Category: ESG
Acting SEC Chair directs Corp Fin to focus on climate
Yesterday, 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.” This action should come as no surprise. As I wrote just yesterday, Lee has used almost every opportunity to emphasize the importance of the SEC’s taking action to mandate climate risk disclosure. (See, for example, this NYT op-ed, her remarks at PLI entitled Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation and this statement, “Modernizing” Regulation S-K: Ignoring the Elephant in the Room.”) “Now more than ever,” Lee said in her statement, “investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future.” But what will this enhanced focus on climate entail?
Advocates make their voices heard on mandatory climate disclosure
Is mandatory climate risk disclosure a done deal yet? Acting SEC Chair Allison Lee has taken almost every opportunity to emphasize the importance of the SEC’s taking action to mandate climate risk disclosure. (See, for example, this NYT op-ed, her remarks at PLI entitled Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation and this statement, “Modernizing” Regulation S-K: Ignoring the Elephant in the Room.”) And now, according to Reuters, Acting Corp Fin Director John Coates remarked during a conference on climate finance that the SEC “‘should help lead’ the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations.” But how to craft the new rules? With the new Administration in Washington, many of the think tanks and advocacy groups are making their voices heard on just that—crafting mandatory climate disclosure regulations. The reports of two are discussed below; there are definitely some common threads, such as the need for the SEC to onboard climate expertise and organize a platform or two for stakeholder input. Their recommendations may also provide some ideas for voluntary compliance and some insight into the direction the SEC may be going.
BlackRock details its climate expectations
In his 2021 letter to CEOs, BlackRock CEO Laurence Fink asked companies to disclose a “plan for how their business model will be compatible with a net zero economy”—that is, “one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC.” (See this PubCo post.) Now BlackRock Investment Stewardship has posted a powerpoint presentation that sets out BIS’s expectations in greater detail. The presentation concludes with a caution that, “where corporate disclosures are insufficient to make a thorough assessment, or a company has not provided a credible plan to transition its business model to a low-carbon economy, including short- medium- and long-term targets, we may vote against the directors we consider responsible for climate risk oversight.”
BlackRock CEO’s big ask for 2021
In his 2020 annual letter to CEOs, Laurence Fink, CEO and Chair of BlackRock, the world’s largest asset manager, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” According to Fink’s letter, “[c]limate change has become a defining factor in companies’ long-term prospects.” What’s more, he made it clear that companies need to step up their games when it came to sustainability disclosure. (See this PubCo post.) At the Northwestern Law Securities Regulation Institute this week, former SEC Chair Mary Schapiro said that, at companies where she was on the board, Fink’s statement had “an enormous impact last year.” Fink has just released his 2021 letter to CEOs, in which he asks companies to disclose a “plan for how their business model will be compatible with a net zero economy.” Will this year’s letter have the same impact?
In a first, a traditional corporation converts to a PBC—will it spark a trend?
For several years, we’ve witnessed a fierce debate regarding the extent to which, in making decisions, boards of traditional corporations may take into account constituencies or stakeholders other than shareholders, such as employees and the larger community, or must consider only the impact of the decision on shareholder value. In a 2014 article In the Harvard Business Law Review, then-Chief Justice Leo Strine of the Delaware Supreme Court argued forcefully that, notwithstanding the allure of “stakeholder capitalism,” current corporate accountability structures make it difficult for directors to “do the right thing.” However, he contended, there is a way to effectively shift the power balance to create incentives for good corporate citizenship: the public benefit corporation. By articulating new corporate purposes and mandates, in Strine’s view, the PBC tweaks the normal corporate accountability and incentive structure that traditionally has made corporate managers accountable to only one constituency—shareholders. (See this PubCo post.) But while there have been a few corporations willing to take the IPO plunge as PBCs, there haven’t been any that have taken the risk, as public companies, of changing to the benefit corporation form—until now that is. And what’s most intriguing is that the shareholder vote at this company in favor of becoming a PBC was overwhelming. Is there more public shareholder support for PBCs than we thought?
Do boards have enough ESG expertise?
One topic that directors were asked about in the PwC 2020 Annual Corporate Directors Survey was ESG. Although 55% of directors surveyed considered ESG issues to be a part of the board’s enterprise risk management discussions, 49% saw a link between ESG issues and the company’s strategy and 51% recognized that ESG issues were important to shareholders, directors were “not convinced that they’re connected to the company’s bottom line. Only 38% of directors say ESG issues have a financial impact on the company’s performance—down from 49% in 2019.” And only 32% thought that the board needed more reporting on ESG-related measures. Notably, 51% thought that their boards had “a strong understanding of ESG issues impacting the company.” As you may discern from its title, this study from the NYU Stern Center for Sustainable Business, U.S. Corporate Boards Suffer From Inadequate Expertise in Financially Material ESG Matters, begs to differ.
State Street expects more diversity disclosure in 2021
In his 2021 letter to directors, Cyrus Taraporevala, President and CEO of State Street Global Advisors, one of the largest institutional investors, announced SSGA’s main stewardship priorities for 2021: systemic risks associated with climate change and the absence of racial and ethnic diversity. SSGA intends, he said, “to hold boards and management accountable for progress on providing enhanced transparency and reporting on these two critical topics.” SSGA’s new voting policies reflect those intentions.
What issues should be on the 2021 audit committee agenda?
In this new Bulletin, consultant Protiviti identifies key issues for the 2021 audit committee agenda and—no surprise—at least half reflect the impact of COVID-19. The agenda includes four topics related to enterprise, process and technology risks and four related to financial reporting, with a reminder regarding ESG. Also available is an audit committee self-assessment questionnaire. The topics suggested for the audit committee agenda are summarized below.
SEC Commissioner Lee: SEC must address systemic financial risk posed by climate change
At last week’s PLI annual securities regulation institute, SEC Commissioner Allison Lee gave the keynote address, Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation. She began her remarks with the pandemic as metaphor: a global crisis that, before it struck, was “understood intellectually to be a serious risk,” but not fully appreciated as something we really needed to worry about. Now, we have experience of a crisis, no longer viewed “antiseptically through our TVs or phones, but firsthand as it unfolds in our homes, families, schools, and workplaces—not to mention in our economy. Seemingly theoretical risks have become very real.” Another dramatic risk that looms even larger with potential for more dire consequences is the topic of Lee’s remarks: climate change. According to a 2018 study by scientists in the U.K. and the Netherlands, the “point of no return” for achieving the goal of two degrees Celsius by 2100 set by the Paris Accord may arrive as soon as 2035. To be sure, the lesson from the pandemic is “not to wait in the face of a known threat. We should not wait for climate change to make its way from scientific journals, economic models, and news coverage of climate events directly into our daily lives, and those of our children and theirs. We can come together now to focus on solutions.” And while this is hardly Lee’s first rodeo when it comes to advocating that the SEC mandate climate risk disclosure, it seems much more likely now, with the imminent change in the administration in D.C., that the SEC may actually take steps toward implementing a regulatory solution.
Oversight of ESG—ten questions for boards
According to Protiviti, in 2019, 90% of companies in the S&P 500 issued separate sustainability reports—not part of SEC filings—and, as of February 2020, over 1,000 companies with an aggregate market cap of $12 trillion have endorsed the Task Force on Climate-related Financial Disclosures (TCFD) recommendations for sustainability disclosure (see this PubCo post and this PubCo post). Similarly, use of the Sustainability Accounting Standards Board (SASB) framework has increased by 180% over the last two years (see this PubCo post). With this heightened focus on sustainability, how can boards best oversee ESG? To that end, in this article, consultant Protiviti offers ten questions about ESG reporting that boards should consider with their management teams.
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