October 7, 2020

“Fishy” Comment Letters, Not So “Fishy” After All

Late last year, some may recall when reports started surfacing of allegedly “fishy” comment letters submitted to the SEC ahead of the agency’s proxy advisor rulemaking. The Office of Inspector General recently issued a statement summarizing its investigation and concludes there was no wrongdoing. Here’s an excerpt:

Each person interviewed stated they willingly submitted a letter to the SEC and did not receive any compensation or benefit from anyone for doing so. Further, the investigation determined that an advocacy association for seniors solicited its members, current and former employees, and friends of the association’s employees to submit comment letters in response to proxy rulemaking proposals. The investigation also determined that a public affairs company working on behalf of another advocacy group solicited individuals to submit letters to the SEC about the proposed rule change. The investigation did not identify any author who did not in fact submit a letter to the SEC or who disagreed with the content in the letter they submitted to the SEC.

The reports of the alleged fake-comment letters caught the attention of a lot of people. Back in July, Senator Chris Van Hollen (D-Md.) inquired about the letters but things were fairly quiet until the OIG issued its statement. The OIG’s statement says it has closed the investigation and that no evidence was found to indicate any criminal violation.

Circle the Wagons: Create Assurance Around ESG Data

We’ve blogged before about the importance of oversight and disclosure controls related to sustainability disclosures.  Just last week, John blogged about CII’s statement calling for use of standard reporting metrics, which also said over time, companies should obtain external assurance of sustainability disclosures. This follows a 2019 McKinsey survey that found 97% of investors surveyed said sustainability reports should be audited and 67% said those audits should be as rigorous as financial audits. A recent EY survey of nearly 300 institutional investors reiterates the importance of the disclosures coupled with the credibility of the information.  According to EY’s report, investors are stepping up their game in terms of assessing company performance using non-financial factors.  High-level data points from EY’s report include:

Overall, 98% of investors surveyed evaluate non-financial performance based on corporate disclosures, with 72% saying they conduct a structured, methodical evaluation. This is a major leap forward from the 32% who said they used a structured approach in 2018.

Investors are also building their understanding of the ESG reporting universe, factoring in disclosures made as part of the Task Force on Climate-related Financial Disclosures (TCFD) framework. In fact, this research found strong evidence that investors see the TCFD framework as a valuable approach for wider non-financial disclosures, beyond climate-related information.

The research found investors have a significant appetite for an independent lens on ESG performance. For example, 75% said they would find value in assurance of the robustness of an organization’s planning for climate risks.

The report offers three suggestions to help companies meet investor expectations:

(1) Build a stronger connection between non-financial and financial performance. Investors can focus on building more credible and nuanced approaches to understanding what influences long-term value for certain sectors and companies, while companies themselves can focus more on their materiality — reporting on what environmental, social and economic factors are most relevant to their stakeholders and could impact their ability to create value over the longer term.

(2) Build a more robust approach to analyzing the risks and opportunities from climate change and the transition to a decarbonized future, and communicate this more comprehensively through TCFD reporting. Critical actions range from understanding the resilience of business strategies and assets under a range of possible climate scenarios, to assessing avenues for capitalizing on the economic opportunities of a decarbonized future – including attracting and accessing capital.

(3) Instill discipline into non-financial reporting processes and controls to build confidence and trust. Establishing effective governance practices and seeking independent assurance of non-financial processes, controls and data outputs can help build trust and transparency with investors. This is an area where CFOs and their finance teams — which have extensive experience in establishing processes, controls and assurance of financial information — can bring their best practices and experience to bear. The input of CROs and risk teams can also be valuable, as can treasury function input when green finance is involved.

Tomorrow’s Webcast: “CFIUS After FIRRMA: Navigating the New Regime”

Tune in tomorrow for the webcast – “CFIUS After FIRRMA: Navigating the New Regime” – to hear Wilson Sonsini’s Stephen Heifetz and Hogan Lovells’ Anne Salladin discuss how to deal with the enhanced national security review environment resulting from implementation of 2019’s Foreign Investment Risk Review Modernization Act.

– Lynn Jokela