It’s never a surprise to find a lawyer that is risk averse. It’s in their nature. But a recent survey finds that in-house lawyers in US companies are particular nervous when it comes to increasing ESG disclosures.

Research by a team at Stanford University’s school of business find that general counsels worry that disclosing more of their companies’ ESG and diversity data could pose legal and reputational risks.

“While general counsels support ESG-related initiatives, they express notable concerns about the impacts of disclosing this data to the public,” the Stanford report says.

A hefty 50% worry that environmental disclosures will “increase their legal or regulatory exposure”, while a 42% fret that diversity information made public will do the same. Another 27% are anxious about the risks posed by making “social impact” disclosures.

The news comes at a time when US financial watchdog, the Securities and Exchange Commission (SEC), is undertaking a consultation on the potential for introducing mandatory ESG and climate change reporting, a practice that is currently well behind existing requirements in Europe and the UK.

ESG disclosures and liability

Though the Stanford team finds concern among corporate lawyers about the risks of increased reporting, they also find their companies are happy to spend on ESG policies.

“We find considerable tension between a willingness, on one hand, to invest in and support ESG-related activities and worry, on the other hand, about liability and potential regulatory harm.

“Can companies find a balance between ‘doing good’ and not creating unexpected damage? This is an importance issue for boards to understand, and a discussion that the general counsel would lead.”

The Stanford team find that companies currently release data on only a third of the environment-related factors they track and 60% of the information they hold on diversity metrics.

In-house lawyers are not the only ones with an eye on ESG-related risks. As if confirming the potential liability, Fitch, the ratings agency, recently drew attention to the issue in an analysis of US directors and officers (D&O) insurance business. Looking ahead at factors that might affect the industry, Fitch says: “An increase in allegations of improper governance amid growing awareness of ESG considerations drive claims allegations previously unseen.”

Reporting under scrutiny

Improvements to ESG reporting by US companies came under close examination by SEC officials in March this year. Since then a debate has raged over which route watchdogs should take. One professor, Amanda Rose, offered a vociferous critique of ESG reporting, claiming it offered “vagueness” and “ESG fuzziness”. She claims reporting proposals “speak in generalities about the importance of ESG to investors without specifying which, if any, specific ESG topics are financially material”.

Meanwhile, a clutch of companies called for the introduction of climate reporting that follows the framework written by the Taskforce on Climate-related Financial Disclosures (TCFD). In submissions to the SEC’s consultation stewardship leaders at BlackRock, the world’s biggest fund manager, call for the US to align with TCFD and work should begin on a single set of global standards.

Corporate lawyers do have real-world examples of the reputational and legal risks posed by climate policies. When activists forced the energy company Shell into a Dutch court over the company’s climate action plan judges ruled the document was “rather intangible, undefined and non-binding”. And this after it was approved by a shareholder vote.

The fears of US corporate counsels may be real but it seems likely regulators will impose more stringent ESG disclosures on companies in the near future. Boards will need to prepare.