As we anticipate new proposals from the SEC on human capital and climate disclosure, this recent paper from the Rock Center for Corporate Governance at Stanford, Seven Myths of ESG, seems to be especially timely. The trend to take ESG into account in decision-making by companies and investors, not to mention the focus on ESG issues by regulators and even associations like the Business Roundtable, is “pervasive,” say the authors. Still, ESG is subject to “considerable uncertainty.” In the paper, the authors set about debunking some of the most common and persistent myths about what ESG is, how it should be implemented and its impact on corporate outcomes, “many of which,” they contend, “are not supported by empirical evidence.” Their objective is to provide a better understanding of ESG so that companies, institutions and regulators can “take a more thoughtful approach to incorporating stakeholder objectives into the corporate planning process.” The authors’ seven myths are summarized below.
While the global powers are occupied at the COP26 climate summit with negotiating and pledging (or, is it more “blah, blah, blah,” as teenage activist Greta Thunberg contends in some, uh, straight talk?), and we await the SEC’s expected climate disclosure framework, it might be worthwhile to get a handle on what companies are doing about sustainability reporting in the meantime. To help companies understand the current state of the art, CEO advisory firm Teneo surveyed 200 sustainability reports from S&P 500 companies in eleven industries published in the period between January 1 to June 30, 2021. Teneo’s report, The-State-of-U.S.-Sustainability-Reporting, provides useful samples, market statistics for various aspects of the content and design of these reports, as well as some practical considerations.
Although BlackRock, which manages assets valued at over $9 trillion, and its CEO, Laurence Fink, have long played an outsized role in promoting corporate sustainability and social responsibility, BlackRock has also long been a target for protests by activists. As reported by Bloomberg, “[e]nvironmental advocates in cities including New York, Miami, San Francisco, London and Zurich targeted BlackRock for a wave of protests in mid-April, holding up images of giant eyeballs to signal that ‘all eyes’ were on BlackRock’s voting decisions.” Of course, protests by climate activists outside of the company’s offices are nothing new. There’s even a global network of NGOs, social movements, grassroots groups and financial advocates called “BlackRock’s Big Problem,” which pressures BlackRock to “rapidly align [its] business practices with a climate-safe world.” Why this singular outrage at BlackRock? Perhaps because, as reflected in press reports like this one in the NYT, activists have reacted to the appearance of stark inconsistencies between the company’s advocacy positions and its proxy voting record: BlackRock has historically conducted extensive engagement with companies but, in the end, voted with management much more often than activists preferred. For example, in the first quarter of 2020, the company supported less than 10% of environmental and social shareholder proposals and opposed three environmental proposals. BlackRock has just released its Investment Stewardship Report for the 2020-2021 proxy voting year (July 1, 2020 to June 30, 2021). What a difference a year makes.
According to Law 360 reporting on a webcast panel last week, Acting Director of Enforcement Melissa Hodgman, warned that, in addition to “increased scrutiny” of “funds touting green investments,” we may well see more ESG disclosure-related enforcement actions in general. In March, then-Acting SEC Chair Allison Herren Lee announced the creation of a new climate and ESG task force in the Division of Enforcement. The moderator of the panel, a former co-Director of Enforcement, observed that “usually you don’t stand up a task force unless you’re pretty sure that task force is going to produce something.” So what should we expect?
When the press publishes articles alleging that a slew of profitable businesses are, quite legally, not paying much—if anything—in income taxes, and politicians argue that companies are just not paying their fair share, it’s bound to raise a few hackles. Now, this article in Bloomberg reports that tax transparency has become one of the “under-the-radar” elements of ESG disclosure that’s “gaining traction.” According to the article, ESG-oriented investors “want large public companies to disclose where they shift their profits and how much they pay in taxes, and to cut back on aggressive tax planning.”
Yesterday, at a meeting of the SEC’s Asset Management Advisory Committee, the Committee adopted recommendations (developed by the ESG Subcommittee) regarding ESG disclosure by issuers, intended to improve the information and disclosure used by investment managers for ESG investing. While addressing a broad array of issues regarding ESG investment products, the Committee recognized “that issuer disclosure is the starting discussion point for all ESG matters.” Given the dependence of the investment management industry on issuer disclosure regarding ESG matters and the resulting demand for consistent and comparable ESG disclosure, the recommendations are surprisingly mild—designed to prod rather than mandate.
Earlier this week, SEC Commissioner Allison Lee delivered keynote remarks at the 2021 ESG Disclosure Priorities Event hosted by the AICPA, the Chartered Institute of Management Accountants, SASB and the Center for Audit Quality. Her topic: “Myths and Misconceptions about ‘Materiality.’” In the context of the discussion about potential mandatory ESG disclosures, Lee observed, there has been a lot of attention to the concept of materiality, which is fundamental to our securities laws. The public company disclosure system “is generally oriented around providing information that is important to reasonable investors,” and “the viewpoint of the reasonable investor is the lens through which we all are meant to operate.” Since investors are the ones who make the investment choices, “investors are also the ones who decide what information they need to make those choices.” But, in the course of the ongoing discourse about ESG, Lee has found that a number of myths have proliferated about the role and meaning of materiality; her purpose in these remarks is to dissect and dispel those myths, which she believes have hampered the “important debate on how best to craft a rule proposal on climate and ESG risks and opportunities.”
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?
Today, the Senate, by a vote of 53 to 45, confirmed Gary Gensler as SEC Chair—for a little while anyway. Presumably, he will be sworn in in the next several days. The current SEC Commissioners offered their congratulations here. The pivot from the approach taken by former SEC Chair Jay Clayton on issues such as adoption of standardized mandatory climate disclosure and other ESG disclosure issues could be head-spinning, so stay tuned.
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.”