Tackling ESG backlash
As ESG backlash escalated this past year, companies have often felt caught between Scylla and Charybdis, struggling to navigate between the company’s commitment to ESG issues that the company believes will contribute to its long-term performance and benefit investors and other stakeholders, and the opposition that has arisen to the corporate focus on ESG, particularly social and environmental matters. The Conference Board, however, suggests that we look at it differently: “Despite the negative connotations, ESG backlash can be a clarifying moment for companies. It can prompt companies to reevaluate their ESG strategy, priorities, and commitments,” providing an “opportunity to clarify their ESG strategy and communications.” In a recent TCB survey, half the companies indicated that they had experienced some form of ESG backlash, whether against their industry (26%), more generally (e.g., their state) (20%) or against the company specifically (18%). In addition, 61% thought that ESG backlash would “stay the same or increase over the next two years.” TCB posits that the increase will be driven largely by “emotionally charged topics, such as hot-button social issues and the transition to more sustainable forms of energy that raises fear of job losses.” With that in mind, this paper from TCB attempts to provide some analysis of the nature of ESG backlash and guidance on how companies can address it.
In Fifth Circuit oral argument, SEC faces challenge to preserve 2022 changes to proxy advisor rules
In December last year, the Federal District Court for the Western District of Texas issued an Order granting summary judgment to the SEC and Chair Gary Gensler and denying summary judgment to the National Association of Manufacturers and the Natural Gas Services Group in the litigation surrounding the SEC’s adoption in 2022 of amendments to the rules regarding proxy advisory firms, such as ISS and Glass Lewis. Those 2022 rules reversed some of the key controversial provisions governing proxy voting advice that were adopted by the SEC in July 2020 and favored by NAM. NAM’s complaint, filed in July last year, had asked that the 2022 rules be set aside under the Administrative Procedure Act and declared unlawful and void, and, in September, NAM filed its motion for summary judgment, characterizing the case as “a study in capricious agency action.” The District Court begged to differ, and NAM appealed. This week, a three-judge panel of the Fifth Circuit heard oral argument on NAM’s appeal. Let’s just say that the Court didn’t appear to be particularly sympathetic to the SEC’s case, with Judge Edith Jones mocking the SEC’s concern with the purported burdens on proxy advisors as “pearl-clutching.”
IAASB proposes new assurance standard for climate disclosures
A 2021 article in the WSJ about carbon emissions identified “[o]ne problem facing regulators and companies: Some of the most important and widely used data is hard to both measure and verify.” According to an academic cited in the article, the “measurement, target-setting, and management of Scope 3 is a mess.” As a result—and as the term “greenwashing” brings to mind—investors and other stakeholders are frequently apprehensive about the reliability of corporate disclosures regarding sustainability. One approach to address this concern is to obtain assurance to verify the data. However, the WSJ suggested that, based on data regarding verification of climate information provided on a voluntary basis, audits are a challenge. For one reason, verification of ESG data “is generally less rigorous than the external audits required for financial reporting.” Moreover, there is “no set standard for how climate data should be verified, or by whom.” That may be about to change—internationally, that is. Will the U.S. follow suit?
Compliance dates for SEC cybersecurity disclosure rules
As you know, the SEC adopted final rules on cybersecurity disclosure on July 26, with compliance dates tied to publication in the Federal Register. (See this PubCo post.) Those rules were published on August 4 with compliance dates spelled out in the published release.
FASB wants more disclosure about expenses
FASB is moving ahead with new requirements for more information about public company expenses, approaching the issue from two perspectives: disaggregation of income statement expenses and segment reporting. More specifically, this week FASB published a proposed Accounting Standards Update intended to provide investors with more decision-useful information about expenses on the income statement. According to the press release announcing the proposed ASU, investors have said that more detailed information about a company’s expenses “is critically important to understanding a company’s performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies.” In addition, last week, FASB made a tentative decision to go forward with new requirements for enhanced disclosure about segment expenses and other segment items, and directed the staff to draft a final ASU for vote by written ballot. FASB had previously explained that investors find segment information to be critically important to understanding a company’s different business activities, as well as its overall performance and potential future cash flows. Although financial statements do provide information about segment revenue and a measure of profit or loss, not much information is disclosed about segment expenses.
Nasdaq proposes listing rule changes related to reverse stock splits
Nasdaq has filed with the SEC a proposed rule change to establish listing standards related to notification and disclosure of reverse stock splits. According to Nasdaq, the volume of reverse splits has increased substantially from 94 in 2020 and 31 in 2021 to 164 reverse stock splits—just as of June 23, 2023. In most cases, Nasdaq observes, the purpose of the reverse splits is to comply with Nasdaq’s $1 minimum bid price requirement to remain on the Capital Market tier. In light of this increased volume, Nasdaq is proposing amendments to its listing rules to “enhance the ability for market participants to accurately process these events, and thereby maintain fair and orderly markets.” Failure to comply could result in a trading halt.
SEC adopts final rules on cybersecurity disclosure [UPDATED]
[This post revises and updates my earlier post primarily to provide a more detailed discussion of the contents of the adopting release.]
At an open meeting on Wednesday last week, the SEC voted, three to two, to adopt final rules on cybersecurity disclosure. In his statement at the open meeting, Commissioner Jaime Lizárraga shared the stunning statistics that, last year, 83% of companies experienced more than one data breach, with an average cost of in the U.S. of $9.44 million; breaches increased 600% over the last decade and total costs across the U.S. economy could run as high as trillions of dollars per year. Given the ubiquity, frequency and complexity of these threats, in March last year, the SEC proposed cybersecurity disclosure rules intended to help shareholders better understand cybersecurity risks and how companies are managing and responding to them. Although a number of changes to the proposal were made in the final rules in response to objections that the proposal was too prescriptive and could increase companies’ vulnerability to cyberattack, the basic structure remains the same, with requirements for both material incident reporting on Form 8-K and periodic disclosure of material information regarding cybersecurity risk management, strategy and governance. According to SEC Chair Gensler, “[w]hether a company loses a factory in a fire—or millions of files in a cybersecurity incident—it may be material to investors….Currently, many public companies provide cybersecurity disclosure to investors. I think companies and investors alike, however, would benefit if this disclosure were made in a more consistent, comparable, and decision-useful way. Through helping to ensure that companies disclose material cybersecurity information, today’s rules will benefit investors, companies, and the markets connecting them.”
SEC adopts final rules on cybersecurity disclosure
In remarks to the audience at a Financial Times summit earlier this month, Gurbir Grewal, SEC Director of Enforcement, citing a recent poll from Deloitte, observed that over “a third of executives reported that their organization’s accounting and financial data was targeted by cyber adversaries last year.” As threats increase, Grewal maintained, cybersecurity is “foundational to maintaining the integrity of not just our securities markets, but our economy as a whole.” (See this PubCo post.) Similarly, in remarks in January 2022, SEC Chair Gary Gensler suggested that the economic cost of cyberattacks could possibly be in the trillions of dollars, taking many forms, including denials-of-service, malware and ransomware. It’s also a national security issue. He reminded us that “cybersecurity is a team sport,” and that the private sector is often on the front lines. And, in his statement at the SEC open meeting yesterday morning, Commissioner Jaime Lizárraga shared the eye-opening stats that, last year, 83% of companies experienced more than one data breach, with an average cost of in the U.S. of $9.44 million; breaches increased 600% over the last decade. Given the ubiquity, frequency and complexity of these threats, in March last year, the SEC proposed cybersecurity disclosure rules intended to help shareholders better understand cybersecurity risks and how companies are managing and responding to them. At an open meeting yesterday morning, the SEC voted, three to two, to adopt final rules on cybersecurity disclosure. Although a number of changes to the proposal were made in response to comments, the basic structure remains the same in the final rules, with requirements for both material incident reporting on Form 8-K and periodic disclosure of material information regarding cybersecurity risk management, strategy and governance. According to Gensler, “[w]hether a company loses a factory in a fire—or millions of files in a cybersecurity incident—it may be material to investors….Currently, many public companies provide cybersecurity disclosure to investors. I think companies and investors alike, however, would benefit if this disclosure were made in a more consistent, comparable, and decision-useful way. Through helping to ensure that companies disclose material cybersecurity information, today’s rules will benefit investors, companies, and the markets connecting them.”
House Republicans want to restructure the SEC…and sack the Chair
Some Republican House members are proposing a bill to “stabilize” the SEC, the SEC Stabilization Act (H.R. 4019). What do they mean by that? First and foremost would be removal of the current “tyrannical”—their word, not mine—SEC Chair, Gary Gensler, “following his long series of abuses that have been permitted under the current SEC structure,” according to the bill sponsor’s press release. (Hmmm, was that just performative?) The actual bill would establish the office of Executive Director and implement a structure similar to that of the bipartisan Federal Election Commission, increasing the size of the SEC to six, with an even party split, thus “protecting U.S. capital markets from any future destabilizing political agenda”—or ensuring permanent gridlock, depending on your point of view.
GAO reports on conflict minerals compliance in 2022
The GAO has just issued its 2022 Report on Conflict Minerals, which examines companies’ conflict minerals compliance in 2022. As you probably know, the SEC’s conflict minerals rules were originally mandated by Congress in an attempt to limit the use of revenue from the trade in conflict minerals to fund the operations of armed groups in the DRC and adjoining countries. Under Dodd-Frank, the GAO is required to assess periodically the effectiveness of the SEC’s conflict minerals rules in promoting peace and security in the DRC region. Are the SEC’s rules having any impact? Based on this report, it seems that the violence in the DRC has not abated: “overall peace and security in the eastern DRC has not improved since 2014 because of persistent, interdependent factors that fuel violence by non-state armed groups.” In 2020, the GAO reports, about 122 armed groups operated in the region, using revenue from the trade in conflict minerals as one source of funding. Experts view corruption as a contributing factor. The GAO observes that, in 2022, “armed groups continue to raise revenue from various sources, such as illegal taxation on citizens and the exploitation of natural resources,” such as conflict minerals.
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