Business and Markets

Playing Offense: Sabastian Niles at Wachtell Lipton on the Risks of Taking Your Eye Off the ESG Ball

January 30, 2023  • Business and Society Program

This post is part of a series of interviews with thought leaders to explore issues on the frontier of the complex domain of ESG.

Adoption of Environmental, Social and Governance (ESG) practices has been steadily growing over the past few years as more organizations use the myriad concepts within ESG frameworks to identify and manage varied risks (from climate change to workforce retention to changing consumer preferences to supply chain inter-dependencies to board oversight) as well as capture economic opportunities. Yet as the use of relevant ESG factors has gained momentum in business decision making, it has become politicized, particularly in the U.S. where financial firms and government institutions have come under attack for “woke” agendas.

This ESG debate is now playing out in a sports-like public arena with adversaries taking sides and running the proverbial political football. Companies and organizations focused on sustainability presently find themselves on the defensive.

“As executives experience frustration and concern over the intensifying drama around ESG, the risk of this unduly political debate is that it injects a level of misinformation into a dialogue about very important issues and distracts companies from the real work of business,” says Sabastian V. Niles, Partner at Wachtell, Lipton, Rosen & Katz, a premier law firm that specializes in corporate governance, activist defense and risk oversight, including ESG, and M&A. “It ends up politicizing issues that business must grapple with in order to thrive.”

Recently, the Aspen Institute Business & Society Program’s Executive Director Judy Samuelson sat down with Niles to discuss how executives and board members, in the midst of this divisive public rhetoric, can effectively play offense for the long-term vitality, competitiveness and health of our enterprises and society.



Judy Samuelson: You and your colleagues at Wachtell Lipton have written extensively about the increasingly contentious debate over ESG in business decision making. What concerns you about the way ESG is being discussed right now?

Sabastian Niles: The risk in the current politicization of ESG is that it promotes confusion in the boardroom and in the executive suite, for CEOs, general counsel and senior leaders. These political discussions do not change the complexity of running a business operating in a multi-stakeholder environment. This complexity is a fact, not rhetoric. As organizations grapple with these complicated questions, we at Wachtell Lipton believe fundamentally that public companies and boards of directors have an opportunity and responsibility as they create value, to do so in a sustainable way that effectively anticipates and manages risk.

JS: Why can’t business leaders and boards afford to take their eye off the ESG ball? What’s at stake?

Niles: At our firm we talk about “EESG”—Employees, Environmental, Social, and Governance issues.  Properly understood, this simply refers to some of the risks and strategies that a company must carefully balance in seeking to achieve long-term, sustainable value.  We see these as core aspects for how companies have long created value and established safeguards against risk to the enterprise. There are diverse stakeholders associated with each of these issues, and we believe that any large enterprise will not be able to survive or sustainably thrive if they have stakeholder blind spots, or ESG-related blind spots.  The risk for ignoring these issues has never been higher.

Whether you look at end markets, consumers, businesses and their needs, we see these stakeholder considerations and EESG issues becoming more relevant and more linked to value creation or potentially to value destruction. And no matter how the narrative around ESG evolves, the case law of fiduciary duty, particularly when it comes to enterprise risk oversight, is strong and clear.

Any company that says, “These issues are just not relevant to us” must have reached that view based on analysis and self-assessment in order for it to be credible. It can’t come from a reflexive, unduly politicized view. Corporate governance now requires collaboration between companies and their investors, and boards, and management teams, and broader stakeholders – mediating the different tensions and trade-offs.  Regardless of one’s political preferences, the inescapable reality is that ESG risks and opportunities have long been considered by boards and management —along with all other material risks and issues—as part of common sense, smart business practices.

JS: The politicized narrative is confusing many companies. What do you advise boards and executives to do in this environment?

Niles: Confusion in the board room and in the C-suite is actually an opportunity to go back to the fundamentals and the basics. Have clarity on your corporate purpose and the issues that are material to your company, and make sure management presents regularly to the board on these issues. And be clear and precise as to who your key stakeholders are for this enterprise and what strategies and risks you see with respect to those stakeholders. Attacks on what various interests choose to impute to the “ESG” label should not obscure the reality of the substantive risks and strategies underneath that label that must be factored into corporate decision-making.

In a number of recent activist defense situations, we’ve found not just ESG but Diversity, Equity & Inclusion topics are almost being weaponized.  What we’ve advised our clients is that regardless of distracting discourse in public, these issues continue to be taken very seriously by your major investors, as well as core non-investor stakeholders, internal and external. The way to handle these matters is to get ahead of them and demonstrate that the board and the management team are not caught flat-footed around these topics.

Activists will continue to draw on ESG critiques to strengthen their cases for change, particularly in instances where ESG-related missteps have drawn public attention, drove business crises, or led to internal or external stakeholder divisions.  More broadly, it remains critical for boards and management teams to consider ESG factors and risks (along with all other material and relevant factors and risks) in their decision-making processes in order to ensure sustainable value for the company over the long term.

JS: The EU is barreling ahead with stringent disclosure regulations around ESG practices for both corporations and investment managers. How are you advising boards around transparency and disclosure in this complicated environment?

Niles: The EU (and possibly the UK) is continuing to drive these issues forward. They are implementing a broad swath of disclosure and transparency regulations that will affect many U.S. multinational companies, as well as overseas companies. That’s just law and regulation – if you’re going to be operating in those markets, you need to have a plan for how you’re going to adjust to those obligations. Some companies are ready for it, some aren’t.

We are also seeing new rules from the SEC in the U.S. on climate and human capital management disclosure. Companies are going to have to figure out what many of these new metrics mean for them and how disclosures will be consumed by a wide variety of audiences—including employees, as well as investors with varying time horizons.  And the time to start this work is now, even though the rules are not yet finalized.

Candidly, like it or not, executives and investors will have to contend with ESG controversies and evolving disclosure obligations for the foreseeable future while staying focused on their strategic priorities.  Proactive board oversight—of both ESG disclosure practices and ESG-related controversies—will be essential to managing companies’ reputational risk strategy around ESG.

JS: How does a company or board begin to assess what issues are critical to them?

Niles: One of the tools that we expect to become even more mainstream and useful from a practical perspective will be materiality assessments, which involves mapping the issues of importance to various stakeholder groups that are relevant to the company. Once you map and rank these issues, then you must consider the nexus between them and your business.  It enables a more sophisticated conversation around these issues.  And despite any emerging political backlash, investor enthusiasm for ESG remains high, and effectively dealing with the complex stakeholder, business and competitive issues and threats that companies face today requires sophisticated engagement on ESG.

JS: We’ve been talking about the “known knowns” as far as challenges to ESG practitioners in 2022. Looking ahead, is there something that you think could take firms or boards by surprise in 2023—and how might they prepare for it?

Niles: Cybersecurity is a constant area of focus, but definitely biodiversity and natural capital-related topics. The Taskforce on Nature-related Financial Disclosures may catch companies by surprise because it’s going to release a structured framework about targets, goals and governance around these sets of topics, and investors have been organizing around a range of sub-topics within these broad areas.

The world is getting more rather than less complicated, and the global geopolitical and macroeconomic volatility that emerged in 2022 is not subsiding anytime soon.  We need to make sure our boards of directors and management teams are empowered to grapple with all of that.

JS: Board members do not have unlimited time. Nor do CEOs and GCs. What advice can you offer to help boards manage these escalating complexities efficiently?

Niles: Be practical, set priorities and have a multi-year plan for dealing with the relevant topics. Some boards use annual off-sites to explore issues more fully, but it is imperative that there is a structure for tackling material ESG risks regularly with the full board and within board committees, supported by quality information flow and metrics. Whenever there’s any kind of challenge, board members have to look at it and say: “This is an opportunity. Let’s sharpen our views on these issues and make sure that people are thinking about them.”

JS: Wachtell Lipton has highlighted that the risk of fiduciary duty litigation sounding Caremark-related claims alleging failures of risk oversight growing—both against directors and, recently, against individual officers—is growing.  Is ESG relevant here too?

Niles: Yes.  Boards have powerful tools at their disposal to defend proactively against Caremark risk oversight claims.  In the ESG context, the best preventive medicine at the board level to prepare for such fiduciary litigation in advance of an ESG crisis includes ensuring that company-calibrated risk-management protocols, innovative board committee architecture reflecting the company’s risk profile, and faithful record-keeping properly reach significant ESG issues, helping avoid the ESG blindspots that directors and officers may come to regret.  This will help ensure compliance with best practices and reduce litigation risk.  With effective preparation, Caremark exposure remains entirely manageable, even in the case of ESG.

ESG may have become a political football, but the challenges and opportunities it elevates are here to stay. With a smart strategic playbook, executives and board members can keep their eyes on the real goal post: moving the company to the next level of performance and thriving over the long-term.

This post is part of an interview series with thought leaders to explore frontier issues in the complex domain of ESG. We welcome Wachtell Lipton, Rosen & Katz as a supporter for this work and thank them for their contributions, including sponsorship of the annual Aspen ESG Summit.



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