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Momentum Shifts as Investors Consider Growing Link Between ESG and EPS

A trio of recent developments illustrate growing support for Environmental Social and Governance (ESG) initiatives in the U.S., as well as abroad. ESG regulatory and legal risks now appear top of mind for institutional investors, as evidenced by the events described below.

Jessica Wirth Strine of Sustainable Governance Partners (formerly with Vanguard and Blackrock) in a recent video interview noted that investors now are more aggressively voting for environmental policy change, rather than working through engagement behind the scenes.  Investors are also evaluating the interplay between ESG and EPS (Earnings Per Share).  Examples include:

  • ExxonMobil announced on June 2, 2021 updated preliminary voting results, stating that a third nominee of activist hedge fund Engine No. 1 appears to have won a third board seat, in addition to the two seats announced at the May 26 annual meeting, for control of one-fourth of the company’s 12-member board. Engine No. 1 waged a campaign to force the company to adopt a “climate transition” plan resulting in net-zero emissions from the company – and its products – by 2050. Institutional investors Blackrock and Vanguard each posted voting bulletins following the meeting explaining why they voted for the dissident nominees, citing industry experience, among other things.  Shareholders also approved proposals seeking more information on lobbying activities, including climate lobbying.
  • A Dutch court ordered Royal Dutch Shell to reduce its greenhouse gas emissions by 45% (compared to 2019 emissions) by 2030 and to become aligned with the climate goals of the Paris

SEC announces re-examination of proxy advisor rules and interpretations

Newly installed Chairman Gary Gensler announced on June 1, 2021 that he is directing the SEC staff to consider whether to revisit its recent actions with respect to proxy voting advice businesses, including:

  • The SEC’s 2020 proxy rule amendments
    • As discussed in our July 24, 2020 blog, the amendments codified the SEC’s interpretation that the definition of solicitation encompassed proxy voting advice and established requirements for exemptions from the information and filing requirements.
  • The SEC’s 2019 interpretation and guidance regarding solicitation
    • As discussed in our October 2019 newsletter, the SEC stated its view that proxy voting advice generally constitutes a “solicitation” subject to the federal proxy rules and explained what proxy advisers should consider disclosing in order to avoid a potential violation of Rule 14a-9 where the failure to disclose such information would render the advice materially false or misleading.

As a result of the Chairman’s announcement, the SEC staff announced later on June 1 that it has decided that it will not recommend enforcement action based on the 2019 interpretation and guidance or the 2020 amendments during this period of staff review.

In addition, the SEC staff announced that if the 2020 amendments ultimately remain in place, it will not recommend enforcement action based on their conditions for a reasonable period after any resumption by ISS of its litigation challenging the 2020 amendments and 2019 interpretation and guidance.

Following these announcements, Commissioners Pierce and Roisman

SEC Chair Directs Staff to Consider New Rules to Manage Risks Highlighted by Game-Like Trading Apps

SEC Chair Gary Gensler testified yesterday before the House Committee on Financial Services about the SEC’s efforts to assess and address the market volatility that occurred in GameStop and other “meme stocks” resulting in significant price volatility and trading volume spikes earlier this year. 

Gensler said the SEC is working to determine, in the face of changes in technology and finance, how to continue to achieve core public policy goals while ensuring that the markets work for everyday investors.  Gensler cited seven factors that were at play during the volatile trading periods:

  • Gamification and User Experience:  Mobile apps expanded access to capital markets, making it easy for investors to sign up, start trading, get wealth management advice, and learn about investing. The apps use a host of familiar online features, such as gamification (points, rewards, leaderboards, bonuses, and competitions), behavioral prompts and differential marketing, to increase customer engagement.
    • Gensler said the staff is preparing a request for public input to consider these issues and determine how to ensure investors using apps with these types of features are appropriately protected and how SEC rules, including Regulation Best Interest, apply in these situations. Gensler noted that many SEC regulations were written well before today’s technologies and communication practices existed and need to be re-evaluated to protect the futures, retirements and education of the investing public.
  • Payment for Order Flow:  Gensler noted that in the last few years, most retail broker-dealers stopped charging fees for trades

Latest Twists in Long and Winding Road to Board Diversity Disclosure

The House Committee on Financial Services met virtually on April 20, 2021 to consider legislation that, among other things, would require public companies to annually disclose the voluntarily, self-identified gender, race, ethnicity and veteran status of their board directors. The Committee cited a 2017 board diversity survey finding that increased board diversity improves companies’ ability to innovate and enhances overall business performance.

In the meantime, the wait continues for an SEC decision on Nasdaq’s proposed “comply or explain why not” mandate that would require public disclosure of board diversity statistics for most Nasdaq-listed companies, initially proposed in December 2020.   The SEC most recently acted on these rules on March 10, 2021, when it issued an “Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Changes, as Modified by Amendment No. 1” (the “Order”).  The Order postponed the date, which had already been extended, by which the SEC is required to make its decision regarding the proposed rules, as amended, until possibly as late as August 2021. 

Some speculated that the delay was, at least in part, to allow time for Gary Gensler to be named SEC Chair.  The Senate confirmed Gensler’s nomination on April 14, 2021, and he was sworn in as a member of the SEC on April 17, 2021, so many expect movement on the Order this summer.  Comments continue to trickle in to the SEC website, and the SEC Office of the Investor Advocate continues to meet by telephone

Be Aware – SEC Implements Holding Foreign Companies Accountable Act (HFCA) Requirements

The SEC recently announced its adoption of interim final amendments to certain forms, including Form 10-K and Form 20-F, to implement the congressionally mandated document submission and disclosure requirements of the Holding Foreign Companies Accountable Act (the “HFCA Act”) that became effective in December 2020.  The amendments will become effective 30 days after publication in the Federal Register.  They apply to public companies (each, a “Commission-Identified Issuer”) that are identified by the SEC as having filed an annual report that includes an audit report issued by a registered public accounting firm that (1) has a branch or office located in a foreign jurisdiction and (2) the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction.  The SEC will be responsible for identifying such companies, and the PCAOB will be required to identify audit firms that have a location in such a foreign jurisdiction.

Annual Report Amendments.  The new requirements will be implemented (1) with respect to Form 10-K, by the addition of Part II, Item 9C, and (2) with respect to Form 20-F, by the addition of Part II, Item 161.  Each new item will be captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.”

New Submission Requirement – Commission-Identified Issuers.  The new rules refer to any year in which the SEC identifies a company as a Commission-Identified Issuer as a “non-inspection year.”  The interim final amendments will require that each Commission-Identified Issuer submit, on or

Don’t Delay: SEC Wants Your Two Cents on Climate Change Disclosure

The SEC recently issued a public statement asking investors, companies and other market participants to share their views on climate change disclosure.  Comments are due by June 13, 2021 and can be submitted via the SEC webform or email.  In addition to, or in lieu of, written submissions, the SEC staff is also willing to meet with members of the public to discuss their feedback.

The SEC generally will post submissions on www.sec.gov, so personal identifying information should not be included in written feedback. The SEC encouraged commenters to include empirical data and other information in support of their comments. Original data may assist the SEC in assessing the materiality of climate-related disclosures, and the costs and benefits of different regulatory approaches to climate disclosure.

The public statement contains 15 multipart questions for consideration, including the key excerpts set out below.  Please refer to the public statement for the full text of the questions.

  • How can the Commission best regulate, monitor, review, and guide climate change disclosures in order to provide more consistent, comparable, and reliable information for investors while also providing greater clarity to companies as to what is expected of them? Where and how should such disclosures be provided?
  • What information related to climate risks can be quantified and measured?  Are there specific metrics on which all companies should report? How have companies or investors analyzed risks and costs associated with climate change? What are companies doing internally to evaluate or project climate scenarios,
  • Wait Continues for Any SEC Public Response to Senators’ Urgent Call for Rule 10b5-1 Plan Reform

    The wait continues for any public response from the SEC to a recent letter from three Democratic members of the Senate Committee on Banking, Housing, and Urban Affairs, including Senator Elizabeth Warren, urging the SEC to (1) consider reforms to prevent what the senators identified as abusive 10b5-1 plan practices and (2) improve disclosure of and enforcement relating to such plans.

    Senators’ SEC Requests for Information.  The senators asked the SEC to respond to the following questions by Monday, February 22, 2021:

  • What actions does the SEC currently take to ensure that 10b5-1 plans are compliant with the Commission’s current rules and requirements?
  • How many enforcement actions has the agency taken with regard to 10b5-1 plans in the past five years? Please provide a list and summary of all such actions.
  • Has the SEC taken action to require a “cooling off period” between the adoption or amendment of any 10b5-1 plan and any stock sales under that plan?
  • Does the agency intend to require that 10b5-1 plans are disclosed publicly and posted online in advance of any trades made under that plan?
  • Has the SEC considered or evaluated modifications of regulations to ensure that 10b5-1 adequately covers “short-swing” purchases?
  • What other actions has the SEC taken or are under consideration to prevent the abuse of 10b5-1 plans?
  • In the letter, the senators said they believe reforms are necessary in large part because “new evidence indicates that executives – especially those in the health care industry – are abusing these

    Climate-Related Disclosure in the Hot Seat

    SEC Commissioners: Are Recent Announcements Changes from Status Quo or New PR Twist?

    SEC Commissioners Hester M. Peirce and Elad L. Roisman today issued a statement providing their perspectives on the recent wave of climate-related announcements by the Divisions of Enforcement, Examinations and Corporation Finance.  Emphasizing that in their view the recent announcements raise more questions than they answer, the commissioners note their impact is not yet clear and query whether the announcements “represent a change from current Commission practices or a continuation of the status quo with a new public relations twist.”  Recent SEC ESG developments include:

    • On March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement to, among other things, develop initiatives to proactively identify ESG-related misconduct.
    • On March 3, 2021, the SEC’s Division of Examinations announced its 2021 examination priorities, which include a greater focus on climate-related risks.
    • On March 2, 2021, Gary Gensler, President Biden’s nominee to serve as SEC Chair, noted in a Senate confirmation hearing that investors increasingly want to see climate risk disclosures. He indicated that, if confirmed, he would support the SEC’s focus on more climate-related disclosures.
    • On March 2, 2021, the House Committee on Energy & Commerce announced the Climate Leadership and Environmental Action for our Nation’s (CLEAN) Future Act which, if adopted as proposed, would direct the SEC to adopt climate risk disclosure rules within two years.
    • On February 24, 2021, Allison Herren Lee,

    New ISS 2021 Factors for Governance QualityScore Address Investor Hot Topics

    ISS recently released updated methodology for its Governance QualityScore (GQS) rating system for institutional investors.  The new factors relate to areas of emerging concern to investors, with 11 of the 17 new factors addressing information security risk and oversight.  Other new factors relate to board matters, such as diversity, inclusion, practices and composition, and to compensation matters, such as whether and the extent to which special grants have been made to executive officers.  ISS also extended to the U.S. market certain factors regarding the number of boards on which directors serve and shareholder voting rights.  ISS further indicated that the updated methodology reflects the rebalancing of certain existing factors in the categories of Board Commitments and Litigation Rights.

    ISS reviews its methodology annually to ensure that its approach remains closely aligned with ISS’ benchmark voting policies and reflects developments in regulatory and market practices.  Key updates to ISS’ benchmark voting policies for the 2021 proxy season are summarized in our December 11, 2020 post. The new factors and factors newly applied to the U.S. market include:

    New Factors as of January 29, 2021:

    Audit (Information Security Risk Oversight)

    • What percentage of the committee responsible for information security risk is independent? (Q403)
    • How often does senior leadership brief the board on information security matters? (Q404)
    • How many directors with information security experience are on the board? (Q405)

    Audit (Information Security Risk Management)

    • Does the company disclose an approach on identifying and mitigating information security risks? (Q402)

    Don’t Forget! Refresher on Glass Lewis COVID-19-Related Guidance and ISS Compensation-Related FAQs

    For companies knee deep in proxy statement drafting and 2021 executive compensation decisions, we recommend a quick refresher on Glass Lewis’ December 2020 Approach to Executive Compensation in the Context of the COVID-19 Pandemic and ISS’ October 2020 COVID-19-related compensation FAQs, as well as ISS’ more general December 2020 compensation-related FAQs and equity plan-related FAQs.  Highlights include:

    Glass Lewis Approach to Executive Compensation in the Context of the COVID-19 Pandemic

    Glass Lewis released this December 2020 guidance to illustrate how it will apply its executive compensation policies in 2021 in the wake of COVID-19.  Glass Lewis noted that the pandemic has not changed its approach to executive pay, which is a “pragmatic, contextual approach that applies in good times and bad.”  Some of the key topics covered are:

    Pay-for-Performance Analysis.  Glass Lewis does not expect the macroeconomic climate to have a drastic impact on its pay-for-performance model and will continue to take a holistic approach when evaluating the alignment between executive pay and company performance within the context of the pay-for-performance model and the pandemic.

    Say-on-Pay Proposals.  Glass Lewis notes that how companies respond to changing macroeconomic conditions resulting from the pandemic will dominate say-on-pay votes.  Given that an executive’s base salary represents a relatively low portion of his or her total compensation, Glass Lewis will view temporary base salary reductions in the face of the pandemic to be token gestures.  Glass Lewis will instead look closely at overall pay levels, including scrutinizing mid-cycle pay

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