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It looks like another effect of Covid-19 might be a shift of investors’ ESG focus by placing more emphasis on social issues – perhaps the focus on climate will need to share the spotlight.  As noted in this SGP 2020 proxy season blog, the “S” issues in ESG were frequently focused on culture and diversity and now, there’s greater focus on worker safety and employee engagement.

ESG funds are getting a lot of attention these days with many noting how ESG funds fared better than the overall market during ongoing turbulence – here’s a WSJ headline and a Morningstar report showing how sustainable funds generally outperformed conventional benchmarks during the first quarter.  Not too long ago, Rhonda Brauer blogged about initial investor responses to the Covid-19 pandemic and noted how some investors have been asking companies to prioritize worker health & safety among other things.

Climate concerns are clearly still a priority, but a recent letter from the International Corporate Governance Network about shared governance responsibilities places emphasis on social issues.  The focus on social issues coexists with a long-term perspective aimed at protecting financial stability and longer-term sustainability.  The letter says Covid-19 presents a new era of engagement and lists governance priorities for companies and for investors – with social issues topping the list. Here’s an excerpt:

The ICGN Statement of Shared Governance Responsibilities broadly emphasizes the need for companies to:

– Prioritize employee safety and welfare while meeting short-term liquidity requirements to preserve financial health and solvency

– Pursue a long-term view on social responsibility, fairness and sustainable value creation and publicly define a social purpose as we all adjust to a new reality

– Take a holistic and equitable approach to capital allocation decisions, considering the workforce, stakeholders and providers of capital

– Communicate comprehensively with all stakeholders to instill confidence and trust in a company’s approach to build resilience into strategy and operations

– The Covid-19 pandemic presents the most significant public health and economic crisis of our time and calls for new forms of cooperation on a global scale. It has ignited an acute recognition of social failures and deep gender, racial and income inequality.

Call for SEC to Sharpen Covid-19 Disclosure Guidance

Some may have read the Council for Institutional Investor’s letter to the SEC’s Investor Advisory Committee sent last week.  Tucked in the middle of the letter between complimenting the SEC’s efforts on disclosure during the Covid-19 pandemic and concerns about virtual shareholder meetings is a call for the SEC to ramp up disclosure of human capital management and customer safety.  Even though the request is in the context of Covid-19, one has to wonder whether this could lead to additional calls later.  Here’s an excerpt from the letter:

A critical set of issues for successful operation now is safety of employees and customers. In many cases, it appears to us highly relevant to investors how companies are assuring safety, including policies on leave and sick pay, as well as safety equipment and protocols at workplaces. And for companies with operations in hiatus due to government orders and/or temporary absence of demand, the ability to gear back up will depend in part on credibility of safety steps that are taken. A question within this topic is whether and how companies are testing (or plan to test) workers for Covid-19 and for antibodies, which will be important for confidence to move forward, particularly to the extent there is not a broad and effective government-sponsored testing regime.

We believe it could sharpen the March 25 guidance for the Division to consider further relevant questions on these matters. We believe that some companies have been very forthcoming on these issues, and it may be early to render negative judgments on companies that have largely shut operations as we arguably are (at most) in the beginning stages of re-opening sectors of the economy. But it would be useful for the Division to consider whether it can prod useful Covid-19 related disclosure on matters of human capital management and customer safety, as it has in other areas.

Companies Targeted for Return of PPP Funds

John’s blogged a few times about issues with the Paycheck Protection Program.  For companies that might be questioning whether to return PPP funds, a couple of recent memos high-light reasons it’d be a good idea to make sure PPP loan recipients were really the intended beneficiaries of this CARES Act program.  The safe harbor to return PPP funds without penalty ends tomorrow – May 14 – John blogged about this extended deadline last week.

First, the U.S. House Select Subcommittee has targeted five companies to return PPP loans or to produce necessary supporting documentation.  A McGuireWoods memo summarizes this development and says each of the targeted companies are public companies with market caps of more than $25 million, received loans of $10 million or more and had over 600 employees.  The memo advises companies to carefully document the analysis used in determining eligibility for the loans and otherwise mitigate risk and potential future liability.

Next, a Nixon Peabody memo points out the government is keeping a close watch for potentially fraudulent activity.  Last week, the Department of Justice announced criminal charges against two people who allegedly filed fraudulent PPP loan applications.  The memo says that the DOJ caught on to the plot before any PPP funds were distributed to the individuals.  The DOJ brought charges alleging conspiracy to make false statements and commit bank fraud, among other felony offenses.  One clear takeaway from the memo is that all CARES Act beneficiaries should prepare for heightened government scrutiny.

– Lynn Jokela