Category: ESG
Fifth Circuit dismisses NCPPR appeal of Corp Fin’s Rule 14a-8 no-action relief
You might recall that, in 2023, the National Center for Public Policy Research submitted a shareholder proposal to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, NCPPR petitioned the Fifth Circuit for review. The SEC moved to dismiss the appeal. But after the NCPPR filed its appeal, Kroger filed its proxy materials with the SEC and included the NCPPR proposal in the proxy materials to be submitted for a shareholder vote. The proposal received less than two percent of the vote. Now, a three-judge panel of the Fifth Circuit has issued its opinion, dismissing the case for lack of jurisdiction; Judge Edith Jones dissented.
Court denies Chamber’s motion for summary judgment that California climate disclosure laws violate First Amendment
Given the impending change in Administration in D.C.—and all that portends for regulation—the States may, in many ways, take on much larger significance. Case in point: California’s climate disclosure laws and the ongoing litigation challenges there. In January, the U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others filed a complaint (and in February, an amended complaint) against two executives of the California Air Resources Board and the California Attorney General challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded under the Supremacy Clause by the Clean Air Act, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws. (See this PubCo post.) California then filed a motion to dismiss the amended complaint for lack of subject matter jurisdiction and failure to state a claim. Interestingly, however, the motion did not seek dismissal of Plaintiffs’ First Amendment claim (except as to the Attorney General, whom the motion seeks to exclude altogether on the basis of sovereign immunity), even though California asserted that Plaintiffs’ First Amendment challenge was “legally flawed.” The Plaintiffs then moved for summary judgment on the First Amendment claim, and California moved to deny that motion or to defer it, enabling the parties to conduct discovery. In this Order, issued on election day, the Federal District Court for the Central District of California denied Plaintiffs’ motion to dismiss and granted California’s motion to deny or defer the motion for summary judgment.
What’s happening with political spending disclosure and accountability?
In this fraught election season and just before tomorrow’s important election day, the Center for Political Accountability has released its annual study, The 2024 CPA-Zicklin Index of Corporate Political Disclosure and Accountability. The report concludes that, overall, leading companies in the S&P 500 have been maintaining “established norms of political disclosure and accountability.” And “companies are not backsliding,” with improvements showing throughout the Index. In 2016, the report discloses, “there were roughly three bottom-tier core companies for every two top-tier core companies. In 2024, over five times as many core companies placed in the top tier as in the bottom.” And keep in mind that those norms have held firm even in the face of “fierce headwinds” against ESG for U.S. companies. In the foreword to the report, former SEC Commissioner Robert Jackson, Jr. writes: “At a moment when our nation is narrowly divided on so much, nearly 90% of Americans agree that corporations should disclose to investors their use of corporate money on politics—even more than the 73% who took that view in 2006. The decades since have seen a financial crisis, a global pandemic and three Presidencies. Those events, and more, have divided voters. Yet the American people have grown even more firm in their conviction that, when corporations participate in the nation’s politics, it is incumbent upon those companies to carefully consider, and explain to investors, how and why they do so.” As Jackson observes, “today, more than 20% of S&P 500 firms scored 90% or above on the Index’s accountability measures, nearly double the number from 2016,” reflecting recognition of “the benefits of independent oversight, careful controls, and transparency.” This information, he maintains, is important for investors to enable them “to decide whether, and how, to invest in American public companies.”
Be sure to VOTE! Election day is tomorrow!
PwC’s 2024 Corporate Directors’ Survey—how are boards addressing the current uncertainty?
The title of PwC’s new 2024 Corporate Directors’ Survey, Uncertainty and transformation in the modern boardroom, might clue you in to one of its themes: uncertainty—anxiety?—arising out of the looming election. According to PwC, the “2024 election matters more than usual. Not only is the American electorate more polarized than anytime in modern history—making corporate leaders’ every statement and decision subject to public criticism—the results could rapidly reshape the business landscape. Which political party emerges victorious in November, in the White House and/or the houses of Congress, may prove enormously consequential for how every industry functions. The impacts could be dramatic.” We may see policy changes on “tariffs, sanctions, treaties and alliances” that might “upend international trade and disrupt supply chains.” We could see revised tax policy and enforcement priorities, transformed attitudes toward DEI and ESG programs, different views on antitrust enforcement, immigration and possibly, “most significant for many industries, the incentives that have fueled recent sustainability investments could grow further—or be diminished.” That makes “a board’s ability to be agile and stay current in the face of uncertainty” more important than ever. To assess the state of current boardrooms, PwC surveyed 500 public company directors, concluding that boards just might be evolving “too slowly to effectively meet the challenges facing companies today and tomorrow, irrespective of potential political disruptions.” PwC attempts to understand what is driving the results and recommends approaches to addressing the issues.
Are ESG performance metrics in comp plans just a layup with little impact?
There’s been a lot of attention lately to the use of ESG metrics as incentives in executive compensation, perhaps because the concept of ESG has become something of a lightning rod in the political landscape—particularly given the fallout from recent court decisions on diversity as well as escalating activity by anti-ESG groups. As discussed below, consultants have found that the use of ESG metrics seems to have levelled out, as some institutional investors have begun to view them cautiously and some academics studies have questioned their rigor and even their benefit. Companies employing ESG metrics as part of their comp plans may want to consider some of the issues raised by these studies, such as level of challenge and transparency, in designing their ESG metrics.
In new GAO report, some distressing news about SEC’s conflict minerals rules and violence in DRC
“Conflict Minerals—Peace and Security in Democratic Republic of the Congo Have Not Improved with SEC Disclosure Rule.” That is the title of the final required report of the U.S. Government Accountability Office, the last of 17 reports provided in response to the statutory mandate of the 2010 Dodd-Frank Act. As you probably know, the SEC’s conflict minerals rules were originally mandated by Congress in Section 1502 of Dodd-Frank in an attempt to limit the use of revenue from the trade in conflict minerals to fund the operations of armed groups that have wreaked violence 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. While the blunt conclusions of this year’s report are, to say the least, very discouraging—even devastating—on so many levels, they should not come as a complete surprise: in 2022, the GAO also reported that the violence in the DRC had not abated: “overall peace and security in the region has not improved since 2014 because of persistent, interdependent factors that fuel violence by non-state armed groups.” (See this PubCo post.) But that assessment was not showcased in the title as it is this year. This time, as Liz Dunshee so aptly phrased it on thecorporatecounsel.net, the report “did not bury the lede.” This year, the GAO found that, not only had the rule not curtailed the level of violence in the DRC, in some areas, the rule was actually associated with a spread of violence. That is, if the report’s findings are accurate, not only are we not helping the problem; in some contexts, such as gold mining, we’re actually exacerbating it. It’s worth noting that, as the GAO reports, the “SEC disagreed with some of GAO’s findings and raised concerns about some of its methodology and analyses. In response, GAO made certain adjustments that did not materially affect its findings.” Will the disturbing conclusions of the report propel Congress to reexamine Section 1502?
SEC’s Investor Advisory Committee discusses tracing in §11 litigation and shareholder proposals—will they recommend SEC action?
Last week, at the SEC’s Investor Advisory Committee meeting, the Committee discussed two topics described as “pain points” for investors: tracing in §11 litigation and shareholder proposals. In the discussion of §11 and tracing issues, the presenting panel made a strong pitch for SEC intervention to facilitate tracing and restore §11 liability following Slack Technologies v. Pirani. The panel advocated that the Committee make recommendations to the SEC to solve this problem. With regard to shareholder proposals, the Committee considered whether the current regulatory framework appropriately protected investors’ ability to submit shareholder proposals or did it result in an overload of shareholder proposals? Was Exxon v. Arjuna a reflection of exasperation experienced by many companies? No clear consensus view emerged other than the desire for a balanced approach and a stable set of rules. Recommendations from SEC advisory committees often hold some sway with the staff and the commissioners, so it’s worth paying attention to the outcome here.
ICYMI—Say goodbye to the SEC’s Climate and ESG Task Force
In case it escaped your notice a few months back—as it did mine—Bloomberg is now reporting that the SEC has “quietly disbanded” its Enforcement Division’s Climate and ESG Task Force. You remember the task force? Back in 2021, when Allison Herren Lee was Acting Chair of the SEC, she directed the staff of Corp Fin to “enhance its focus on climate-related disclosure in public company filings.” Shortly thereafter, the SEC announced that the new climate focus would not be limited to Corp Fin—the SEC had created a new Climate and ESG Task Force in the Division of Enforcement. While the initial focus of the Task Force was to identify any material gaps or misstatements in issuers’ disclosure of climate risks under then-existing rules, the remit of the Task Force went beyond climate to address other ESG issues. Lee said that the Task Force was designed to bolster the efforts of the SEC as a whole in addressing climate risk and sustainability, which were “critical issues for the investing public and our capital markets.” (See this PubCo post.) Now, an SEC spokesperson has advised Bloomberg that it has “shut down its Enforcement Division’s Climate and ESG Task Force within the past few months.”
Keurig settles SEC “greenwashing” charges
According to a 2023 survey discussed in Global Executives Say Greenwashing Remains Rife in the WSJ, executives think greenwashing is widespread: almost “three-quarters of executives said most organizations in their industry would be caught greenwashing if they were investigated thoroughly.” Moreover, almost “60% say their own organization is overstating its sustainability methods.” However, the article suggested, although some companies may be intentionally overstating their progress, for the most part, the greenwashing is more benign: companies set their sustainability goals but didn’t have a “concrete plan” to achieve them or reliable data to measure them. According to the survey, 85% of executives believe that “customers and clients are becoming more vocal about their preference for engaging with sustainable brands,” creating more impetus for sustainability initiatives. By the same token, these external influences also create more pressure for greenwashing. The article reports that the risks related to greenwashing are increasing, with the threat of potential “crackdowns.” (See this PubCo post.) Last week, the SEC charged Keurig Dr Pepper with making inaccurate statements in its Forms 10-K for fiscal 2019 and 2020 regarding the recyclability of its K-Cup beverage pods used to make coffee and other beverages in Keurig’s single-serve brewing systems. According to the Associate Director of the SEC’s Boston Regional Office, “Public companies must ensure that the reports they file with the SEC are complete and accurate….When a company speaks to an issue in its annual report, they are required to provide information necessary for investors to get the full picture on that issue so that investors can make educated investment decisions.” To settle the SEC’s charges, Keurig agreed to pay a $1.5 million civil penalty. Commissioner Hester Peirce had a few words to say in dissent.
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