April 15, 2021

Senate Confirms Gary Gensler as SEC Chair

Yesterday, the Senate voted to confirm Gary Gensler’s nomination as the next SEC Chair by a 53-45 vote. Gary will likely be sworn in early sometime early next week – and many expect he will hit the ground running.

Usually, when the Senate approves a new SEC Chair, the person is approved to serve in that capacity for a 5-year term. In this case, the Senate approved Gary to serve only for the remainder of former SEC Chair Jay Clayton’s term, which ends on June 5th of this year. An SEC Commissioner can serve up to 18 additional months following expiration of their initial term if a successor isn’t named – but another Senate vote is required to serve beyond that.

Although there’s no imminent plan for another Senate vote on this position, the Senate Banking Committee already cleared the reappointment of Gary for a second five-year term ending on June 5, 2026 when they advanced his nomination. So it’s on the Senate calendar, but the vote is subject to Gary’s commitment to respond to testify before any Senate committee. This Cooley blog gives more detail about the confirmation hearing and potential priorities for a Gensler SEC.

ESG Reports: 7 Tips for a “Health Check”

I’m happy to share this guest post from Ashley Walter, JT Ho and Carolyn Frantz of Orrick – with 7 tips for conducting a “health check” on your ESG report:

Environmental, Social and Governance (ESG) reports are becoming “table stakes” for public companies, regardless of a company’s industry or market capitalization. Whether you have been publishing a report for years or you haven’t started the process yet, given recent SEC developments, and increased focus on ESG by various stakeholders, including investors, proxy advisors, commercial partners, customers and employees, now is the time to revisit and reassess your disclosure.

In this post, we offer guidance on how companies can perform a “health check” on their ESG reports:

1. The horse must come before the cart. As a result of the focus on disclosure by investors and other stakeholders as well as proxy advisors and ESG ratings organizations, it is easy for companies to fall into the trap of prioritizing disclosure over the underlying ESG framework that forms the basis for such disclosures. Companies should focus on implementing a tailored framework that identifies key performance measures, establishes effective oversight at the Board, committee and management levels, addresses commercial requirements, is responsive to stakeholder interests, and ensures legal compliance.

2. Review disclosure controls and procedures. Companies should consider employing some the same disclosure controls and procedures in reviewing and approving an ESG report that they employ in reviewing and approving SEC filings, which may require internal and external audit review. Given the amount of information included in such filings and the critical business issues addressed, the publication of an ESG report can expose a company to risk if the report is not vetted properly. Having disclosure controls and procedures in place will also enable an auditor to provide assurance with respect to the company’s disclosures, if the company deems that advisable.

3. Be cognizant of language describing the purpose of ESG measures and the timeline for implementation of ESG goals. Throughout its pages, an ESG report will, in various ways, address the connection between the ESG measures described in the report and the impact on value for stakeholders – this relationship must be articulated carefully and should be consistent across the report. Statements closely tying representations about ESG to financial performance may heighten litigation risks if those representations are later considered misleading. In addition, to the extent forward-looking ESG goals are presented, any timelines for implementation should be realistic and caveated appropriately. Special attention should be paid to this issue when it comes to letters composed by members of management or the board that are included in the report.

4. Refrain from employing the concept of materiality. Given the SEC’s stated intention to revise its guidance regarding what may be considered material with respect to climate-related disclosure, companies should refrain from using the word “materiality” in their ESG reports so that the term is not conflated with materiality as defined by the SEC. Alternatives include referring to “priority,” “significant,” or “relevant” ESG factors.

5. ESG report or website? Certain companies have opted to provide their sustainability disclosures on internal website pages as opposed to within a separate published report. While this approach enables a company to update the material more easily and avoid some of the costs associated with preparing a stand-alone report, it’s also possible that it may be more difficult for proxy advisors, ESG ratings organizations, investors and others to quickly find relevant information and, more importantly, it may work against the company’s efforts to ensure consistent disclosure controls and procedures are applied with respect to ESG disclosure.

6. Leverage your lawyer. Legal counsel can advise the company on governance, board fiduciary duties and director liability, and litigation risks associated with ESG programs and disclosures. Any communications with legal counsel may be privileged. Company counsel should be involved in a targeted fashion at key points in the process – most importantly at the outline stage, after an initial draft has been put together by the company/its consultant(s), and before the report is finalized.

7. Should we hire a consultant? There are many different types of firms that offer ESG reporting services, including traditional management consultancies, ESG-specific management consultancies, communications firms and engineering firms. Each brings a unique perspective and set of skills. A company should identify the resources it has internally and through its existing advisors and consider hiring a consultant to extent there are any gaps in its capabilities, and the company should select the type of consultant based on the consultant’s skill set and the nature of the identified gap(s).

Companies are under increasing pressure to publicly disclose a broad and detailed set of information regarding their ESG practices. Such information is used by institutional investors in their investment decisions by all major proxy advisors in developing their reports for shareholders (and may guide voting recommendations), and may also be used by potential and current commercial partners, consumers and employees. Given the potential opportunities and risks, companies preparing an ESG report for the first time should exercise great care in determining content and drafting language, and companies that have publishing reports for some time should reexamine their disclosures in the light of recent developments.

– Lynn Jokela