As the lead-up to the November 2024 election brings increased focus to issues that fall along partisan lines, we expect to see sustainability issues garner continued attention among investors and other stakeholders. We expect the following trends to be among the most prominent in the coming months.
1. Mandatory Climate-Related Disclosures
The push for mandatory greenhouse gas (GHG) emissions disclosures is expected to continue to gain steam in 2024 at the US federal and state levels, as well as internationally. March 2024 will mark the two-year anniversary of the US Securities and Exchange Commission’s (SEC) proposal of new climate-related disclosure rules, and, after much anticipation and delay, the SEC currently is expected to publish the final rules in the first half of 2024. The proposed rules would require reporting of Scopes 1, 2 and (if material) 3 GHG emissions, plus disclosures of climate-related risks, public pledges of environmental goals, and impacts of climate change on financial statement line items. The SEC received thousands of public comments, which the agency is reviewing in finalizing the climate-related disclosure rules. It remains to be seen how the final rules will differ from the proposal, but there has been significant focus on whether the Scope 3 disclosure requirement might be scaled back and/or delayed.
At the state level, California signed into law the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261). SB 253 requires companies doing business in California with revenues over $1 billion to disclose Scope 1 and Scope 2 GHG emissions by 2026, and Scope 3 GHG emissions by 2027, among other requirements. SB 261 requires certain companies in California, by 2026, to prepare and submit climate-related financial risk reports, consistent with recommendations from the Task Force on Climate-Related Financial Disclosures framework. Last month, multiple entities filed a lawsuit challenging both laws, arguing that they violate the First Amendment by compelling subjective speech, among other claims.
In the international arena, the European Union finalized the Corporate Sustainability Reporting Directive in 2023, which will require many US-based companies that reach certain employment and revenue thresholds in the EU to publish reports on social and environmental risks and how corporate activities impact people and the environment. In short, mandatory climate-related disclosures appear to be upon us at least in some jurisdictions, and companies expected to be subject to these requirements should prepare to collect, assess and accurately report on climate-related data.
2.Environmental Justice
Since 2021, the Biden administration has taken a whole-of-government approach to implementing environmental justice priorities. In 2023, the administration issued a critical executive order directing US federal agencies to prioritize environmental justice, bolstered offices designed to implement environmental justice initiatives, and enhanced federal screening tools to help agencies and private entities better understand their impacts in low-income communities and communities of color. These actions, along with shareholder engagement, foreshadow a continued focus on environmental justice by government agencies and private entities alike.
3. Human Capital Management
Shareholders continue to focus on human capital, including increased focus on pay equity and labor rights. The 2023 season saw more pay equity proposals submitted than in 2022. These proposals are in part spurred by highly publicized movements across all industries; growing requests for commitments to workers’ rights to organize, informed by allegations of labor violations at companies; and public strikes. While investors rejected most of these shareholder proposals throughout the 2023 proxy season, we expect that these proposals will continue to be an area to watch given the broader focus throughout public discussion over the past few years.
Some SEC Commissioners have indicated that they believe the SEC should expand its disclosure requirements to include additional workforce information.1 In September 2023, the SEC’s Investor Advisory Committee (IAC) unanimously voted to recommend that the SEC issue a rule proposal that would require companies to include certain additional workforce information in their reporting. The SEC already requires some information on this topic based on the 2020 human capital disclosure rules, but new proposed rules would increase the scope of required information. According to the IAC, the workforce information that should be considered for mandatory disclosure could include the number of people employed, grouped as full time, part time and contingency; attrition or similar stability metrics; and demographic data demonstrating a company’s efforts to recruit and manage talent and to evaluate the effectiveness of those efforts. The recommendation also calls for companies to disclose how compensation incentives and staffing fit within broader market strategy. The SEC’s Regulatory Flexibility Agenda indicates that the agency plans to issue a proposal for new human capital disclosure requirements this year.
4. ESG-Related Enforcement
Environmental, social and governance (ESG)-related enforcement is likely to continue to be a focal point in 2024, with a particular focus on greenwashing lawsuits and government enforcement, at both the US federal and state levels. For example, the Federal Trade Commission is currently updating the Green Guides for the Use of Environmental Claims (Green Guides), which focus on consumer interest in purchasing environmentally friendly products that are often the subject of greenwashing claims. The Green Guides aim to help marketers avoid making unfair or deceptive environmental marketing claims. The anticipated updates will likely focus in part on what products can be called “recyclable,” as one example.
In addition to California’s climate disclosure bills, SB 253 and SB 261, public and private companies that operate and make claims within California should be aware of a new “anti-greenwashing” law, the Voluntary Carbon Market Disclosures Act (VCMDA), or Assembly Bill 1305. VCMDA came into effect on January 1, 2024 (although the legislature intended January 1, 2025, as the compliance deadline). The law requires companies to make disclosures that aim to increase transparency and accountability around climate-related claims and the use of voluntary carbon offsets. For example, a company that makes a claim implying it does “not add net carbon dioxide or greenhouse gases to the climate or has made significant reductions to its carbon dioxide or greenhouse gas emissions” must make specific disclosures on its website.
5. Shareholder Proposals and Activism
This proxy season, we expect to see continued shareholder activity focused on sustainability and social issues, ranging from climate to civil rights and racial justice to political contributions and lobbying. For example, in 2023, shareholders continued to submit proposals seeking to require companies to assess and report on the alignment between their stated values and political, lobbying and electioneering expenditures. We expect to see a continued focus on these topics in this election year.
Activist investors may also take advantage of recent changes to the proxy rules to press companies on sustainability issues by nominating directors for election to company boards. In 2022, the SEC adopted rules requiring the use of one “universal proxy card” in contested director elections, which requires that both parties to a contested director election list on their respective proxy cards both the company’s and the activist’s nominees, allowing investors to pick and choose among nominees instead of voting for a full slate of nominees put forth by either the company or activist.2 In November 2023, the Strategic Organizing Center—a coalition of labor unions, including the Service Employees International Union—announced it had nominated three directors for the Starbucks board of directors who would add “the right skills and experience to help the Company address its significant human capital issues and chart a sustainable path forward.” Other activist investors may take a similar approach.
6. Human Rights in Corporate Supply Chains
Globally and in the US, we continue to see expansion and increased enforcement of regulations governing human rights in corporate supply chains. At the US federal level, regulations relating to the use of forced labor are generally contained in the Tariff Act of 1930, as amended (Tariff Act), the Federal Acquisition Regulation (FAR), and the Trafficking Victims Protection Reauthorization Act (TVPRA). The Tariff Act prohibits the importation of goods made with forced labor; the FAR prohibits the use of forced labor in the production of materials (or provision of services) sold to the federal government (covered in greater detail below); and the TVPRA bars companies from knowingly benefitting from the use of forced labor. Companies in a range of industries regularly consider the application of these laws in their supply chains, including through risk assessments, internal investigations, and remediation.
Also at the US federal level, the Uyghur Forced Labor Protection Act (UFLPA), which came into force in June 2021, creates a rebuttable presumption that merchandise produced wholly or in part in Xinjiang, China, or by certain designated entities, were made with forced labor and are therefore not legally importable. Since the UFLPA came into force, US Department of Homeland Security (DHS) Undersecretary Robert Silvers has emphasized that “C-suite executives – need to understand that forced labor is now a top tier compliance issue.”3 We have seen that borne out, as US Customs and Border Protection (CBP) detained around $1.4 billion in goods pursuant to the UFLPA in fiscal year 2023 alone; for fiscal year 2024, CBP is already reporting detention of $309 million in goods.4 DHS has identified the following sectors as priorities for enforcement: apparel, cotton and cotton products, silica-based products, and tomatoes and downstream products.5 DHS may add others to this list over time.
At the state level, California is the only state that specifically mandates reporting on compliance initiatives relating to the use of forced labor, through the California Transparency in Supply Chains Act. Other states also prohibit forced labor, as defined in the Tariff Act, in state-level procurement activity, and also criminalize knowingly benefitting from labor trafficking.
In recent years and months, we have observed increased internal investigations, whistleblowing, risk assessment and enforcement in these areas, and anticipate these trends will continue in 2024.
7. Doing Business With the US Government
As noted above, US federal contractors and subcontractors, as well as federal grant and cooperative agreement recipients, are prohibited from using forced labor in the performance of a contract or subcontract award or engaging in other trafficking-related activities. This prohibition is implemented in federal government contracts and subcontracts through the clause at FAR 52.222-50, Combating Trafficking in Persons, and in federal grants and cooperative agreements through the award terms spelled out at 2 C.F.R. § 175.15. Contractors and recipients must immediately disclose information from any source indicating a violation. FAR 52.222-50(d)(1) (duty to disclose “credible” information); 2 C.F.R. § 175.15(b) (duty to disclose “any” information). Failure to comply with the applicable contract and award terms may result in consequences ranging from contract or award termination to suspension and debarment.
In addition to these requirements, recent years have seen consistent, bipartisan efforts to expand government regulation of forced labor in US government contracts. Last year, the US Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration proposed to amend the FAR to impose anti-trafficking reporting requirements on US-flag air carriers under certain contracts with US federal government civilian agencies for air transportation of passengers. 88 Fed. Reg. 52102 (Aug. 7, 2023). Similarly, the bipartisan End Human Trafficking in Government Contracts Act of 2022 enacted in November 2022 requires US federal government agencies to refer substantiated allegations of trafficking violations by a recipient of a federal contract, grant or cooperative agreement for evaluation by the relevant agency’s suspension and debarment official. With the addition of that explicit internal government escalation, noncompliant contractors, including those who self-report “credible information” of potential violations as already required by the mandatory Combating Trafficking in Persons clause at FAR 52.222-50(d)(1), face increased risks of potential suspension and debarment.
Consistent with these developments, we would not be surprised to see additional bipartisan efforts in 2024 to reinforce and potentially expand prohibition and enforcement against forced labor and human trafficking in the implementation of US contracts and other federal awards.
Conclusion
As we approach the election, we expect to see continued “anti-ESG” activity, including efforts to challenge or investigate sustainability investments or corporate decision-making, through congressional investigations (such as the investigations into major financial institutions in 2023), litigation, and investor activity. At the same time, sustainability efforts, such as regulatory and investor action on these topics, especially on climate-related topics, are likely to remain strong. The 2024 election can be expected to have significant impacts in these areas.
1 See Remarks at the Investor Advisory Committee Meeting, Commissioner Jaime Lizarraga, THE U.S. SECURITIES AND EXCHANGE COMMISSION (Sept. 21, 2023), https://www.sec.gov/news/statement/lizarraga-remarks-iac-092123. See also Recommendation of the SEC Investor Advisory Committee’s Investor-as-Owner Subcommittee regarding Human Capital Management Disclosure, THE U.S. SECURITIES AND EXCHANGE COMMISSION (Sept. 21, 2023), https://www.sec.gov/files/spotlight/iac/20230921-recommendation-regarding-hcm.pdf.
2 See Release No. 34-93596, Universal Proxy (Nov. 17, 2021).
3 Richard Vanderford, Forced Labor a ‘Top Tier’ Compliance Issue, Says U.S. Official, WALL STREET JOURNAL (2022), available at https://www.wsj.com/articles/forced-labor-a-top-tier-compliance-issue-says-u-s-official-11664271003.
4 US Customs and Border Protection, Uyghur Forced Labor Prevention Act Statistics (last modified Dec. 22, 2023), available at https://www.cbp.gov/newsroom/stats/trade/uyghur-forced-labor-prevention-act-statistics.
5 US Department of Homeland Security, Office of Strategy Policy and Plans, 2023 Updates to the Strategy to Prevent the Importation of Goods Mined, Produced, or Manufactured with Forced Labor in the People’s Republic of China (July 26, 2023), available at https://www.dhs.gov/sites/default/files/2023-08/23_0728_plcy_uflpa-strategy-2023-update-508.pdf.
