Environmental, Social and Governance Matters
Governance and Disclosure Considerations from the SEC’s Climate Change Comment Letters
The SEC’s Division of Corporation Finance has issued a sample comment letter, and sent actual comment letters to a series of public companies, asking for additional Form 10-K disclosure on topics addressed in the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 2, 2010), or an explanation for why the comments do not apply. The comment letters are a preamble to the SEC’s rulemaking, which is now expected early in 2022. In his recent remarks on mandatory climate change disclosure, SEC Chairman Gary Gensler noted that investor demand is driving SEC rulemaking: “Investors today are asking for that ability to compare companies with each other. Generally, I believe it’s with mandatory disclosures that investors can benefit from that consistency and comparability. When disclosures remain voluntary, it can lead to a wide range of inconsistent disclosures.” SEC Comment Letters In its comment letters, the SEC has suggested that it will continue to monitor climate change disclosure beyond SEC filings. Companies are asked to explain what consideration was given to providing the same type of climate-related disclosure in SEC filings as was provided in more expansive disclosure in corporate social responsibility (CSR) reports. This comment prompts companies to evaluate the consistency of their disclosure across multiple platforms. Specifically, companies may re-consider whether and when to use the term “material,” and what it means in an SEC filing versus a CSR report or a website. When used to qualify a requirement for the furnishing of information in a registered securities offering, the SEC definition of “materiality” limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered. Furthermore, the comments request Management’s Discussion & Analysis disclosure, to the extent material, of: the effect of pending or existing climate-change legislation and international accords on the business, financial condition and results of operations, capital expenditures for climate-related projects, indirect consequences of regulations or business trends, such as changes in demand for goods or services based on carbon emissions, weather-related and other physical effects of climate change on operations and results, and quantification of increased compliance costs related to climate change. Companies have also been asked to add or update material risk factors related to climate change, including potentially: transition risks related to climate change that may affect the business, financial condition and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks or technological changes, and litigation risks related to climate change and the potential impact on the company. More information on governance and disclosure considerations from the SEC's Climate Change Comment Letters can be found here.
October 12, 2021
by Cam C. Hoang and Nicole H. Strydom
Environmental, Social and Governance Matters
State Street Calls for Board and Workforce Diversity Data
Companies that count State Street Global Advisors as an investor should review its CEO Cyrus Taraporevala’s just-released annual letter on its proxy voting agenda, which has significant updates on voting policies with regard to board and workforce diversity. Indicating that State Street's primary challenge as an investor is the lack of publicly available racial and ethnic diversity data, the CEO states: In 2021, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards; In 2022, we will vote against the Chair of the Compensation Committee at companies in the S&P 500 that do not disclose their EEO-1 Survey responses; and In 2022, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not have at least 1 director from an underrepresented community on their boards. Diversity voting policies at State Street and other investors are prompting companies to expand disclosure of board demographics in their proxy statements, with many considering the matrix disclosure from the Nasdaq proposed listing standard. And the attention to workforce diversity continues to grow. State Street’s request for EEO-1 Survey responses is likely to result in expanded human capital management disclosure in annual reports on Form 10-K. On sustainability, starting in 2020, State Street began voting against companies in the bottom 10% of R-Factor scores that could not articulate a plan to improve their score — its R-Factor scoring system is based on the Sustainability Accounting Standards Board (SASB) framework, which focuses on financially-material, industry-specific ESG risks. The CEO also reiterated State Street's support for climate risk disclosure using the Taskforce on Climate-related Financial Disclosures (TCFD) framework.
January 11, 2021
by Cam C. Hoang
Environmental, Social and Governance Matters
It’s Really Time to Talk Diversity in D and O Questionnaires (with Updated Sample Question and Summary of Nasdaq’s Proposed Rules)
On December 1, 2020, Nasdaq submitted a proposal to the SEC seeking approval of new listing requirements for board diversity. The stated goal of the proposal is to provide stakeholders with a better understanding of a company’s current board composition and enhance investor confidence that listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that standard. Nasdaq has provided a summary of the top five things companies should know and will update this document throughout the SEC review and approval process. There is also a related set of FAQs. Under proposed Rule 5606, Nasdaq proposes to provide each company with one calendar year from the date that the SEC approves this proposal (the “Approval Date”) to comply with the requirement for statistical information regarding diversity, using a standardized disclosure matrix template. For the first year a company is required to disclose board diversity statistics, the company would be required to publish board diversity statistics for the current year only. Each subsequent year, the company will be required to publish its data for the last two years. Under proposed Rule 5605(f)(2), no later than two calendar years after the Approval Date, each company must have, or explain why it does not have, one Diverse director. Further, each company must have, or explain why it does not have, two Diverse (at least one Female director and at least one director who is either an Underrepresented Minority or LGBTQ+) directors no later than: (i) four calendar years after the Approval Date for companies listed on the Nasdaq Global Select or Global Market tiers; or (ii) five calendar years after the Approval Date for companies listed on the Nasdaq Capital Market tier. Foreign issuers and smaller reporting companies, by contrast, have more flexibility and may satisfy the requirement by having two Female directors, or in the case of foreign issuers, one Female director and a director who is an underrepresented individual in their home country jurisdiction. The proposed rules currently exempt non-operating companies from proposed rule. Consistent with Nasdaq’s corporate governance rules the following types of companies are exempt: acquisition companies listed under IM-5101-2; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non- voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 Series. The FAQs are worth a read, as they provide additional color on the proposed rules. For companies who do not eventually meet the diversity requirements, they may provide an explanation as to why they do not meet the requirements. The following are several examples of such disclosure included in the rule filing for the proposed board diversity and disclosure rules: If under Israeli law regarding board diversity, an Israeli company is required only to have a minimum of one woman on the board and such Israeli company chooses to comply with Israeli home country law in lieu of meeting the diversity objectives of Rule 5605(f)(2)(B), it may choose to disclose that “the Company is incorporated in Israel and required by Israeli law to have a minimum of one woman on the board, and satisfies home country requirements in lieu of Nasdaq Rule 5605(f)(2)(B), which requires each Foreign Issuer to have at least two Diverse directors.” If a U.S. company had two Diverse directors but one resigned due to unforeseen circumstances, it could disclose, for example: “Due to the unexpected resignation of Ms. Smith this year, the Company does not have at least one director who self-identifies as Female and one director who self-identifies as an Underrepresented Minority or LGBTQ+. We intend to undertake reasonable efforts to meet the diversity objectives of Rule 5605(f)(2)(A) prior to our next annual meeting and have engaged a search firm to identify qualified Diverse candidates. However, due to unforeseen circumstances, we may not achieve this goal.” Or a U.S. company may disclose that it chooses to define diversity more broadly than Nasdaq’s definition by considering national origin, veteran status or individuals with disabilities when identifying nominees for director because it believes such diversity brings a wide range of perspectives and experiences to the board. Timing for SEC approval is currently unclear, but could happen as early as the first half of 2021. The SEC will provide a minimum of 21 days from the time they publish the proposed rule changes in the Federal Register for the public (including investors, companies, and their representatives) to have an opportunity to comment on the proposals. After publication in the Federal Register, the SEC has 30 to 240 calendar days to approve the proposal. Clients who do not currently meet these board diversity requirements are encouraged to start board-level conversations on board size, director succession planning and director recruitment. As discussed here, we also encourage companies to start gathering information on the demographics of their boards, for example, through the annual D&O questionnaire. We have updated our model question in light of the proposed Nasdaq rulemaking. Corporate secretaries who choose to include a director diversity question should review it against any existing board diversity policies. They may also wish to provide directors with a supplemental explanation as to why they are being asked to self-identify and how the information will be used, particularly if it may be disclosed in the proxy statement and other media including the company website, responses to ESG surveys and the corporate responsibility report. Corporate secretaries may also choose to emphasize that responses are optional. Sample Director Diversity Question: We are planning to disclose director diversity information in our Proxy Statement. Please answer the following questions if you agree to inclusion of the information: 1. Gender (check one): Male Female Non-Binary Other: _____________ Prefer not to answer 2. LGBTQ+ (check one): Yes No Prefer not to answer 3. Ethnicity or Race (check one or more): White Hispanic, Latinx or Spanish Origin Black or African American American Indian or Alaska Native Asian Native Hawaiian or Other Pacific Islander Other: ______________ Prefer not to answer Other Diversity Characteristics that You Wish to Identify (e.g., [underrepresented individual in home country jurisdiction][for foreign private issuers], religion, nationality, disability, military service or socio-economic or demographic characteristics):
December 2, 2020
by Cam C. Hoang
Environmental, Social and Governance Matters
2019 Proxy Season Update: Shareholder Proposal Trends
In the United States, the process by which shareholders submit proposals to be voted on at a company’s annual meeting has long been a mechanism used to promote often obscure special interests and social issues. In recent years, however, as environmental, social and governance (ESG) topics have become more mainstream, the market has seen a surge in this type of proposal. In 2018, Russell 3000 companies received a record 144 proposals requesting action on social and environmental issues, making this category larger than any other. In a recent article, The Wall Street Journal reported that the increase in support for ESG-related proposals has risen from “middle single digits from 2000 until 2008 to 24% in 2018.” Another record. As we draw closer to the end of the 2019 proxy season, it is clear that the momentum in this area continues. New Fronts in Environmental Proposals In the same article, the WSJ reported on a new front involving proposals focusing on plastic waste, a trend we previously noted in our March chemical industry update. The WSJ further noted that most of the companies that had received the proposal about plastic waste agreed to implement the request in order to avoid including it in their proxy statements. Proposals are often withdrawn when companies and proponents reach a compromise approach. This is a tactic that has risen in popularity in recent years as ESG topics have garnered more support from the broader shareholder base. In another article, the WSJ highlighted this trend, explaining that about 49% of environment-related shareholder proposals were withdrawn last year, compared with 33% two years prior and that “roughly 45% of shareholder proposals related to social issues, including income inequality, political-spending disclosure and animal testing, were withdrawn last year, up from 34% two years earlier.” Another development involves proposals related to climate change. This category itself is not new, and in fact these proposals have dominated in recent years, even gaining majority approval in some cases. This year, however, some companies found a degree of success via the no-action letter process. At least two companies obtained permission from the SEC to exclude a proposal that (if passed) would have required them to disclose how their operations align with the greenhouse gas reduction targets under the Paris Climate Accord. The SEC explained in one of the no-action letters: “the Proposal would micromanage the Company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.” This success, however, is limited. The SEC declined to issue no-action letters on other types of climate change proposals, and more carefully crafted proposals are likely to survive review next year. The Future of ESG-related Shareholder Proposals The SEC announced last fall it was conducting a review of the proxy system. The shareholder proposal process was included as one of the areas due for an overhaul. While it remains unclear what form changes may take, it is possible the SEC will issue guidance after this proxy season. Proposed rulemaking could also follow. One anticipated rule change would be to raise the stock ownership threshold required for submitting a shareholder proposal (currently, a de minimis $2,000 in shares). Another would be to increase resubmission thresholds. Such steps will certainly make a dent in the number of overall proposals, particularly from shareholders who don’t have a financially meaningful stake in a company. However, many ESG proposals—such as the new ones about plastic waste—are backed by non-governmental organizations who either have meaningful resources themselves or who partner with larger shareholders. As such, absent some broader change to the shareholder proposal process (such as expanding the bases on which companies can seek to exclude proposals), we don’t expect the popularity of ESG-related shareholder proposals to diminish anytime soon.
May 8, 2019
by Troy M. Keller
Environmental, Social and Governance Matters
The Era of Private Ordering for Corporate Governance
Following the 2016 election, corporate governance circles have focused intently on what will happen in the nation’s capital with regard to a potential roll back of the current regulatory regime. While attention given to Congress and the SEC for the possible direction of corporate governance is not misplaced, future changes in this arena will most likely come from investors, and they have their own agenda which is very different from that of the Trump administration. Regardless of, or perhaps in response to, any changes in the U.S. governance regulatory framework, investors and groups of investors are likely to continue to push for actions and disclosures beyond what is mandated and will use the their voting power to effect change. Public companies should also anticipate increased demand for the use of metrics and related disclosures that facilitate comparison, including in non-traditional performance areas such as certain environmental, social and governance matters where investors see a strong tie to long-term value creation. Read the full article here, as posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
August 28, 2017
by Gary L. Tygesson
Environmental, Social and Governance Matters
Investors' Climate Change Voting Records Face Scrutiny
Companies who engage with their large institutional shareholders on environmental and social issues during the 2018 proxy season should keep in mind that these investors are facing pressure from other investors on their voting policies. Large institutional investors are receiving shareholder proposals from a coalition of smaller investors, urging them to take a more engaged approach to environmental and social proposals. During the 2017 proxy season, investors including Vanguard, BlackRock, Bank of New York Mellon, T.Rowe Price, JP Morgan Chase & Co. and Fidelity Investments received shareholder proposals from investors including Walden Asset Management, requesting that management issue reports on their proxy voting policies and practices related to climate change. Some of these proposals were withdrawn, based on vote changes, updated voting policies and greater disclosure, as reported by BNA Bloomberg. However, Vanguard's November 15th annual meeting agenda will include Walden's proposal. This is Vanguard's first shareholder meeting since 2009 (Vanguard is not required to hold a meeting unless there is a proposal for a shareholder vote). In its preliminary proxy filing, Vanguard opposes Walden's proposal, for reasons including that the report requested is duplicative of information that's already publicly available, and that direct, ongoing engagement with companies is often more effective than votes for shareholder proposals. Vanguard and many other institutional investors have historically voted against climate change shareholder proposals, given the challenges of demonstrating a material business impact over a definitive time horizon. However, their positions have evolved over recent proxy seasons.1 Earlier this year, Vanguard voted for shareholder proposals at Exxon Mobil and Occidental Petroleum Corp. requiring that the companies report on climate change. Vanguard had voted against a similar proposal at Exxon Mobil in 2016. These climate change proposals, and another one at PPL Corp., subsequently passed. More broadly, during the 2017 proxy season, shareholders submitted 144 environmental proposals. Of the 55 proposals voted on, support averaged 28.9% of votes cast, compared to 71 proposals that received 25.1% of votes cast in 2016. 1Vanguard's updated proxy voting guidelines state that Vanguard will consider environmental and social proposals on their merits, and that it may support those proposals where there is a link to long-term shareholder value. According to Vanguard's proxy voting guidelines, some of the factors considered when evaluating these proposals include the materiality of the issue, the quality of current disclosures/business practices, and any progress by the company toward the adoption of best practices and/or industry norms. (See Liz Dunshee's blog for additional articulation of Vanguard's approach).
August 3, 2017
by Cam C. Hoang
Environmental, Social and Governance Matters
A Long and Winding Road Ends for Resource Extraction Disclosure
On February 14, 2017, President Trump approved a joint resolution of Congress that disapproves the SEC’s rule requiring specific disclosures by resource extraction issuers, effectively repealing the rule. The rules required resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments, including foreign subnational governments, for the commercial development of oil, natural gas or minerals. Compliance under the rules for resource extraction issuers would have begun for fiscal years ending on or after September 30, 2018. The quick death of these rules are somewhat ironic given the time and energy taken to adopt them in the first place. Consider the timeline: 2010 - Dodd-Frank Wall Street Reform and Consumer Protection Act enacted, which mandated the implementation of the resource extraction rules 2012 - First set of rules adopted 2013 - Rules vacated by the U.S. District Court for the District of Columbia 2015 - After Oxfam America Inc. brought suit in an effort to expedite the long-delayed rules, a federal judge held that the SEC had “unlawfully withheld” agency action by failing to promulgate final rules on this topic 2015 - SEC re-proposes rules 2016 - SEC adopts final rules 2017 - Rules disapproved under the Congressional Review Act While the mandate to implement these rules still exists under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Congressional Review Act bars the enactment of a new rule that is substantially in the same form as the repealed rule. These rules, like the conflict minerals rules, attempted to further social policy through public company disclosure requirements. The aim here was to promote and support “global efforts to improve transparency in the extractive industries . . . to help combat global corruption and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.” While the goal is a worthy one, it was unclear whether the disclosure required by these rules would effectively and efficiently advance that goal. Congress and the White House were concerned with the regulatory burden and competitive disadvantage that these rules imposed. The White House’s Statement of Administration Policy noted that the “rule would impose unreasonable compliance costs on American energy companies” and could put American resource extraction issuers at a “competitive disadvantage in cases where their foreign competitors are not subject to similar rules.” Reducing the regulatory burden on public companies is both useful and necessary. However, there is one unfortunate aspect of this repeal. The rules provided for alternative reporting, so that issuers could comply with SEC disclosure obligations with a report complying with the requirements of an alternative reporting regime, such as Canada’s Extractive Sector Transparency Measures Act and the EU Accounting Directive and the EU Transparency Directive. For companies with operations in multiple jurisdictions, the recognition of an alternative reporting regime was a welcome attempt to address concerns of duplicative reporting requirements and implement mandated rules in a more efficient and cost-effective way for many issuers. This allowance was similar in concept to the Canadian Multi-Jurisdictional Disclosure System (the MJDS), a widely used alternative reporting regime for certain types of Canadian issuers. Successful implementation and use under an alternative reporting regime under the repealed rules by a wide variety of resource extraction issuers might have nudged the SEC to consider broader use of alternative reporting systems. On the whole, the repeal of resource extraction issuers is a positive development. Now if we could just eliminate the conflict minerals disclosure rules and the CEO pay ratio rules...
February 17, 2017
by Kimberley R. Anderson
