Category: ESG
SEC Chair Clayton talks about SPACs, ESG and other topics at Financial Advisor Summit
Tuesday, at the CNBC Financial Advisor Summit, SEC Chair Jay Clayton was interviewed by CNBC’s Bob Pisani, touching on a variety of issues, including SPACs, proposed changes to Form 13F, ESG ratings and investing, emerging market listings and other topics of interest. No breaking news, but some insight into the SEC’s thinking on these subjects.
World Economic Forum and Big Four present new framework for stakeholder capitalism metrics
Back in January, in Davos, the World Economic Forum International Business Council— a group of 120 of the largest businesses—together with the Big Four accounting firms, announced a new initiative “to develop a core set of common metrics to track environmental and social responsibility” and released a draft set of metrics for review and consideration. (See this PubCo post.) Last month, the final results, the IBC Stakeholder Capitalism Metrics, were presented in this whitepaper, “Measuring Stakeholder Capitalism—Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” The preface to the whitepaper observes that we are “in the midst of the most severe series of challenges the world has experienced since World War Two. The COVID-19 pandemic has exposed the fragility of our global systems. It has exacerbated underlying economic and social inequalities and is unfolding at the same time as a mounting climate crisis…. The private sector has a critical role to play.” The whitepaper is presented in that larger context, as an effort
“to improve the ways that companies measure and demonstrate their contributions towards creating more prosperous, fulfilled societies and a more sustainable relationship with our planet. It also recognizes that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable—and valuable—in the long-term. The culmination of a year’s effort from contributors on every continent, this work defines the essence of stakeholder capitalism: it is the capacity of the private sector to harness the innovative, creative power of individuals and teams to generate long-term value for shareholders, for all members of society and for the planet we share. It is an idea whose time has come.”
Quite a heavy lift. But will the framework be widely adopted?
SEC Commissioner Lee makes her case for diversity and climate disclosure
SEC Commissioner Allison Lee has been speaking up quite a bit recently about diversity and inclusion and about climate change—and not just at SEC open meetings. In her recent dissents in voting on proposals regarding amendments to Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors (see this PubCo post) and amendments to the SEC’s shareholder proposal rules (see this PubCo post), Lee did not hesitate to express her misgivings about the failure of the first proposal to mandate disclosure regarding diversity and climate change and the anticipated adverse impact of the second proposal on shareholder proposals related to ESG. In recent remarks to the Council of Institutional Investors Fall 2020 Conference, Diversity Matters, Disclosure Works, and the SEC Can Do More, and in this NYT op-ed, Lee reinforces her view that the SEC needs to do more in terms of a specific mandate for diversity and climate disclosure.
CFTC report on climate change finds major risk to financial system—advocates enhanced disclosure requirements for public companies
This blog doesn’t typically write about the goings-on at the Commodity Futures Trading Commission, but here’s an exception—especially given that its recommendations encompass the SEC. In July, the CFTC voted to establish a Climate-Related Market Risk Subcommittee, which was asked to provide a report that would “identify and examine climate change-related financial and market risks.” The Subcommittee comprised over 30 financial market participants, including members from “financial markets, the banking and insurance sectors, as well as the agricultural and energy markets, data and intelligence service providers, the environmental and sustainability public policy sector, and academic disciplines focused on climate change, adaptation, public policy, and finance.” That Report was released yesterday. What does it conclude? That “[c]limate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy,” calling for U.S. financial regulators to “move urgently and decisively to measure, understand, and address these risks.” The Report includes 53 recommendations, such as putting an “economy-wide price on carbon,” developing a strategy for integrating climate risks into the monitoring and oversight functions of financial regulators, allowing 401(k) retirement plans to use ESG factors in making investments (contrary to currently proposed controversial DOL regulations) and developing standardized classification systems for physical and transition risks. Importantly, the Report also concludes that current disclosure by U.S. companies is inadequate—in no small part because of what might be a cramped interpretation of the concept of “materiality”—and recommends, as discussed further below, that the SEC update its 2010 guidance on climate risk disclosure and impose specific climate-related disclosure requirements on public companies. Will the Report make a difference?
SEC adopts amendments to modernize Reg S-K requirements for business, legal proceedings and risk factor disclosures (UPDATED)
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
By a vote of three to two, on Wednesday, the SEC voted to adopt amendments, substantially as proposed with some modifications, to modernize the Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors. As Chair Jay Clayton observed in his Statement, these Reg S-K disclosure items “essentially have not changed in over 30 years,” but much has changed in our economy since that time, making these updates well warranted. The changes are a component of the SEC’s Disclosure Effectiveness Initiative and reflect public comments on the SEC’s 2016 Concept Release (see this PubCo post) and the 2019 Reg S-K proposal (see this PubCo post), as well as experience from the staff’s disclosure review process. In devising the final amendments, the SEC considered the “many changes that have occurred in our capital markets and the domestic and global economy” since the requirements were adopted. The amendments largely reflect the SEC’s historic “commitment to a principles-based, registrant-specific approach to disclosure” that, although “prescriptive in some respects,” is “rooted in materiality” and designed to provide an understanding of a company’s business through the lens that management and the board apply in managing and assessing the company’s performance. While there are changes throughout, the most significant change is the enhancement of the disclosure requirement for human capital, a topic that has been front-burnered by the impact of COVID-19 on the workforce. How substantially disclosure changes as a result of these amendments remains to be seen. The amendments will become effective 30 days after publication in the Federal Register.
World Economic Forum offers framework for valuing human capital—will it catch on?
With the SEC presumably about to adopt enhanced disclosure requirements for human capital next week (see this PubCo post), this new report from the World Economic Forum in Davos, prepared in collaboration with consultant Willis Towers Watson, offers a timely new framework for valuing human capital. While the COVID-19 pandemic has increased our focus on the value of the workforce as an asset, this shift in perspective is not entirely new: SEC Chair Jay Clayton has long recognized that, while, historically, companies’ most valuable assets were plant, property and equipment, and human capital was primarily a cost, now, human capital often represents “an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.” But he also recognized that developing a metric around this issue was not so easy. (See this PubCo post.) The pandemic, however, serves as a springboard: the new WEF report contends that, as “companies look to reset for the new world of work that emerges from the pandemic, they would benefit from an approach that values talent as a key asset that contributes to an organization’s sustained value creation. This calls for the development of a new human capital accounting framework, which would enable a company’s board and management to track how their investment in people is augmenting the firm’s human capital, and support the delivery of better outcomes for the business, the workforce and the wider community.” The report seeks to offer that framework. Whether it actually catches on is another question.
Does workplace sexual harassment predict poor stock price performance?
We’ve certainly seen any number of examples of companies taking a big hit when sexual harassment of employees by key executives comes to light—sometimes someone even makes a pretty good movie about it. But what about your everyday non-CEO harasser? Does workplace sexual harassment affect the value of the company? Some might argue that it’s just a case of correlation, not causation, but in this study, the authors found that a high incidence of workplace sexual harassment has a powerful adverse impact on company value. Toxic culture, it turns out, matters when it comes to shareholder value.
GAO finds lack of consistency in ESG disclosure—how will the SEC respond?
In 2018, in recognition of the increasing expectation of shareholders to see disclosure regarding material environmental, social and governance issues that affect financial performance and communities, Senator Mark Warner asked the GAO to prepare a report on public company disclosure regarding ESG. That report has now been issued. According to Warner, “[m]ost institutional investors find current company financial disclosures limited in their usefulness, and augment company disclosures through burdensome engagement with the company, purchasing third party compilation data, or initiating shareholder proposals. It is time for the SEC to establish a task force to establish a robust set of quantifiable and comparable ESG metrics that all public companies can adhere to.” Although SEC Chair Jay Clayton has acknowledged “the growing drumbeat for ESG reporting standards,” he has made clear his lack of enthusiasm for imposing a prescriptive sustainability disclosure requirement that goes beyond principles-based materiality. (See, e.g., this PubCo post and this PubCo post.) Will the SEC address the drumbeat?
Corporate political spending and its potential consequences
Has all of the current political unrest and social upheaval had any impact on the drive for political spending disclosure? Apparently so, according to the nonpartisan Center for Political Accountability, which reports in its June newsletter that support for shareholder proposals in favor of political spending disclosure hit record highs this past proxy season. But one risk potentially arising out of political spending is reputational, which could fracture a company’s relationship with its employees, customers and shareholders. As companies and CEOs increasingly offer welcome statements on important social issues such as climate change, healthcare crises and racial injustice, the current heated political climate has heightened sensitivity to any dissonance or conflict between those public statements and the company’s political contributions. When a conflict between action in the form of political spending and publicly announced core values is brought to light, will companies be perceived to be merely virtue-signaling or even hypocritical? To borrow a phrase from asset manager BlackRock, if the public perceives that these companies are not actually doing “the right thing”—even as they may be saying the right thing—will they lose their “social license” to operate? (See this PubCo post.) CPA’s brand new report on Conflicted Consequences explores just such risks.
Will companies accede to calls for actions to improve racial and ethnic diversity in hiring and promotion? California considers a new mandate for racial/ethnic board diversity
In this excellent NYT article from early June, the author painfully explores the view of many African-American executives that, notwithstanding the public condemnations of racism by many public companies and the “multimillion-dollar pledges to anti-discrimination efforts and programs to support black businesses,” still, many of these companies “have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women. ‘Corporate America has failed black America,” said [the African-American president of the Ford Foundation]. ‘Even after a generation of Ivy League educations and extraordinary talented African-Americans going into corporate America, we seem to have hit a wall.’” In the article, a number of Black executives offer recommendations for actions companies should take to begin to implement the needed systemic transformation. And now, third parties—from proxy advisors to institutional investors to legislators—are taking steps to induce companies to take some of these actions. Will they make a difference?
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