Fall 2023

Guest Editorial: Managing Risk in the Environmental, Social, and Governance Era

By Peggy Otum, Shannon Morrissey, and Caroline McHugh, Attorneys at WilmerHale

Many businesses today face an environmental reckoning, and attention to environmental, social, and governance (ESG) issues is at an all-time high throughout the public and private sectors.  These trends and priorities drive companies to take unprecedented action on environmental issues, including environmental justice (EJ).  While many ESG issues are now well understood throughout the corporate and social mainstream, the less ubiquitous concept of “EJ” warrants a brief introduction.  EJ refers to the unequal distribution of environmental negatives (i.e., water and air pollution) among minority, low-income, tribal, and indigenous communities compared with wealthy, white communities.  EJ is an increasingly important compliance consideration for companies across sectors for two primary reasons:

• Public Sector Priorities – The Biden-Harris Administration’s focused attention on racial equity is leading to an unmistakable and noisy shift in environmental regulatory and enforcement priorities that create new risks and requirements for businesses; and
• Private Sector Imperatives – Investors and stakeholders are demanding action on ESG issues, including EJ, through shareholder proposals and other efforts targeting business reputations.

These public sector priorities and private sector imperatives are aligning to assert sustained pressure on companies to embed principles of EJ into corporate governance.  Those imperatives are already driving visible changes in industries with apparent EJ impacts.  The scope of EJ, however, extends beyond these industries, and companies can evaluate EJ risks and develop a proactive ESG and compliance program.

President Biden established EJ as a key public sector priority his first week in office.  The “Executive Order on Tackling the Climate Crisis at Home and Abroad” triggered significant changes to center racial equity and environmental issues across the entire federal government’s operations.  Subsequent executive policies like the “Executive Order on Revitalizing Our Nation’s Commitment to Environmental Justice for All” reinforce those priorities (Biden, 2021, 2023).  An ambitious enforcement initiative is at the heart of the Biden-Harris Administration’s EJ agenda.  The United States Environmental Protection Agency (US EPA) and Department of Justice (US DOJ) are both implementing policies to focus environmental enforcement on addressing pollution that impacts overburdened communities.  This initiative has resulted in several significant settlements with EJ implications, including an agreement requiring BP Products to implement upgrades valued at more than $197 million to reduce hazardous emissions at a refinery located in an overburdened community in Indiana and pay a civil penalty of $40 million (US DOJ, 2023).  EJ is also a key priority in US EPA’s 2022-2026 Strategic Plan, and the agency is ahead of its goals to increase inspections and enforcement actions in disadvantaged communities, performing 56 percent of on-site inspections in 2022 in overburdened communities (US EPA, 2022).  This enforcement focus poses new compliance risks for companies.

Recent high profile judicial decisions are unlikely to disrupt implementation of these EJ initiatives.  For example, the US Supreme Court’s decision in Students for Fair Admissions vs. Harvard outlines limitations on consideration of race in the very narrow context of higher education admissions decisions.  The contexts of higher education and environmental regulation are distinct, and EJ extends far beyond race to incorporate a range of socioeconomic, demographic, and environmental factors and principles of community engagement that are not affected by the Harvard decision.  Similarly, the US Court of Appeals for the Third Circuit’s recent decision preventing US EPA from imposing stricter permit requirements on a reopening of an oil refinery in an EJ community has a limited scope.  The court, in Port Hamilton Refining & Transportation LLP vs. EPA, explored the US EPA’s authority in the specific “prevention of significant deterioration” of the Clean Air Act (CAA) permitting program.  The decision clarifies that US EPA cannot require a facility that is reopening to obtain a stricter permit typically required only for new and modified facilities.  The decision does not address the ability of US EPA (or other agencies) to impose stricter permit requirements in other contexts, including for new permits.  In short, these decisions do not diminish the need to incorporate EJ into environmental compliance programs.

We have entered a new era of ESG disclosures, and the attention on EJ from both the public and private sector drives an urgent need for companies to evaluate corporate ESG strategies.”

These public sector priorities are increasingly aligned with private sector demands for action from public companies on EJ.  Formal shareholder proposals are a key tool for investors and stakeholders seeking to influence company actions on EJ.  The number of environmental shareholder proposals has roughly doubled since 2021, and, in 2023, six proposals have been submitted that specifically call for assessment of EJ issues.  These proposals generally call for the company to publish a report describing the company’s efforts to identify and reduce environmental and health impacts from operations on communities of color and low-income communities.  The trend of increasing environmental shareholder proposals is expected to continue, and proposals have dual significance – as tools to force corporate change and signals of shifting shareholder priorities.  We have entered a new era of ESG disclosures, and the attention on EJ from both the public and private sector drives an urgent need for companies to evaluate corporate ESG strategies.

Given the increased enforcement attention on EJ, and sustained pressure on ESG values from the private sector, what should companies do?  An environmental risk audit can help companies evaluate current practices, identify risks, and implement changes to successfully navigate the evolving ESG landscape.  An environmental risk audit is an internal review that allows a company, at the direction of legal counsel, to take a privileged and confidential look at whether there is an environmental issue that could impact the company and develop a response.  This audit is a 360-degree evaluation of the impacts of a business and how that business affects the community, environment, and climate.

The scope of an environmental risk audit is flexible and adaptable to meet the unique needs of each company’s operations, regulators, and shareholders.  It may have multiple phases, include a review of different processes and organizations, and result in a range of different outputs.  Key environmental risk audit findings could include strategies for minimizing enforcement risk where operations may affect disadvantaged communities, or an assessment of whether corporate climate and racial equity commitments align with EJ records.  For some companies, problematic EJ issues have raised questions about the company’s credibility with respect to climate and diversity, equity, and inclusion (DEI) pledges.  A voluntary risk audit conducted with legal counsel presents an opportunity for companies to build a strong internal ESG program and stay ahead of regulators and shareholders in the face of increasing demands for ESG disclosures.

Sustained pressure from both the public and private sectors is changing the ESG disclosure landscape at a rapid pace.  Increasingly, regulators and shareholders are demanding more transparency on environmental issues, including EJ.  An environmental risk audit can help companies identify potential issues and develop an informed ESG and environmental compliance strategy that embeds EJ considerations into corporate governance practices.  Simply put, identifying and addressing latent EJ issues is important for a company’s overall assessment of environmental risk and helps generate long-lasting value.