January 14, 2020

Walking the Talk: BRT Companies’ ESG Reporting Practices

The Business Roundtable’s “Statement on the Purpose of a Corporation” has been a frequent conversation and blog topic.  Interesting to see that the Governance & Accountability Institute recently analyzed and reported on the reporting practices of the companies whose CEOs signed the BRT statement.

Of the stats included in G&A’s report, 85% of the signatory companies publish a sustainability/ESG report.  Of the signatory companies that publish a sustainability report, 58% have adopted one or more Sustainable Development Goals – with the most common SDG being climate action and the next being decent work and economic growth.

To hear more about shareholder primacy and the corporate purpose, be sure to tune-in for our January 21 webcast, “Deciphering ‘Corporate Purpose’.”  We’ll talk with John Wilcox of Morrow Soldali, Pam Marcogliese of Freshfields Brruckhaus and Tricia Vella of Morris Nichols to understand what the debate is all about and what it means for directors’ fiduciary duties and company disclosure.

Divestment: Another Investor Approach to Social Issues?

Last summer, Liz wondered whether shareholders would show renewed interest in “firearms responsibility” during the 2020 proxy season. In December, the Connecticut Treasurer announced a “responsible gun policy” that goes past engagement and right on to divestment. We’ve blogged about how the NY Comptroller is considering divestment as part of its “decarbonization” plan as well – but of course it’s too early to tell whether divestment will become a real threat on these types of “social” issues.

Here’s an excerpt from the Connecticut Treasurer’s FAQs about its new policy:

As State Treasurer, the costs and risks of gun violence are a matter of significant financial concern, and the business of guns is becoming an increasingly risky proposition. Under Connecticut statute, the State Treasurer is empowered to consider the social, economic and environmental implications of specific investments. The Treasurer will propose amendments to the current Investment Policy Statement, with appropriate public notice prior to consideration and approval by the Investment Advisory Council.Following amendment of the Investment Policy Statement, fund managers will be instructed to reallocate investments into comparable substitutes in a similar industry that have the same risk and return characteristics as civilian gun manufacturing companies.

The Connecticut Retirement Plans and Trust Funds (CRPTF) currently hold $30 million of equity investments in 5 companies involved in the manufacture of ammunition for the civilian market (Northrop Grumman, Olin Corp., Daicel Corp., Clarus Corp., and Vista Outdoor). These investments represent .08% of the CRPTF’s portfolio.

While the CRPTF currently does not own investments in Sturm, Ruger & Company, a publicly traded civilian firearms manufacturer headquartered in Southport, CT, the Responsible Gun Policy will prohibit consideration of future investments with this company unless they move to advance smart gun technology. Other manufacturers, such as Colt (based in West Hartford, CT), are privately-held and would not be impacted by divestment.

The CRPTF is currently invested in Northrop Grumman, a multi-billion dollar global security company which wholly-owns Adaptive Optics Associates Xinetics (AOX) in East Hartford. Since Northrop Grumman is also in the civilian firearms ammunition manufacturing market, its securities would be subject to the Responsible Gun Policy and as such, $28 million currently invested in Northrop Grumman would be reallocated to an economically equivalent substitute.

Besides prohibiting Connecticut’s pension funds from investing in such companies, the policy will also require banks and other financial institutions that want to work with the state to disclose their policies on guns.  When making decisions to contract with a bank or financial institution, the state will consider the institution’s gun policies as one factor in its decision making process.

10-K Considerations to Keep in Mind

With calendar year Form 10-K filings coming up, Gibson Dunn issued a memo that walks through substantive and technical considerations when preparing 2019 10-Ks.  The memo discusses SEC disclosure amendments in the last year and SEC enforcement actions that may impact this year’s disclosures.  Here are some of the considerations, check out the complete 12-page memo for more:

– As of year end, of the 91 S&P 500 companies that filed a Form 10-K since the MD&A changes went into effect last April, 57% discussed 3 years of financial information rather than omitting discussion of the earliest of the 3 years from the MD&A

– Whether discussing 3 years or only 2 in the MD&A, companies should remember to review discussion of the earlier years to determine whether anything has come to light since the time of the original disclosure that would now make the original disclosure incomplete or inaccurate to an extent that it would be material – the memo provides examples of how or when this could occur

– Given SEC enforcement actions last year dealing with risk factor statements that phrased an event or contingency as a hypothetical, risk factors should be regularly revisited and treated as “living” as much as the rest of the filing – it may be preferable to refer to consequences of a risk that arises from time to time as a material contingency instead of as a hypothetical contingency

– Lynn Jokela