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Could SEC mandating ESG disclosures harm Black businesses?

On March 21, 2022, the United States Securities Exchange Commission (SEC) proposed a rule that would require public companies to issue ESG disclosures of climate change risks.

With only 0.22% of public companies being Black-owned, why should Black-owned businesses care about mandated ESG disclosures?

This article explores:

  • What is ESG?

  • How does ESG apply to privately-held companies?

  • What is the possible impact to Black-owned businesses should the SEC mandates ESG disclosures?

What is ESG?

ESG is an acronym for Environmental, Social and Governance. It’s an investment framework that considers factors such as a company’s carbon footprint (environmental), diversity and inclusion (social), and compliance and risk management (governance).

The framework was launched in 2006 by a network of investors supported by the United Nations (UN), the Principles for Responsible Investment (PRI), who committed to incorporating ESG factors into their investment decisions.

Four years later the SEC made its first steps toward mandated ESG disclosures. In 2010, it issued guidance that noted climate change related risks and opportunities might be required in a registrant’s disclosures related to its business description, legal proceedings, risk factors, and management’s discussion and analysis of a company’s performance.

The importance of ESG reporting grew through the influence of asset management firms BlackRock, Vanguard, and State Street Corporation. These asset management companies, known as the “Big 3,” apply an ESG framework to the investments they make on behalf of retail investors, 401Ks, pension funds, insurance companies, and corporations.

In 2020, the Big 3 collectively managed $20 trillion USD of assets, a figure representing almost 24 percent of 2020 global annual GDP. (GDP measures the monetary value of final goods and services produced in a country).

So when looking to determine what investors want, the SEC looks toward the Big 3. And the Big 3 have called for requiring standardized ESG disclosures.

How do ESG disclosure rules apply to privately-held companies?

The SEC’s proposed rule requires publicly-traded companies to report green-house gas (GHG) emissions. GHG emissions are broken up into three different categories called Scope 1, 2 and 3 emissions.

Scope 3 emissions requires companies to go beyond direct GHG emissions, and look at indirect upstream and downstream emissions. This means that when corporations consider operational and reputational risk, they will apply ESG criteria to businesses within their value chain. Among other things, this includes suppliers and independent contractors providing services.

Thus, any Black business in the value chain of a reporting company will be impacted by ESG disclosures.

How ESG’s top-down approach may impact Black-owned businesses

Environmental criteria are supposed to address climate change concerns. The framework focuses on energy efficiency and the use of renewable energy. We’ll discuss how these two criteria continue to support extractive capitalism and large corporations, penalize small companies, and don't actually address climate change.

Energy efficiency is defined by using less energy to perform the same task, and is measured in terms of units of energy consumed per dollar of GDP. Rather than requiring that companies curb energy consumption, this framework requires that they extract the most amount of profit from the least amount of energy consumed.

Companies that have the capital to retrofit operations with energy efficient equipment will benefit over those who simply limit the amount of energy consumed. Unfortunately, most Black businesses are undercapitalized and are likely to struggle to pay for upgrades.

Unlike fossil-fuel based conventional power, renewable energy includes resources that rely on fuel sources that do not diminish and restore themselves over short periods of time. These fuel sources are: solar, wind, hydroelectric, geothermal, and biomass (plant and waste material). For instance, although it would take a tree 30 years or more to reach maturity, burning it for energy is considered a renewable source because it doesn’t take millions of years to create, such as the case of petroleum.

However, “clean energy” sources rely on carbon-intensive processes in their production and extractive practices. Much like their fossil fuel predecessors, clean energy detrimentally impacts U.S. minority populations and the Global South. Large corporations rip natural resources from the Earth, export profits, and pollute the surrounding environment. Yet, companies who pay for or borrow funds to pay for costly renewable energy upgrades will fall in-line with ESG criteria despite this extractive reality.

Additionally, ESG criteria could include employee commutes. Although only 5% of Black businesses are employee businesses, these larger businesses are more likely to fall within ESG. Thus, Black employee businesses may be detrimentally impacted by ESG as Black populations shift from urban job cores to the suburbs.

A longer commute by a suburban labor force would necessitate an increase in GHG consumed. And while Black commuters have been disproportionately served by public transportation which is considered to have a smaller carbon footprint, as commute times increase so do car ownership rates. It’s likely that Black commuters will join the overwhelming majority of suburban residents who commute by car. Unlike wealthy suburbanites, they are less likely to afford expensive electric and hybrid cars.

Finally, GHG emission schemes allow major polluters to offset their investment risk by purchasing carbon credits. Small businesses can also pay for carbon credits, which are currently relatively affordable. But markets respond to supply and demand, and ESG mandated disclosures will increase the demand for carbon credits, increasing their price. While increases in operating costs hurt all businesses, historically undercapitalized Black businesses will likely be the hardest hit.

In conclusion, SEC mandated ESG disclosures will incentivize larger corporations to reduce exposure to climate-related risk by hiring or enlisting certain Black-owned businesses as subcontractors. This will in turn impact Black businesses’ ability to serve these companies due to an inability to cover the high costs of environmental compliance.

As you look to craft an investment offering, you may want to consider including ESG risk factors into your disclosures to increase business opportunities and ensure legal compliance. We can help with this. Schedule a consultation with us today to get started.


Ward Williams, “Black-owned Public Companies: Companies that went public and how they’re doing,” Investopedia, updated January 24, 2022.

Witold Henisz, Tim Koller, and Robin Nuttall, “Five ways that ESG creates value,” McKinsey & Company, Nov 14, 2019.

Abigail N. Bortnick and Jennifer C. Guest, “Will ESG Disclosures be Mandated by Law? A Legislative Analysis.” King & Spalding, Sep 22, 2021.

Climate Disclosures and the SEC,” Latham & Watkins, Oct 8, 2021.

Saqib Iqbal Ahmed and Sohini Podder, “BlackRock profit beats as assets grow to a record $9.5 trillion,” Reuters, Jul 14, 2021.

Chris Flood, “Vanguard’s assets hit record $7tn,” Financial Times, Jan 12, 2021.

Tim Callen, “Gross Domestic Product: An Economy’s All,” Finance & Development, IMF, updated Feb 24, 2020.

Corporate Value Chain (Scope 3) Standard, Greenhouse Gas Protocol, accessed Mar 21, 2022.

Marlize van Romburgh and Gené Teare, “Funding To Black Startup Founders Quadrupled In Past Year, But Remains Elusive,” Crunchbase, Jul 13, 2021., “What is Energy Efficiency?” accessed Mar 21, 2022.

Robert Bryce, “7 Energy Efficiency Myths Debunked,” Popular Mechanics, Mar 26, 2008.

What is Green Power?, U.S. Environmental Protection Agency, accessed Mar 21, 2022.

Monica Anderson, “Who relies on public transit in the U.S.” Pew Research Center, Apr 7 2016.

Shirah Dedman is a Legal Fellow at Elizabeth L. Carter, Esq., LLC. Her focus is on blockchain, NFT, and cryptocurrency matters.

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