avenues for legislation, like the Green New Deal, and the SEC has recently promulgated new proposals around climate disclosures.
In Europe, the EU Green Deal represents a comprehensive road map for innovative legislation. For example, one controversial proposal would make EU companies pay for the carbon emissions of products produced outside the EU, but exported within. In this situation, any company that trades with the EU could be held accountable for environmental harm or human rights violations that took place somewhere in their supply chain. Similarly, the EU is working on measurements to assess environmental and social sustainability, and tying that to executive compensation.
Outside of direct ESG legislation, participants also discussed the government’s role as human capital and social infrastructure investor. One area where governments could step in is job training. In many industries, there is a skills mismatch in the labor market, with job training unaligned to what companies are looking for. One program in New Jersey tries to integrate workforce development and economic development goals, allowing people to take out loans for further education and be forgiven for such loans if they are later able to obtain jobs that pay more than $50,000 a year.
But caution was stressed because many government programs in this vein have failed. Participants made clear that while intentions can be good, the long-term infrastructure to properly implement and maintain programs over the long term can be lacking.
One session takeaway was that collaboration between all stakeholders, including government, is key. As it stands, a single investor cannot make significant changes—nor can governments or activists do it alone.
Public Statements and Engagement
Since the murder of George Floyd in May 2020, calls for corporations to make public statements on social and other public policy issues has exploded (and led to backlash). During a session focused on business and public engagement, participants discussed public perceptions of corporate responsibility. (For a public discussion of these issues, see “A Conversation Between Ken Chenault and Ken Frazier.”)
Participants examined how a major AmLaw 100 law firm sought to invest in its roots and founding values, focusing on pro bono, racial equality, and the idea of “doing the right thing.” For the firm, the 2016 election signaled a watershed moment in the rule of law—they responded by doubling down on pro bono hours. While the firm’s chairperson wanted to stand for difficult issues like protecting democracy and voting rights, he recognized that law firms often have to decide between building a bolder message independently or taking less extreme positions and gathering allies. To enact its core values, the firm took specific cases, including representing the abortion provider Jackson Women’s Health Organization in the U.S. Supreme Court case known colloquially as Dobbs. With the end of Roe v. Wade, the firm began chairing the Reproductive Task Force in New York to protect doctors who come to New York to perform abortions. The firm also represented the parents of the children murdered in the Sandy Hook shooting against the gun manufacturer Remington Arms, ultimately successfully arriving at a large settlement for the plaintiffs. The chairperson intends to continue expanding the scope of the firm’s representation on these tough issues.
Why should we care about what business leaders say? Because, according to research from the Edelman Trust Barometer, they are increasingly seen as trusted sources of information (often at the expense of governments). For instance, according to an Edelman Trust report on how the public viewed business, nearly two-thirds thought that companies have a large role in advancing social, economic, and geopolitical responsibilities. Moreover, nearly three-fourths thought that the primary responsibility of a corporation is to benefit all its stakeholders, rather than just shareholders or owners. The Edelman Trust Barometer revealed that individuals have begun looking intricately at corporate values when they choose which employer to work for, which brands to buy, and where to place their investments. Although the economy has become more turbulent, even job-insecure employees still care that their job gives them the opportunity to address societal issues. Edelman found that employees of both political parties also care that their company addresses certain issues publicly, especially health care access.
These issues ultimately feed into a discussion about the state of democracy and the rule of law—and the role business plays in both. Business is a major political player, with alignment between a business’s public voice and its actions coming under increasing scrutiny.
The Role of the Board in ESG and Diversity
As companies increasingly engage on social issues, the role of the board has become increasingly important and visible. When, for instance, does the CEO speak as the CEO, and when do they speak for the company? What role does the board have in crafting this public statement or strategy? For DEI initiatives to truly take shape in corporate landscapes, the board needs to buy in: inclusion requires active intervention. Board committees who rule on topics like compensation and compliance are critical for crafting policy decisions around ESG and DEI. In a session devoted to the role of the board in ESG and diversity, participants examined the relationship between boards and companies in driving change.
To examine these issues, participants played out two hypothetical scenarios—both represented potential real-world crises that a board could face as they seek to make decisions in an uncertain geopolitical landscape.
The first involved allegations of election fraud in a particular jurisdiction. Should a corporation respond? Who should decide how to respond (management or board)? Participants had to think about what the cost benefit of taking action when considering the two sides (allegations vs. confirmed fraud) from the standpoint of a defense company selling to government or a tech company with a young customer base. They had to think through stakeholders, including management, employees, regulators, and customers. They had to consider what type of response: A statement? A private company forum? Or nothing at all? They discussed the political and legal implications.
In a second hypothetical, participants considered whether a company with a large LGBTQ customer base should engage in a jurisdiction where being LGBTQ was criminalized. They considered the purpose of the company as well as the purpose of the board. Participants were asked to consider what they would need to take into account if they were advising the board on what to do.
Each interactive scenario helped the participants examine and understand the predicaments boards often face today. Participants walked away understanding the chaotic and nuanced atmosphere under which board decision-making occurs. Moreover, board decision-making no longer happens behind closed doors. As the public asks for transparency and an eye into the discussions, boards also must balance the competing interests of different stakeholders, along with the difficult calculus of profits and morals.