Category: ESG
SEC to scrutinize company accounting for impact of climate
In February, then-Acting SEC Chair Allison Lee directed the staff of Corp Fin, in connection with the disclosure review process, to “enhance its focus on climate-related disclosure in public company filings,” starting with the extent to which public companies address the topics identified in the interpretive guidance the staff issued regarding climate change in 2010. (See this PubCo post.) In March, the SEC announced the creation of a new Climate and ESG Task Force in the Division of Enforcement. (See this PubCo post.) How else does this new ESG focus play out? On Wednesday, Bloomberg reported, Lindsay McCord, Corp Fin Chief Accountant, in remarks to the Baruch College spring financial reporting conference, said that the SEC staff are also “scrutinizing how public companies account for climate-related risks and impacts to their business based on existing accounting rules.” So, in addition to refreshing their understandings of the 2010 guidance, companies will also need to take a hard look at the how environmental issues could affect their financials.
Not much data disclosed on human capital, according to new survey
When, in August 2020, the SEC considered adopting a new requirement to discuss human capital as part of an overhaul of Regulation S-K, the debate centered largely on principles-based versus prescriptive regulation—a debate that continues to this day. In that instance, notwithstanding a rulemaking petition and clamor from numerous institutional and other investors for transparency regarding workforce composition, health and safety, living wages and other specifics, the “principles-based” team carried the day; the SEC limited the requirement to a “description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).” What was the result? In this new Human Capital Disclosure Report: Learning on the Job, Intelligize took a look at how companies responded to the new disclosure mandate. Its conclusion: most companies made a “sincere effort to fulfill the scantly defined disclosure obligation”; nevertheless, the report contends, companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand.”
Happy Earth Day!
Climate Action 100+ reports that, last year, there were 22 climate-related weather disasters in the U.S. that “each caused more than $1 billion in damages—far and away a record. To investors, climate change poses not only physical risks of damage to assets, supply chains and infrastructure but also transitional risk if portfolio companies do not adjust rapidly enough as the economy decarbonizes and systemic risk posed to the entire economy.” According to environmental nonprofit Ceres, as of April 21, 408 businesses and investors “with a footprint” in the U.S. have signed an open letter to the President indicating their support for the administration’s commitment to climate action and for setting a new climate target to reduce emissions. The signatories collectively represent over $4 trillion in annual revenue, over $1 trillion in assets under management and employ over 7 million U.S. workers across all 50 states. The letter states that to “restore the standing of the U.S. as a global leader, we need to address the climate crisis at the pace and scale it demands. Specifically, the U.S. must adopt an emissions reduction target that will place the country on a credible pathway to reach net-zero emissions by 2050. We, therefore, call on you to adopt the ambitious and attainable target of cutting GHG emissions by at least 50% below 2005 levels by 2030.” As reported by the NYT and others, the President announced today that the U.S. is setting a new climate target with a goal of reducing U.S. emissions by 50% to 52% below 2005 levels by 2030. The target “calls for a steep and rapid decline of fossil fuel use in virtually every sector of the American economy and marks the start of what is sure to be a bitter partisan fight over achieving it.”
Can SEC Commissioner Hester Peirce avert adoption of ESG metrics?
It’s widely anticipated that we’ll soon be seeing more action from the SEC on sustainability disclosure, including possibly a prescriptive ESG framework that draws on some global metrics. (See, e.g., this PubCo post and this PubCo post.) Trying to head those prescriptive ESG metrics off at the pass is Commissioner Hester Peirce—yes, she who once described “ESG” as standing for “enabling shareholder graft”—in her statement, Rethinking Global ESG Metrics. With Gary Gensler now sworn in as SEC Chair, the revised composition of the SEC does not bode well for Peirce’s mission. Peirce concludes her statement with the admonition, “[l]et us rethink the path we are taking before it is too late.” But has the train already left that station?
What’s ahead for this proxy season?
Alliance Advisors, a proxy solicitation and corporate advisory firm, has just posted its 2021 Proxy Season Preview, a useful introduction into the major themes of this season—well worth a read. First, and most obviously, there is COVID-19 and its direct and indirect impact. The pandemic is having a significant direct impact this year—not just in necessitating recourse to virtual-only annual meetings again this season—but also in focusing the attention of investors and proxy advisors on “how well corporate leaders navigated the crisis and protected business operations, liquidity and the health and welfare of employees.” But the pandemic has also had a somewhat surprising broader indirect impact. While it was widely anticipated that the challenges of COVID-19 would overwhelm any other concerns, the impact appears to be otherwise, as the pandemic has highlighted our increasingly precarious condition, including the effects of climate change, and intensified our social and economic inequality—all issues that are front and center this season. The Preview predicts that environmental and social proposals “are likely to see stronger levels of support in view of last year’s record 21 majority votes… and more assertive investor policies on diversity, climate change and political spending.”
How do we incorporate ESG factors into incentive compensation?
In BlackRock Investment Stewardship’s recent commentary, BIS observed that ESG-related metrics have increasingly been incorporated as performance measures in companies’ incentive plans. BIS cited a recent study from the GECN Group, which showed that 67% of companies in the study used ESG measures (but only 56% in the U.S. alone) and that COVID-19 had accelerated the incorporation of ESG factors into incentive plans. Importantly, however, BIS cautioned that, to the extent that companies included sustainability metrics in their incentive plans, they should “be material and aligned with a company’s long-term strategy. It is important that companies using sustainability performance metrics explain carefully the connection between what is being measured and rewarded alongside business goals and long-term performance. Failure to do so may leave companies vulnerable to reputational risks and undermine their sustainability efforts.” How do companies determine which sustainability objectives are most material for them, and how do they transform those goals into measures for purposes of incentive compensation? This new article from consultant Semler Brossy offers some advice. What is the overarching message? “Move carefully, but move.”
SEC’s Asset Management Advisory Committee considers ESG recommendations
On Friday, the SEC’s Asset Management Advisory Committee met to discuss various matters, including possible recommendations to the SEC regarding—what else?—ESG. The latest version of subcommittee draft recommendations do not advocate a change from the current materiality disclosure requirements. Rather, they support adoption of mandatory standards to guide those materiality requirements, standards that take a “parsimonious” approach with a limited number of material metrics by industry—not exactly the “comprehensive” direction that the SEC appears to be headed, at least at the moment. Although the recommendations address investment product disclosure, the focus at the meeting was primarily on company ESG disclosure as the necessary predicate to investment product disclosure. Accordingly, the Committee heard from a panel of issuer representatives, who expressed a variety of views, but on the whole, appeared to advocate a cautious approach.
Acting SEC Chair Lee discusses a new direction for the SEC on ESG
Elections have consequences, as they say, and one of those consequences is new leadership at the SEC who bring with them a markedly different agenda. In remarks yesterday to the Center for American Progress, entitled A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC, Acting SEC Chair Allison Lee provided important insights into where the SEC is headed with regard to environmental, social and governance issues. As Lee confirmed in the introduction to her speech, “no single issue has been more pressing for [her] than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy.” Investors are not getting the information they need, and that’s why the SEC has “begun to take critical steps toward a comprehensive ESG disclosure framework.” In addition, she has directed Corp Fin to revisit the shareholder proposal process and is also considering whether the SEC should establish a dedicated ESG standard setter. According to Lee, “climate and ESG are front and center for the SEC.”
The Shareholder Commons offers a new approach to ESG activism
Environmental, social and governance activism continues to adopt new approaches. One of the latest is from The Shareholder Commons, a non-profit organization founded by CEO Rick Alexander—you might recognize the name from B-Lab and Morris Nichols in Delaware—that uses “shareholder activism, thought leadership, and policy advocacy to catalyze systems-first investing and create a level playing field for sustainable competition.” In essence, TSC seeks to shift the focus from the impact of a company’s activities and conduct on its own financial performance to “systemic portfolio risk,” the impact of the company’s activities and conduct on society, the environment and the wider economy as a whole, which would affect most investment portfolios. In particular, the group has helped with submission of a number of shareholder proposals that address issues in its sweet spot—influencing corporate behavior regarding social and environmental systems that affect the economy as a whole. This season, the proposals have advocated conversion to public benefit corporations (see this PubCo post), disclosure of reports on the external public health costs created by the subject company’s retail food business, studies on the external costs resulting from underwriting of multi-class equity offerings, and reports on the external social costs (e.g., inequality) created by the company’s compensation policy. Earlier this year, TSC, working with a long-term shareholder, submitted a shareholder proposal to Yum! Brands, asking the company to disclose a study on “the external environmental and public health costs created by the use of antibiotics in the supply chain of [the] company… and the manner in which such costs affect the vast majority of its shareholders who rely on a healthy stock market.” TSC has just announced that it has withdrawn its proposal because Yum! has agreed to “provide comprehensive reporting on the systemic effects of the use of antibiotics in its supply chain by the end of 2021.”
New Enforcement Task Force on Climate and ESG
Last week, Allison Lee, Acting Chair of the SEC, directed the staff of Corp Fin to “enhance its focus on climate-related disclosure in public company filings.” Yesterday, the SEC announced that the new climate focus would not be limited to Corp Fin—the SEC has created a new Climate and ESG Task Force in the Division of Enforcement. According to the press release, the initial focus of the Task Force will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules, giving us all another reason to excavate the staff’s 2010 interpretive guidance regarding climate change. (You may recall that the guidance addressed in some detail how existing disclosure obligations, such as the Reg S-K requirements for business narrative and risk factors, could apply to climate change. See this PubCo post.) Apparently, however, the remit of the Task Force goes beyond climate to address other ESG issues. Lee said that the Task Force is designed to bolster the efforts of the SEC as a whole in addressing climate risk and sustainability, which “are critical issues for the investing public and our capital markets.”
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