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US Securities and Corporate Governance

ESG

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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

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

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,
  • SEC Acting Chair Announces Sweeping Climate and ESG Initiatives, New Regulatory Priorities and Potential Rollback of Recent Rule Changes

    In a speech on March 15, 2021, Allison Herren Lee, Acting Chair of the SEC, reported on the steps the SEC is taking to meet investors’ growing demand for climate and ESG information, stating that “no single issue has been more pressing for me” and that “climate and ESG are front and center for the SEC.”  She observed that there has been a shift in capital towards ESG and sustainable investment strategies, and that ESG risks and metrics increasingly affect investment decision-making.

    Lee indicated that the SEC will devote substantial resources to investor protection initiatives that extend beyond, but are mutually reinforcing of, the SEC’s climate and ESG initiatives.  She noted that these other initiatives include, among others, ensuring strong and clear standards for broker-dealers, taking a “hard look” at the effects of the continuing flow of capital away from the public markets and proceeding with equity market structure reforms.  Reflecting the change in administration and SEC leadership, she noted that this may result in undoing some recently adopted rules and/or guidance.

    Highlights of Acting Chair Lee’s speech follow:

    Improving Climate and ESG Disclosures.  Lee noted that the SEC’s fundamental role with respect to climate and ESG is helping ensure that material information gets into the market in a timely manner.  She believes the SEC’s current voluntary framework for climate and ESG disclosures neither ensures that result nor meets investor demands; as a result, the SEC has begun taking steps to create a mandatory and comprehensive ESG disclosure framework

    SEC Acting Director Coates proposes framework for future ESG rulemaking

    Yesterday, John Coates, the acting director of the SEC’s Division of Corporation Finance, announced a proposed framework for considering new ESG disclosure requirements, recognizing that while the scope of ESG issues is very broad, specific ESG issues affect particular companies differently based on industry, geography and other factors.

    Need for “adaptive and innovative” policy

    Coates compared ESG issues to asbestos-related risks, which evolved from invisible “non-financial” risks that were not addressed in SEC filings to visible and eventually clear financial risks that were increasingly disclosed in companies’ filings.  He believes that SEC policy needs to be adaptive and innovative and, for example, respond to climate risks that were formerly peripheral and now have greater significance.

    Effective ESG disclosure system

    Coates believes some of the questions the SEC should consider include:

    • What disclosures are most useful?
    • What is the right balance between principles and metrics?
    • How much standardization can be achieved across industries?
    • How and when should standards evolve?
    • What is the best way to verify or provide assurance about disclosures?
    • Where and how should disclosures be globally comparable?
    • Where and how can disclosures be aligned with information companies already use to make decisions?

    Costs from having no ESG requirements

    Although recognizing that disclosure requirements impose costs on companies, Coates believes that failing to establish ESG requirements is itself costly – that the lack of consistent, comparable and reliable ESG data discourages investment and voting decisions.  Companies incur higher costs in responding to multiple, conflicting or redundant investor

    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,

    Nasdaq amends its board diversity proposal

    On Friday, Nasdaq submitted a revised proposal that addresses board diversity membership for listed companies.  As discussed in our prior alert, Nasdaq had originally called for public companies – over a two-to-four year phase-in period — to include two diverse directors on their boards and to disclose in a “diversity matrix” certain anonymous aggregate data regarding gender identity, race, ethnicity and sexual orientation.

    Based on comments, including criticism as discussed here, Nasdaq has modified the proposal in a variety of areas:

    • Smaller boards. Companies with five or fewer directors would only need to include one diverse director, instead of two.
    • Grace period for vacancies. A one-year grace period would be provided for companies that no longer meet the diversity objective as a result of a vacancy on the board.
    • Timing of disclosure. Diversity information would need to be made publicly available before annual shareholder meetings, to align with disclosures for other proxy-related governance matters.
    • Extra time for newly-listed companies. Newly-listed companies that become listed after the phase-in period for the new rules ends would have an additional two-year period after the phase-in period to fully meet the diversity objective.
    • Trigger date. The operative date for disclosure would be the later of (1) one calendar year from the date of SEC approval of the revised proposal or (2) the date the proxy statement is filed for a company’s annual meeting during the calendar year of such SEC approval date.
    • Location of disclosure. Companies could choose to disclose

    Apple adds ESG bonus component to executive compensation program

    In its recently filed proxy statement, Apple Inc. announced that beginning in 2021, the Compensation Committee will incorporate an environmental, social and governance modifier into the annual cash incentive program.  The Compensation Committee will use the modifier to determine whether to increase or decrease bonus payouts by up to 10% based on the Compensation Committee’s evaluation of executives’ performance with respect to “Apple Values” and other key community initiatives during 2021.

    “This change is intended to further motivate Apple’s executive team to meet exceptionally high standards of values-driven leadership in addition to delivering strong financial results,” according to the proxy statement disclosure.

    The proxy statement did not include specific ESG targets or initiatives for the modifier, although the introduction to the proxy statement listed the Apple Values shown below, noting they “reflect our commitment to leave the world better than we found it and to create powerful tools for others to do the same.”

    Education

    apple.com/education

    For more than 40 years, Apple has worked alongside educators to inspire the next generation of learners. From primary through post-secondary school, teachers and students are using Apple products to express their creativity and to teach and learn the skills needed to succeed in a rapidly changing world. Through our Community Education Initiatives, such as ConnectED, our products, services, and support have reached learners of all ages in underserved communities that need them the most.

       

    Environment

    apple.com/environment

    Apple has dedicated our resources and best thinking to considering the environment in everything

    New Nasdaq Listing Proposal: Add Diverse Directors or Explain Why Not

    Nasdaq yesterday announced a proposed new listing rule that would require all Nasdaq-listed companies to publicly disclose consistent, transparent board diversity statistics in a specified form of matrix.  In addition, the proposed rule would require Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors:  one woman and one person who self-identifies as either an underrepresented minority or LGBTQ.

    Nasdaq believes its proposal would benefit investors and the public interest, citing in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  It also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

    If the rule is approved by the SEC, companies would be required to disclose board-level diversity statistics within one year of the SEC’s approval of the listing rule.  In addition:

    • All operating companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule (non-operating companies, such as asset-backed issuers, cooperatives, limited partnerships and investment management companies, as well as certain specified issuers of non-equity securities, would be exempt from the proposed rule).
    • Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have a second diverse director within four years of the SEC’s approval.
    • Companies listed on the Nasdaq Capital Market will be expected to have a second diverse director within five years of the SEC’s

    Consider Updates to D&O Questionnaire as Pressure Mounts for Voluntary Racial, Ethnic and Gender Diversity Disclosures

    As the pandemic and racial unrest continue in 2020, companies should consider whether to update their D&O questionnaires to gather information in response to the growing pressure for voluntary diversity disclosures from investors, proxy advisors, activists and others, as noted in our recent posts on August 3 and August 10.

    Boards grappling with the possibility of voluntary diversity disclosures must consider how to accurately collect data.  In February 2019, the SEC issued Compliance and Disclosure Interpretation 133.13 requiring certain disclosures if a board or nominating committee considers self-identified diversity characteristics of an individual who has consented to the company’s disclosure of those characteristics.  Companies understandably were slow to address self-identification of diversity traits in D&O questionnaires, given the sensitivity of the topic.

    But now, as pressures mount and some companies publicly pledge to add diverse directors to their boards within one year, the annual D&O questionnaire can be a useful way to document the issue and provide a basis for any voluntary disclosures a company may decide to make.  Given the sensitivity of the issue, companies could consider discussing the topic in advance of circulating the questionnaire in order to evaluate whether or how directors wish to proceed. To maintain collegiality, companies should make clear responses are optional, and take care to avoid any implication that particular directors were appointed because of their race, gender or other characteristics.  In lieu of a questionnaire, the board could consider addressing self-identification disclosures during a board meeting or in

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