Trends and Implications of the TransAtlantic Convergence of ESG

Doug Davison, Menaka Nayar and Chloe Shostak, Linklaters LLP

In a sharp departure from the previous administration, President Biden has thrown America’s full weight behind global efforts to address Environmental, Social and Governance (“ESG”) issues. At the recent G7 summit in the United Kingdom, President Biden, along with other world leaders, unveiled a raft of multilateral initiatives, including a new “Build Back Better for the World” scheme to help developing countries tackle climate change. Meanwhile, a growing wave of climate change lawsuits has notched significant wins, including, most recently, a sweeping decision from a Dutch court ordering Royal Dutch Shell to reduce its global carbon emissions by 45% by 2030, and a historic ruling that the Australian government has a duty of care to protect children from the future impacts of climate change.

Closer to home, the Biden administration has signaled that the formidable regulatory apparatus of the U.S. federal government will be brought to bear on climate and ESG risks. On May 20, 2021, the White House issued a new Executive Order setting out a whole-of-government approach to addressing climate risks. This follows closely on the heels of major announcements from the U.S. Securities and Exchange Commission regarding several new ESG initiatives, including the launch of a Climate and ESG Task Force, which could result in increased enforcement and private lawsuits.

Going beyond the “E” in “ESG,” the COVID-19 pandemic and recent developments involving social justice movements have increased regulatory and investor attention on social and governance issues. The SEC’s latest rulemaking agenda includes proposed rules on corporate board diversity and human capital disclosures. Meanwhile, investors continue to focus their attention on social issues. Research shows that shareholder resolutions relating to human rights doubled in 2019, and it is increasingly common to see proposals on social and human rights reporting put forward alongside requests for reporting on climate change or political lobbying.

The European Union is at the vanguard of legislative and regulatory developments in social and human rights issues, particularly with respect to mandatory supply chain due diligence. In a landslide vote on March 10, 2021, the European Parliament passed a resolution calling for a draft directive on mandatory human rights diligence, and on June 11, 2021, the German Bundestag passed a mandatory Supply Chain Due Diligence Act, due to take effect in 2023. This could become one of the most significant pieces of legislation with regards to human rights diligence worldwide.

While the United States has yet to see any legislative or regulatory proposals similar to those we are seeing overseas, federal agencies such as the State Department and Customs and Border Protection have focused on forced labor in the supply chains of goods imported into the country. As activists and investors continue to press corporates on human rights – including via publicity-grabbing lawsuits addressing supply chain risks – we should expect to see increasing convergence on both sides of the Atlantic in respect to these ESG issues that will continue to be top of mind worldwide.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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