Monthly Archives: November 2020

November 12, 2020

Survey Results: Signature Authority Thresholds

We’ve wrapped up our latest survey relating to signature authority thresholds. Here are the results:

1. What is your company’s market cap?

– Less than $300M – 17%
– $300M – $2B – 21%
– $2B – $10B – 21%
– $10B – $100B – 34%
– More than $100B – 7%

2. What is the dollar threshold requiring board approval for acquisitions?

– Less than $10M – 43%
– $10M – $25M – 21%
– $25M – $50M – 11%
– $50M – $100M – 7%
– $100M – $250M – 11%
– $250M – $1B – 7%
– More than $1B – 0%

3. Does your board have the same or different dollar thresholds requiring board approval for the following categories: acquisitions, financing transactions, general contracts, and real estate?

– Same – 38%
– Different – 62%

Please take a moment to participate anonymously in these surveys:

Human Capital Management & Metrics
Insider Trading – Covid-19 Adjustments

For more on human capital management, be sure to check out today’s webcast “The Top Governance Consultants Speak” & next month’s webcast “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments.”

ESG: 2021 Investor Trends

This SquareWell Partners report addresses investor approaches to ESG issues during 2020 and predicts how they will shape the dialogue between companies & shareholders during the upcoming year.  This excerpt address investors’ increasing focus on capital allocation decisions:

As the impacts of COVID-19 will continue and the ‘V’-shaped recovery looking less likely, capital allocation decisions will require a delicate balancing act for companies in 2021 to manage the diverging expectations of its stakeholders (especially within its shareholder base regarding the payment of dividends).

Companies will be expected to justify their capital allocation decisions, whether it is to remunerate shareholders or not. Whilst investors like Schroders have communicated that they would be more flexible regarding capital raising requests, other investors (and proxy advisors) will scrutinize the management quality, urgency of the funds, and the long-term strategy before supporting any capital raise (as in the case at French mall operator, Unibail-Rodamco-Westfield).

The report cautions that while investors demonstrated restraint during the current year, 2021 will likely be a critical year during which investors will pass judgment on corporate actions or failures to act in response to the crisis.

Rule 10b5-1 Plans: No Affirmative Defense to Bad Publicity

Pfizer’s announcement earlier this week about the apparent efficacy of its Covid-19 vaccine is the best news the market – and the world – has heard this year.  That announcement helped fuel a stock market surge, and according to media reports, Pfizer’s CEO & another executive sold a sizeable amount of the company’s shares during the rally.

The more thoughtful coverage of these sales pointed out that they were made under the terms of pre-existing Rule 10b5-1 plans, but the situation provides another example of the fact that whatever else a 10b5-1 plan does, it doesn’t provide an affirmative defense against bad publicity.

John Jenkins

November 11, 2020

Board Diversity: Companies Focus On Overboarding to Move the Needle

Last week, Liz blogged about a recent report from the NYSE & Diligent that said that 81% of directors indicated that their board either already has a plan for increasing boardroom diversity or will have one soon, but that 45% lacked a specific timeframe for meeting diversity goals. However, the report goes on to say that those companies that have established a timeframe plan to move fast, and are limiting the number of boards on which directors may serve to help them achieve their diversity goals. Here’s an excerpt from this article:

But when a timeframe is set, it is ambitious: 35% of companies have set a one to three-year period in which to meet their diversity goals. The most widely adopted approach companies are taking to promote board refreshment is limiting the number of boards a director can sit on (17%). This brings a new focus on the concept of overboarding – a growing issue for investors in recent years. Although the Diligent and NYSE study doesn’t provide numbers when talking about limiting the number of boards a director can sit on, both ISS and Glass Lewis have tightened their stance on this in recent years.

The report says that 14% of companies have also introduced age limits for their directors in order to promote board refreshment & greater diversity. Another 11% percent have added more seats to their boards in order to make room for more diverse directors to join.

Covid-19: U.S. Chamber Petitions SEC for Liability Protection

The Covid-19 pandemic has already prompted a wave of litigation, including nearly three dozen securities lawsuits.  In an effort to protect businesses from what it characterizes as “unjustified Covid-19 lawsuits,” the U.S. Chamber of Commerce recently filed a rulemaking petition with the SEC seeking to enhance protections against pandemic-related securities claims.  Here’s an excerpt from Kevin Lacroix’s D&O Diary blog:

On October 30, 2020, the U.S. Chamber Institute for Legal Reform and the Chamber’s Center for Capital Markets Competitiveness filed a petition with the Securities Exchange Commission, pursuant to Rule 192(a) of the Commission’s Rules of Practice. (Rule 192(a) provides that “Any person desiring the issuance, amendment or repeal of a rule of general application may file a petition therefor with the Secretary” of the SEC.) The petition urges that the SEC should exercise the authority given to the agency in the PSLRA an “act without delay to place reasonable limits on securities litigation arising out of the COVID-19 pandemic.”

The Chamber’s petition asks the SEC to consider several specific actions. These include:

– Using its authority under the PSLRA to “bar liability for statements about a company’s plans or prospects for getting back to business, resuming sales or profitability, or other statements about the impacts of COVID-19, whether forward-looking or not—as long as suitable warnings were attached.”

– Alternatively, limiting liability for all such statements to circumstances in which the plaintiff can prove that the speaker had actual knowledge of their falsity (which would have the effect of treating all such statements as “opinions” for purposes of the securities laws).

– Requiring financial statements – which aren’t protected by the PSLRA safe harbors – to include language reminding users that a number of the elements of those statements “are determined on the basis of projections of future business or market conditions or by applying “mark to market” standards and stating that due to the tremendous uncertainties flowing from the pandemic and its effect on the economy, there is a greater possibility of variation than in the past.” Liability for pandemic-related misstatements in financial statements that include these warnings would be barred or, or alternatively, treated as the equivalent of opinions requiring proof that the company subjectively knew they were false in order for them to be actionable.

Kevin’s blog reviews the petition in detail, as well as some of the impediments to any quick action by the SEC on it.  He also provides additional context for the concerns about a potential explosion in Covid-19-related securities litigation in light of the rise of “event driven” securities class actions in recent years.

Tomorrow’s Webcast: “The Top Governance Consultants Speak”

Tune in tomorrow for the webcast – The Top Governance Consultants Speak – to hear Laura Wanlass of Aon, Rob Main of Sustainable Governance Partners, Allie Rutherford of PJT Camberview and Chris Young of Jefferies discuss what you should be focusing on in fall engagements and what proposals are emerging for the upcoming year.

John Jenkins

November 10, 2020

SEC Enforcement: More Edgar Hackers Face the Music

The ongoing proceeding against the alleged perpetrators of the 2016 hack of the Edgar system is one of the Division of Enforcement’s most high-profile cases. Last week, the SEC announced that it had reached a settlement with three of the defendants in that case, Sungjin Cho, Ivan Olefir, and Capyield Systems, Ltd., an entity affiliated with Olefir. According to the SEC’s complaint, the defendants allegedly traded on the basis of the hacked information during the period from July to October 2016. The SEC’s litigation release lays out the sanctions imposed:

Cho, Olefir and Capyield consented to the entry of final judgments that would permanently enjoin them from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. Additionally, Cho and Olefir agreed to conduct-based injunctions limiting their ability to trade U.S.-listed securities and derivatives. Cho agreed to pay a civil penalty of $175,000, and Olefir and Capyield agreed to pay a joint and several penalty of $250,000.

Earlier this year, the SEC reached a similar settlement with two other defendants. But the two alleged masterminds of the scheme – Ukrainian nationals Artem Radchenko & Oleksandr Ieremenko – are currently being sought by the Secret Service & the State Dept. The U.S. government has offered a reward of $2 million for information leading to their arrest or conviction.

SEC Enforcement: 2020 Annual Report

Last week, the SEC’s Division of Enforcement issued its annual report for the 2020 fiscal year.  This Sullivan & Cromwell memo summarizes the report’s highlights:

As the Report details, the Division obtained a record-breaking $4.68 billion in monetary remedies in FY 2020, including $3.59 billion in disgorgement and $1.10 billion in penalties. Total monetary relief in FY 2020 exceeded that in FY 2019 by $330 million, or 8%.

The Division filed 715 enforcement actions in FY 2020, which reflected a 17% decline from the previous year. Of the total actions brought, 405 were so-called “standalone” enforcement actions, 180 were follow on administrative proceedings, and 130 were actions to de-register companies that were delinquent in their SEC filings. Of the total number of enforcement actions, 492 were brought after instituting mandatory telework in mid-March. The decline in the number of actions is attributable largely to the disruptions resulting from COVID-19, as well as the fact that the prior year included numerous actions filed as part of the SEC’s Share Class Selection Disclosure self-reporting initiative.

Three enforcement areas drove the majority of the SEC’s standalone cases: (i) securities offerings (32%); (ii) investment advisory and investment company issues (21%); and (iii) issuer reporting/accounting and auditing (15%). The SEC also brought actions relating to broker-dealers (10%), insider trading (8%), market manipulation (5%), Public Finance (3%), and FCPA (2%). The SEC continued to pursue charges against individuals; 72% of the SEC’s standalone cases involved charges against one or more individuals.

The Division of Enforcement received 23,650 tips, complaints, and referrals in FY 2020, with most of them being received during the pandemic. That represents a substantial increase over the comparable FY 2019 figures, and the report says that they’ve helped to create a “strong pipeline for future enforcement actions.”

Virtual Annual Meetings: Gearing Up for 2021

At this point, most of us have reconciled ourselves to the fact that things aren’t getting back to normal anytime soon. Since that’s the case, companies will need to prepare for possibility that their 2021 annual meeting will once again need to be a virtual or hybrid meeting. This recent Bryan Cave blog offers up some tips on preparing for next year’s virtual meetings. This excerpt lays out some things to think about when it comes to such a meeting’s format and rules of conduct:

Companies need to decide whether a meeting will be virtual-only, physical-only or a hybrid. For any virtual component, they need to decide whether the access will be audio-only or audio plus video. While a majority of virtual meetings during the 2020 proxy season appeared to be in audio-only format, we expect that in 2021 companies will increasingly use video for their meetings, as video conferencing has evolved during the pandemic.

Clear rules of conduct are imperative. As more companies transitioned to virtual meetings in 2020, one area of focus was on how and when shareholders could submit questions. Investors and others questioned whether companies might be “cherry-picking” the questions they answered and requested that all shareholders have access to the questions submitted. Companies in 2021 will need to put in place and clearly address the Q&A process. For example, issuers need to decide whether questions may be asked live during the meeting via a chat function and/or over the phone, and/or prior to the meeting by submitting online or through email.

If you’re not already thinking about the possibility of a virtual component to your meeting next year, you probably ought to be. The blog says that many companies are already exploring retention of virtual meeting providers and video and real-time Q&A alternatives, and have also begun drafting disclosure about meeting logistics to include in their proxy materials.

John Jenkins

November 9, 2020

What Will the Election Mean for the SEC?

This Bloomberg Law article lays out some thoughts on what the Biden administration might mean for the SEC & its rulemaking and enforcement priorities. This excerpt points out that the recent amendments to the proxy rules targeting proxy advisors & shareholder proposals top the list of rules that could be undone by a reconstituted SEC:

In July 2020, the SEC made significant changes to the proxy advisor rules. Critics, such as Commissioner Allison Herren Lee, argued that the new rules were unwarranted, as they addressed no identifiable problem. The scope of the opposition to this measure makes it a candidate for early reversal in 2021. A to-do list of similar measures could also include recent changes to the shareholder proposal rules that make it more difficult for a small investor to submit or resubmit a proposal for inclusion in company proxy materials.

The article also predicts a more receptive environment for ESG-related disclosure requirements, and a more aggressive enforcement posture.  Whether a Democratic led SEC can find a way to reach consensus on issues like these and end its string of 3-2 votes on rulemaking proposals remains to be seen, but I sure wouldn’t bet the farm on it.

Disclosure: Prescriptive v. Principles-Based Approaches

Since the S-K modernization amendments just became effective, I thought this recent Bass Berry blog provided a timely illustration of the differences in disclosure practices that might result when a principles-based rule replaces a prescriptive one.

The blog reviewed a Staff comment letter & response involving a company that disclosed its dependence on a handful of 10%+ customers.  In its comment letter the Staff requested the company to disclose the identities as required – until recently – by the prescriptive language of Item 101(c) of S-K. However, as a smaller reporting company, the company was permitted to adopt the principles-based approach sanctioned by Item 101(h).  Here’s an excerpt from the company’s response to the Staff:

The Company respectfully asserts that disclosure of the names of its customers is not required by Item 101(h)(4)(vi) of Regulation S-K, nor does the Company believe the identity of its largest customers is material to an understanding of its business taken as a whole or necessary for investors to make an informed investment decision. Unlike Item 101(c)(1)(vii) of Regulation S-K, Item 101(h)(4)(vi) does not require a smaller reporting company to identify the name of any customer that accounts for 10% or more of its revenue. The Company also believes that the identities of its customers are of significantly less importance than a qualitative and quantitative description of the extent to which revenue from such customers is relied upon.

Each of the Company’s top three customers in 2019 have been customers for many years. The Company’s largest customer, representing 36.8% of revenue in 2019, has been a customer for 30 years. The second and third largest customers in 2019 have been customers for approximately 10 years and 7 years, respectively. While the Company does consider the loss of revenue from any one of its largest customers significant, warranting appropriate risk factor disclosure of the potential consequences of such loss, the Company does not believe investors will be more informed of these risks by knowing the customers’ identities.

The Company also indicated that both it & its customers regarded their identities to be highly confidential and commercially sensitive, but also agreed to provide additional disclosure about the percentage of its revenue derived from sales to those customers during the prior year. The Staff did not comment further on the company’s disclosure.

Stock Buybacks: Guidance for Your Repurchase Program

The SEC’s recent enforcement action against Andeavor LLC arising out of internal control lapses relating to the company’s stock repurchase plan has caused many companies to take a hard look at the mechanics of their own plans. If you’re working with one of those companies, take a look at this recent Mayer Brown memo, which reviews the application of the Rule 10b-18 safe harbor and a variety of other potential issues that may arise under the federal securities laws, state corporate law, and – for some issuers – applicable provisions of the CARES Act.

John Jenkins

November 6, 2020

Reg S-K Modernization: Corp Fin Issues 3 Transitional FAQs

Yesterday, Corp Fin issued three FAQs to address transitional issues that companies have been wondering about in light of the recent amendments of Regulation S-K Items 101, 103 and 105, which are effective for filings made after today. Thanks to the Staff for addressing these questions – and it was also great that the SEC sent out a separate email showing exactly which interpretations had been added. Here are the topics that are covered (also see this Cooley blog):

1. Whether a Form S-3 prospectus supplement that’s filed after November 9th, relating to a registration statement that became effective before that date, has to comply with the new rules.

2. Whether new Item 101 requires companies to disclose info in the Form 10-K for more than the fiscal year covered by the report.

3. Whether a company must always provide a full discussion of the general development of its business in an annual report or registration statement that requires Item 101 disclosure.

Tesla D&O Coverage Gets an “Elon Exclusion”

Earlier this year, John blogged that Tesla struck a deal in which CEO Elon Musk would personally provide D&O coverage to the board. Last week, the company’s latest Form 10-Q reported that the coverage came with a $3 million price tag for 90 days of coverage – which apparently was a 50% discount from the market quotes that Tesla received!

Tesla says that it’s now decided to line up a customary policy with third-party carriers. You’ve gotta wonder whether they’ve been able to negotiate a more reasonable price, since according to this article, the new policy has an “Elon exclusion.”

Will Mr. Musk play it safe without the safety net of insurance coverage? We’ll see, but my guess is he feels fine being self-insured. He now has $3 million more to cover mishaps, and that’s just pocket change for the fourth-richest man in the world.

Visit Our “Proxy Season Blog”

We continue to share daily posts on our “Proxy Season Blog” – which is available to members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Emerging Shareholder Proposal: B-Corp Conversions
– ISS to Cease Providing Draft Reports to S&P 500
– 14a-8 No-Action Letters: Key Points for Next Year
– Investors’ Letter-Writing Campaigns Just Got Easier
– Trends in Audit Committee Disclosures

Liz Dunshee

November 5, 2020

More on “Board Diversity: Goldman Says No More ‘Boys Club’ IPOs”

Last year, Goldman Sachs’ CEO David Solomon announced that the bank wouldn’t be taking any company public unless the company met diversity quotas – one diverse director in 2020, two in 2021. In this LinkedIn post, DJ D-Sol notes that they’ve taken 54 companies public since the policy went into effect – and they’ve started a new initiative to get first-timers on boards.

Goldman Sachs isn’t alone in these initiatives – the NYSE is also involved with getting diverse directors connected with companies who are seeking new directors. This recent report from the NYSE & Diligent says that 81% of directors indicated that their board either already has a plan for increasing boardroom diversity or will have one soon. However, 45% lacked a specific timeframe for meeting diversity goals. Check out the full survey for info on board refreshment practices and other diversity efforts.

Critical Audit Matters: PCAOB Says CAMs Made Ripples, Not Waves

Last week, the PCAOB issued this analysis of the impact of the “critical audit matter” disclosure requirement, which has already been in effect for large accelerated filers and will take effect for other companies at the end of this year. This Cooley blog summarizes some of the high expectations and worries that people had when the requirement was adopted. But so far, other than auditors putting in some long hours (or maybe because of auditors putting in long hours), it seems like CAMs are making more of a ripple than a wave. Here are some of the key PCAOB findings:

• 2,420 audit reports contained CAMs – averaging 1.7 per report (7 was the highest). The most common CAMs reported related to revenue recognition (604), goodwill (462), other intangible assets (385) and business combinations (355).

• Audit firms made significant investments to support initial implementation of CAM requirements – but so far, they don’t appear to be passing those costs on to companies.

• Audit committee chairs and company preparers participating in the interview process indicated that the CAM implementation process was a “generally smooth experience” for companies, largely as a result of the significant upfront preparation by auditors. In particular, those interviewed considered the “dry runs” conducted by auditors to be useful.

• 41% of engagement partners who participated in the survey felt that the CAM requirement enhanced audit committee communications – less than 2% felt they constrained communications.

• Investor awareness of CAMs communicated in the auditor’s report is still developing, but some investors are reading CAMs and find the information beneficial. Only 31% of surveyed investors had seen a CAM “in the wild.”

• Only 2% of engagement partners reported issuer changes to internal control over financial reporting because of CAMs.

• The staff has not found evidence of significant unintended consequences from auditors’ implementation of CAM requirements for audits of large accelerated filers in the initial year.

The PCAOB analysis was accompanied by two whitepapers: one covering stakeholder outreach on CAM implementation and the other providing an econometric analysis of CAM requirements. Riveting stuff. The PCAOB plans to issue another report in 2022 and a comprehensive post-implementation review in 2024.

COVID-19: Heightening Investors’ Focus on Social Issues?

Social issues are attracting greater attention from asset managers this year, compared to the “Before Times” – but governance remains the most important issue. That’s according to a recent survey of 65 asset managers by ISS ESG, asking how the pandemic has impacted their consideration of ESG factors in investment decision-making and stewardship or engagement activities. The press release lists these key findings (see our “ESG” Practice Area for a bevy of surveys and memos):

– 62.5 percent of respondents report that social issues attract more of their attention now than before the COVID-19 pandemic.

– Governance remains the most important ESG factor in the investment analysis and stewardship activities of 86 percent of respondents.

– Respondents report the primary drivers of growth in their ESG engagements include client and stakeholder demand, racial inequality and diversity, and regulatory changes.

– 44.1 percent of respondents expect future ESG ratings to place a greater weight on workplace safety, treatment of employees, diversity and inclusion, as well as supply chain labor dynamics.

– 37.5 percent of respondents have either already added or intend to add new staff to manage ESG-related issues.

Liz Dunshee

November 4, 2020

SEC Might Abandon Proposed 13F Amendments

Last week, Bloomberg reported that the SEC was shelving its proposal to raise the Form 13F reporting threshold. If that’s true, it would come as a relief to the 2,238 people who penned letters to oppose the proposal – and disappoint all 24 who supported it.

As Lynn blogged and others pointed out, the higher threshold probably would made things more difficult for corporate folks involved in shareholder engagement. Keep an eye on future Reg Flex Agendas to see if this one comes back or just fades into oblivion.

Measuring “TCFD” Disclosures

According to this progress report from Climate Action 100+, 120 companies now have a board committee with express responsibility for oversight of climate risks and 59 companies now formally support the disclosure framework from the Task Force on Climate-related Financial Disclosures. The TCFD is a voluntary set of climate-related financial risk disclosures that is intended to help price climate risks – the task force is chaired by Mike Bloomberg.

As this Paul Weiss memo explains, although the TCFD’s recommendations were first published only three years ago, it’s one of the frameworks that’s become more popular. Late last week, TCFD issued its third annual status report to document progress. Here are a few of the key findings (for more benchmarking, also see this 15-page memo from Vigeo Eiris and Four Twenty Seven):

– Almost 60% of the 100 largest global public companies support the TCFD, report in line with the TCFD recommendations, or both

– The largest increase in disclosure was related to how companies identify, assess, and manage climate-related risk – but disclosure of the potential financial impact of climate change on businesses remains low

– Less than 1% of companies disclosed information on the resilience of their business strategy, taking into consideration different climate-related scenarios

– The most useful piece of info according to “expert users” is the impact of climate change on a company’s business & strategy – check out Appendix 5 beginning on pg 93 to see how these users ranked the usefulness of other information, which could help you prioritize your disclosure efforts

The TCFD also published two guidance documents:

Guidance on Scenario Analysis for Non-Financial Companies: provides ways to use scenario analysis and ideas for disclosing resilience of strategies to different climate-related scenarios

Guidance on Risk Management Integration & Disclosure: aimed at companies interested in integrating climate-related risks into their existing risk management processes and disclosing information on their risk management processes in alignment with the Task Force’s recommendations

Putting Sustainability into Action: 10-Year Roadmap

Recently, Ceres launched a 10-year sustainability action plan for companies to consider as a framework for governance, disclosure and strategic actions – along with this micro-site that includes performance milestones for each category of action, and other resources.

Speaking of putting sustainability into action, Coca-Cola recently announced that they would be discussing the company’s approach to sustainability, diversity and inclusion during a webcast for investors on November 13th. They’ll discuss the company’s sustainability strategy and goals, response to COVID-19 and stance on racial equity, among other topics.

Liz Dunshee

November 3, 2020

SEC Simplifies Exempt Offering Framework!

Following its open meeting yesterday, the SEC announced that it adopted amendments to simplify & harmonize the private offering framework. The Commission had proposed these rules in March following a concept release last summer. Here are highlights from the SEC’s Fact Sheet about what the amendments do:

– Establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings – and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering. The amendments also provide 4 non-exclusive safe-harbors from integration.

– Increase the offering limits for Reg A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits

– Set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities

– Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions

As has become the norm, the amendments were adopted by a 3-2 vote, with Commissioners Hester Peirce and Elad Roisman saying the rules don’t go far enough, and Commissioners Allison Herren Lee and Caroline Crenshaw saying that the rules strip away investor protections and were adopted without adequate data. Here’s a link to all of the statements from the Commissioners and SEC Chair Jay Clayton.

The amendments will go effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register. Publication often takes about a month – so if that’s the case, that would put us in the February time frame for this new private offering regime.

We’ll be updating our “Reg D Handbook” for these new rules as well as the changes to the accredited investor definition that go effective next month. We’ll also be posting memos in our “Private Placements” Practice Area.

New PPP “Loan Necessity Questionnaire” – 10 Days to Respond!

The Small Business Administration published a notice last week that it would release a new “loan necessity questionnaire” – Form 3509. If your company borrowed $2 million or more from the Paycheck Protection Program, you’ll need to complete the form to show the necessity of the borrowings – and it’ll be due within 10 business days of receiving it from your lender.

Although copies of the Form are popping up online, this Kaplan blog points out that the SBA website hasn’t posted an official version. This McDermott memo gives an overview of the information that borrowers will be expected to provide and suggests that they start collecting supporting documentation, given that the time frame for responding will be short.

Sustainability Reporting: XBRL Coming Soon?

PwC is working with SASB to translate its sustainability reporting standards into an XBRL taxonomy, according to this “Accounting Today” article – and the charge is being led by former SEC Chief Accountant Wes Bricker. The “Big 4” accounting firms definitely see an opportunity in ESG. As I blogged a couple of months ago on the Proxy Season Blog, they’re also working together to develop a set of common metrics for reporting.

Sure, common metrics and even XBRL could be helpful to investors, but I think the biggest opportunity here is to use this “alphabet soup” to create our very own, modern take on the “Mickey Mouse Club” song: S-A-S-B, X-B-R-L, E-S-G, M-O-U-S-E! Who’s with me?

Liz Dunshee

November 2, 2020

ESG: Election Edition

Tomorrow’s the day everyone’s been waiting for: my son’s birthday. Also, Election Day. Lots of people think that if there’s a “Blue Wave,” it would accelerate the push for “stakeholder capitalism” – especially after a group of Democratic senators announced a working group on Friday to signal that the rights of workers and long-term, sustainable operations would be a priority if their party gets wins up & down the ballot.

That may well be the case, but I don’t think a Trump victory means that we’ll be able to write off ESG. Remember the aftermath of the 2016 election and the US withdrawal from the Paris Climate Agreement? It only moved ESG momentum from the government to the patchwork of private ordering – if anything, it seemed to energize investors and companies to push in that direction.

For example, BlackRock first urged companies to serve a “social purpose” in a January 2018 letter, which ignited interest in “long-termism” and “corporate purpose.” Then we had the BRT statement last year, which is still making waves. Last week, this As You Sow review catalogued shareholder proposals on the topic of whether companies are adopting plans to implement the ideals of the BRT’s “corporate purpose” statement. And we’ve all been drowning in the proliferation of ratings and disclosure standards over the last four years.

DOL Leaves “ESG Investing” on Life Support

Then again, this administration has done a thing or two to try to divert attention from ESG issues. On Friday, the Department of Labor published the final version of its rule to require private-sector retirement plans to prioritize “pecuniary factors” when making investment decisions (I blogged about the proposal on our Proxy Season Blog back in June). It doesn’t expressly limit the use of ESG-themed investments, as had been proposed – but the substance of the proposal remained largely intact. This “Plan Adviser” article gives more detail:

The final version does include some significant changes compared with the proposal, which will seemingly protect the use of ESG investing to some extent. Chief among these changes is the fact that the text of the final rule no longer refers explicitly to “ESG.” Rather, it presents a framework that emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance. In this sense, the rule does seem to leave ample room for the use of ESG-minded investments, presuming these types of investments are assessed in a purely economic manner and that their financial features make them prudent investments.

The preamble to the final rule, on the other hand, does speak directly to the ESG topic. The DOL and EBSA officials said the preamble seeks to help stakeholders understand how the pecuniary framework may apply to the assessment of ESG investments in practice.

Another important change emphasized by senior DOL and EBSA leaders is that the final rule does not explicitly prohibit the selection of a fund that uses ESG factors as a plan’s qualified default investment alternative (QDIA). Once again, the final rule requires that a fund being selected as the QDIA must be assessed using purely pecuniary factors that are directly material to its financial performance. Beyond this, the final rule does stipulate that a fund is not appropriate as a QDIA if its stated objectives include explicitly non-pecuniary factors—for example addressing climate change itself, rather than addressing climate change’s impact on the financial outcomes of investors.

Our November Eminders is Posted!

We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!

Liz Dunshee