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Yesterday, Corp Fin revised “Disclosure Guidance Topic No. 7” to be more specific about how to handle expiring orders. When this piece of the guidance was first added last September, it tied the analysis for the different alternatives to orders issued “less than 3 years ago” or “more than 3 years ago.” Now, Corp Fin has helpfully put a stake in the ground at October 15, 2017. So the alternatives upon expiration are are:

1. If the contract is still material, refile it in complete, unredacted form

2. Extend the confidential period – using the short-form application for orders initially issued after October 15, 2017, or filing a new and complete application for orders initially issued on or before October 15, 2017

3. Transition to the “redacted exhibit rules” in Reg S-K Item 601(b)(10), if the contract continues to be material and the initial confidential treatment order was issued on or before October 15, 2017

Corp Fin also reiterated that if a confidential treatment order was granted on or before October 15, 2017, you don’t need to wait for the order to expire to transition to compliance with the redacted exhibit rules. You can just start doing that in a new filing or by amending a previously filed document.

Mandatory Climate Disclosure: California Bill Sets Ambitious Tone

California has been a bellwether for board diversity & consumer privacy movements. Now, it could be setting the tone for mandatory climate disclosures. California Senate Bill 260 – which was introduced in late January and will be taken up by committees this month – would apply to publicly traded domestic and foreign corporations with annual revenues in excess of $1 billion that do business in California, and would require:

– Public disclosure of their greenhouse gas emissions, categorized as scope 1, 2, and 3 emissions, from the prior calendar year – beginning in January 2024

– Setting & disclosing “science-based emissions targets” based on the covered entity’s emissions that have been reported to the state board, which would be consistent with the Paris Agreement goal of limiting global warming to no more than 1.5 degrees Celsius – beginning in 2025

– Public disclosures to be independently verified by a third-party auditor, approved by the state board, with expertise in greenhouse gas emissions accounting

This Akin Gump blog explains why this bill would be a big deal if it passes:

While many large companies already issue climate disclosures on a voluntary basis, SB 260 would no longer give them—or their more reluctant peers—a choice. Importantly, the bill’s required scope 2 and 3 emissions reporting would force companies to disclose, for the first time, the indirect emissions that result from their purchase and use of electricity as well as their supply chains, business travel, procurement efforts, water use and wastes.

Covered entities also would have to engage certified third-party auditors to verify their disclosures and emissions targets, another noteworthy first that should lead to a greater degree of standardization over time in climate reporting. Given the bill’s capacious reach and the minimum contacts with California required to trigger its applicability, most large companies in virtually every sector would soon face climate disclosure requirements.

As the blog explains, the bill faces a long road before it could become law. But even if it doesn’t end up passing, the dialogue that comes out of this process could influence company practices and investor preferences – and maybe even other disclosure regimes.

Value Vs. Values: False Dichotomy?

When pressed on “social policy” positions, the talking point for index funds and long-term investors seems to be that they’re simply taking positions that promote long-term financial value for the company. This recent study points out that it’s not so much the financial value of each individual company that they’re trying to maximize – it’s the financial value of their overall portfolio. And because that overall financial value increases when society prospers, investors have strong incentives to promote “ESG” issues, which reduce systemic risk and lead to diversified gains. Here’s an excerpt:

The analysis also shows why it is generally unwise for such funds to pursue stewardship that consists of firm-specific performance-focused engagement: Gains (if any) will be substantially “idiosyncratic,” precisely the kind of risks that diversification minimizes. Instead asset managers should seek to mitigate systematic risk, which most notably would include climate change risk, financial stability risk, and social stability risk. This portfolio approach follows the already-established pattern of assets managers’ pursuit of corporate governance measures that may increase returns across the portfolio if even not maximizing for particular firms.

Systematic Stewardship does not raise the concerns of the “common ownership” critique, because the channel by which systematic risk reduction improves risk-adjusted portfolio returns is to avoid harm across the entire economy that would damage the interests of employees and consumers as well as shareholders.

These theories probably don’t mean much for boards as a whole – who will still need to focus on their specific shareholders, and the business judgment rule will protect most decisions. But when it comes to individual directors, the paper makes the case that rejecting “weak directors” is one company-by-company action investors can take that has portfolio-wide effects. That seems to be consistent with some of the investor policies that have been published lately, and means the focus on board composition & skills isn’t going away anytime soon.

– Liz Dunshee