Category: ESG
More prescriptive proposals, less support for 2022 proxy season
This proxy season, companies saw more shareholder proposals than in the past, a change that has been widely attributed to actions by the SEC and its Division of Corporation Finance that had the effect of making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. As discussed in this article in the WSJ, investors are taking the opportunity to press for more changes at companies. Nevertheless, the prescriptive nature of many of the proposals, especially climate-related proposals, has prompted many shareholders, including major asset managers, to vote against these proposals. Will next season reflect lessons learned by shareholder proponents from this proxy season?
How are boards addressing sustainability?
With regulators in the U.S. and around the world looking hard at the possibility of imposing sustainability disclosure requirements, and investors and other stakeholders continuing to focus on sustainability in their engagements with companies—according to a PwC survey, “ESG is the topic investors most want to discuss during engagements with shareholders”—one question that arises is just what corporate boards are doing to deal with sustainability—what are their attitudes and commitments? Are they even prepared to address sustainability issues? In an article reporting on a 2022 survey by consulting firm Russell Reynolds (published on the Harvard Law School Forum on Corporate Governance), the firm tried to answer these questions. One conclusion from the survey: “Rather than having a sole ‘ESG director’ or ‘sustainability director,’ expectations are increasing for the entire board to bring a minimum level of sustainability awareness—if not expertise—to their work, using it to identify both risks and new opportunities for value creation.”
SEC proposes to narrow three substantive exclusions in the shareholder proposal rule
[This post revises and updates my earlier post on this topic primarily to reflect the contents of the proposing release.]
At an open meeting last week, the SEC voted, three to two, to propose new amendments to Rule 14a-8, the shareholder proposal rule. Under Rule 14a-8, a shareholder proposal must be included in a company’s proxy materials “unless the proposal fails to satisfy any of several specified substantive requirements or the proposal or shareholder-proponent does not satisfy certain eligibility or procedural requirements.” The SEC last amended Rule 14a-8 in 2020 to, among other things, raise the eligibility criteria and resubmission thresholds. The SEC is now proposing to amend three of the substantive exclusions on which companies rely to omit shareholder proposals from their proxy materials: Rule 14a-8(i)(10), the “substantial implementation” exclusion, would be amended to specify that a proposal may be excluded as substantially implemented if “the company has already implemented the essential elements of the proposal.” Rule 14a-8(i)(11), the “substantial duplication” exclusion, would be amended to provide that a shareholder proposal substantially duplicates another proposal previously submitted by another proponent for a vote at the same meeting if it “addresses the same subject matter and seeks the same objective by the same means.” Rule 14a-8(i)(12), the resubmission exclusion, would be amended to provide that a shareholder proposal would constitute a “resubmission”—and therefore could be excluded if, among other things, the proposal did not reach specified minimum vote thresholds—if it “substantially duplicates” a prior proposal by “address[ing] the same subject matter and seek[ing] the same objective by the same means.” The SEC indicates that almost half of the no-action requests the staff received under Rule 14a-8 in 2021 were based on these three exclusions. In his statement, SEC Chair Gary Gensler indicated that the proposed amendments would “improve the shareholder proposal process” by providing “greater certainty as to the circumstances in which companies are able to exclude shareholder proposals from their proxy statements.” In the proposing release, the SEC contends that the amendments “are intended to improve the shareholder proposal process based on modern developments and the staff’s observations” and “would facilitate shareholder suffrage and communication between shareholders and the companies they own, as well as among a company’s shareholders, on important issues.” Notably, however, the two dissenting commissioners seemed to view the proposed changes—even though they stop well short of revamping the 2020 eligibility criteria and resubmission thresholds—as an effort to undo or circumvent the balance achieved by the 2020 amendments without actually modifying those aspects of the rules. For example, new Commissioner Mark Uyeda said that the proposed amendments could “effectively nullify the 2020 amendments to the resubmission exclusion and render this basis almost meaningless.”
Will U.S. companies face ESG reporting requirements in the EU?
Some U.S. companies may well have to report on ESG—even if the SEC takes no action on climate or other ESG disclosure proposals! How’s that? According to this press release from the Council of the European Union, the Council and the European Parliament reached a provisional agreement last week on a corporate sustainability reporting directive (CSRD) that would require more detailed reporting on “sustainability issues such as environmental rights, social rights, human rights and governance factors.” The provisional agreement is subject to approval by the Council and the European Parliament. The press release indicates that the requirements would apply to all large companies and all companies listed on regulated markets, as well as to listed small- to medium-size companies (“taking into account their specific characteristics”). Importantly, for companies outside the EU, “the requirement to provide a sustainability report applies to all companies generating a net turnover of €150 million in the EU and which have at least one subsidiary or branch in the EU. These companies must provide a report on their ESG impacts, namely on environmental, social and governance impacts, as defined in this directive.”
Is buying a carbon offset like buying a medieval indulgence?
At a recent meeting of the SEC’s Investor Advisory Committee discussing the SEC’s climate disclosure proposal, a speaker in charge of ESG investing at an asset manager raised the possible risk that companies, faced with a disclosure mandate, would just buy carbon offsets to satisfy investors that they are making progress toward their climate goals. His firm, he said, has been seeing this phenomenon occur, but he thought that the practice could lead to poor outcomes. Companies would probably experience better outcomes, he advised, if they first considered spending those same funds on investments that would actually reduce their carbon footprints. (See this PubCo post. ) What’s that about? While many experts view carbon offsets as essential ingredients in the recipe for net-zero, some commentators worry that they are just part of a “well-intentioned shell game” or perhaps, less generously, a “racket with trees being treated as hostages”? And some think both concepts—essential and racket—may be true in some cases at the same time. Are carbon offsets effective or are they just a way to assuage, as the NYT phrases it, “carbon guilt”?
SEC Commissioners Lee and Crenshaw want more assurance on Scope 3
While the proposed requirement to disclose material Scope 3 greenhouse gas emissions seems to be one of the most contentious—if not the most contentious—element of the SEC’s climate disclosure proposal (see this PubCo post and this PubCo post), two of the SEC’s Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw, told Bloomberg that they think it still doesn’t go far enough. They are advocating that Scope 3 GHG emissions data be subject to attestation—like the proposed requirement for Scopes 1 and 2—to ensure that it is reliable. This discussion might just be a continuation—or perhaps a reinvigoration—of an internal debate that reportedly led to delays in issuing the proposal to begin with. As previously discussed in this PubCo post, the conflicts were reportedly between SEC Chair Gary Gensler and the two other Democratic Commissioners, Lee and Crenshaw, about how far to push the proposed new disclosure requirements, especially in light of the near certainty of litigation. One major issue at the time, Bloomberg reported, was whether to mandate disclosure of Scope 3 GHG emissions, which, some companies contended, is not under their control and “unfairly makes companies vulnerable to shareholder lawsuits and government enforcement actions.” Another major point of contention was reportedly was whether to require that auditors sign off on the emissions disclosures. The current proposal may reflect a compromise on these issues, but apparently one that does not sit comfortably with Lee and Crenshaw.
SEC’s Investor Advisory Committee hears about non-traditional financial information and climate disclosure
Last week, at a meeting of the SEC’s Investor Advisory Committee, the Committee heard from experts on two topics: accounting for non-traditional financial information and climate disclosure. Interestingly, two of the speakers on the first panel are among the eight new members just joining the Committee. In his opening remarks, with regard to non-traditional financial information, SEC Chair Gary Gensler characterized the discussion as “an important conversation as we continue to evaluate types of information relevant to investors’ decisions. Whether the information in question is traditional financial statement information, like components in an income statement, balance sheet, or cash flow statement, or non-traditional information, like expenditures related to human capital or cybersecurity, it’s important that issuers disclose material information and that disclosures are accurate, not misleading, consistently applied, and tied to traditional financial information.” With regard to climate disclosure, Gensler returned to his theme that the SEC’s new climate disclosure proposal is simply part of a long tradition of expanded disclosures, addressing the topic of “a conversation that investors and issuers are having right now. Today, hundreds of issuers are disclosing climate-related information, and investors representing tens of trillions of dollars are making decisions based on that information. Companies, however, are disclosing different information, in different places, and at different times. This proposal would help investors receive consistent, comparable, and decision-useful information, and would provide issuers with clear and consistent reporting obligations.” In her opening remarks, SEC Commissioner Hester Peirce asked the Committee to “consider whether our proposed climate disclosure mandate would change fundamentally this agency’s role in the economy, and whether such a change would benefit investors. Are these disclosure rules designed to elicit disclosure or to change behavior in a departure from the neutrality of our core disclosure rules?”
Is expertise trouncing strategy? The Conference Board reports on board experience and diversity
In a recent report, Board Composition: Diversity, Experience, and Effectiveness, The Conference Board explores the implications for board composition of current trends toward ESG expertise and board diversity, together with the continuing emphasis on ensuring the right mix of skills and experience. This expanding list of priorities has led to increased diversity disclosure as well as greater functional expertise, larger boards and enhanced needs for board education. But while there has been a significant increase in disclosure regarding board diversity, that increase “has not been matched by increases in racial/ethnic diversity.” One cautionary note from the report: as boards seek to recruit more directors with functional expertise, such as cybersecurity or climate, the proportion of board members with business strategy experience has declined. For example, among companies in the Russell 3000, the percentage of directors with experience in business strategy decreased by five percentage points in the last three years. According to the Executive Director of the ESG Center at The Conference Board, the “recent decline in board members with business strategy experience is worrisome. Directors without broad strategic experience risk hindering effective board discussions and will likely be less useful partners for management….Although boards may want to add functional experience…, directors can bring meaningful value only if they can make the connection between these functional areas and business strategy.”
After dam collapse, SEC alleges false safety claims in sustainability reports and SEC filings
As described in this press release, the SEC has filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. According to Gurbir Grewal, Director of Enforcement, “[m]any investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions….By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.” Notably, the press release refers to the SEC’s Climate and ESG Task Force formed last year in the Division of Enforcement “with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by Vale.” The SEC’s charges arising out of this horrific accident are a version of “event-driven” securities litigation—brought this time, not by shareholders, but by the SEC.
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