Our 58-page Annotated Sample Climate Disclosure, which is now available to members of PracticalESG.com, includes example text and tables, along with annotated guidance on key elements of the proposed disclosure. I would like to acknowledge the efforts and John Jenkins and Lawrence Heim in putting together the sample disclosures, because I think it is enormously helpful to have these sample disclosures as a starting point for the discussion.
There were many takeaways from our Climate Disclosure Event earlier this week, but the biggest takeaway for me was just how difficult compliance with the climate change disclosure rules will likely be and how much advance planning will be necessary even before the SEC adopts the final rules. As my good friend Marty Dunn always used to say, the life of a securities lawyer is always a markup of last year, but the challenge that we face with these rules is that we will have nothing to markup from last year! At least our sample disclosures can provide you with a starting point for comparing what the rules may require with what your company is disclosing today about climate change.
Back in April, I blogged about how Judge Terry Green of Los Angeles County Superior Court found that Assembly Bill 979, which required publicly traded companies based in California to have board members from underrepresented communities, violated the state’s constitution. According to this Law360 article, yesterday Judge Green declined to issue a stay of the Court’s order while the matter is pending on appeal.
California had asked Judge Green to pause the injunction pending appeal, or to at least make the injunction only partially mandatory to allow California to continue the process of gathering data and compiling reports about the diversity of corporate boards and compliance.
In this year of many anniversaries, the twentieth anniversary of the Sarbanes-Oxley Act is fast approaching on July 30. While most remember the Sarbanes-Oxley Act for its focus on auditors and internal controls, the Act and the events that surrounded it changed the face of corporate governance at public companies.
With all that has happened in corporate governance over the past two decades, it is difficult to recall just how low corporate governance standards were in the run-up to the early 2000s corporate scandals that ultimately prompted Congress to enact the Sarbanes-Oxley Act. The Act, and the continuing fallout from Enron, WorldCom and the many other corporate meltdowns of the era, in turn prompted the SEC and the stock exchanges to embark on a frenzied rulemaking and standard-setting effort that set the stage for the robust corporate governance environment that remains with us to this day.
As part of my efforts to document the history of the SEC’s Division of Corporation Finance for the SEC Historical Society’s virtual museum and archive, I will be hosting a program on July 21 from 2:00 to 3:30 pm eastern time titled The Sarbanes-Oxley Act at 20: A Corporate Governance Legacy. This program will feature Harvey Pitt, Alan Beller, Shelley Parratt and Annemarie Tierney. I encourage you to register for this virtual event, it will be a very interesting discussion.
At an open meeting yesterday, the SEC adopted rule amendments reversing certain changes to the proxy rules that were adopted just two years ago to address concerns with proxy voting advice from proxy advisory firms. The Commission’s announcement of the rule changes notes:
The final amendments rescind two rules applicable to proxy voting advice businesses that the Commission adopted in 2020. Specifically, the final amendments rescind conditions to the availability of two exemptions from the proxy rules’ information and filing requirements on which proxy voting advice businesses often rely. Those conditions require that: (1) registrants that are the subject of proxy voting advice have such advice made available to them in a timely manner; and (2) clients of proxy voting advice businesses are provided with a means of becoming aware of any written responses by registrants to proxy voting advice. Institutional investors and other clients of proxy voting advice businesses have continued to express concerns that these conditions could impose increased compliance costs on proxy voting advice businesses and impair the independence and timeliness of their proxy voting advice.
The final amendments also delete the 2020 changes made to the proxy rules’ liability provision. Although the 2020 changes were intended to clarify the application of this liability provision to proxy voting advice, they instead created a risk of confusion regarding the application of this provision to proxy voting advice, undermining the goal of the 2020 changes. The final amendments address the confusion while affirming that proxy voting advice generally is subject to liability under the proxy rules.
The SEC also rescinded guidance that the Commission issued in 2020 to investment advisers regarding their proxy voting obligations.
The adopting release points out that this rulemaking did not represent a wholesale reversal of the 2020 rulemaking, noting:
Proxy voting advice generally remains a solicitation subject to the proxy rules, including liability under Rule 14a-9 for material misstatements or omissions of fact;
In order to rely on the exemptions from the proxy rules’ information and filing requirements set forth in Rules 14a-2(b)(1) and (3), proxy advisory firms will still have to satisfy Rule 14a2(b)(9)’s conflicts of interest disclosure requirements; and
The deletion of Note (e) does not affect the scope of Rule 14a-9 or its application to proxy voting advice.
The Commission notes that final amendments reflect the fact that “our thinking has evolved with respect to the Rule 14a-2(b)(9)(ii) conditions and Note (e) to Rule 14a-9, informed, in part, by the concerns expressed by PVABs’ clients and other investors that were among the primary intended beneficiaries of the 2020 Final Rules.”
Commissioners Peirce and Uyeda did not support the amendments.
Yesterday, the SEC also proposed amendments to Rule 14a-8, the shareholder proposal rule. The proposed amendments were not as far-reaching as I had suspected, addressing just three of the 13 substantive bases for excluding shareholder proposals under Rule 14a-8(i).
Under Rule 14a-8(i)(10), a company can exclude a shareholder proposal that “the company has already substantially implemented.” The proposed amendments would introduce a new test for assessing whether a company can exclude a proposal on this basis: whether or not “the company has already implemented the essential elements of the proposal.”
Under Rule 14a-8(i)(11), a company can exclude a proposal that substantially duplicates another proposal that will appear on the company’s proxy card. The SEC’s proposing release explains that, in assessing whether a proposal substantially duplicates another, the Staff historically has looked at whether a new proposal shares the same “principal focus” as an earlier submitted proposal. The proposed new test will assess whether potentially duplicative proposals address the same subject matter and seek the same objective by the same means.
Under Rule 14a-8(i)(12), a company may exclude from its materials a shareholder proposal that addresses “substantially the same subject matter as a proposal . . . previously included in the company’s proxy materials within the preceding five calendar years” if the matter was voted on at least once in the last three years and received support below specified vote thresholds on the most recent vote. The proposed amendments would provide that a proposal constitutes a resubmission if it substantially duplicates another proposal that was previously submitted for the same company’s prior shareholder meetings under the same test specified in Rule 14a-8(i)(11).
Unlike the proxy voting advice rulemaking, the Commission proposal does not seek to revisit the amendments to the procedural requirements of Rule 14a-8 that were adopted back in September 2020.
While the proposals do not seek to delve into some of the more controversial and thorny bases for exclusion, the proposing release does note:
In addition, while we do not propose to amend Rule 14a-8(i)(7),13 the ordinary business exclusion, at this time, we reaffirm the standards the Commission articulated in 1998 for determining whether a proposal relates to ordinary business for purposes of Rule 14a-8(i)(7).
Comments are due 30 days after publication in the Federal Register or September 12, 2022, whichever is later.
Yesterday we covered a lot of ground at our Climate Disclosure Event. We discussed the expectations for the climate disclosure rules and the steps that companies should be taking now to prepare for adoption of the final rules. We also addressed the expectations from investors and other users of climate data. You will definitely want to check out the model disclosures that are based on the rules as proposed, as well as our useful checklist. Go to PracticalESG.com today to get access to the resources you will need to prepare for the SEC’s climate disclosure rules.
I often advise clients to wait for the SEC to adopt final rules before formulating their compliance efforts, because the final rules can often differ from what is proposed. The SEC’s proposed climate disclosure rules are different, and they demand your attention now. When adopted, these rules will require extensive compliance efforts on the part of companies and their advisers in what will ultimately be very short timeframes given the overwhelming amount of work that must be done to prepare the anticipated disclosures.
I encourage you to jumpstart your efforts by participating in our program today and attending our 1st Annual PracticalESG Conference. There is no cost to sign up for our Climate Disclosure Event today, so please register now.
On Monday, the Financial Stability Board (FSB), a group of financial regulators, treasury officials and central bankers from the G-20 nations, announced that it will be proposing robust global rules for cryptocurrencies in October of this year.
Back in February, the FSB published an updated risk assessment on crypto-assets, which outlined the group’s concerns over the rapid growth in crypto-assets. The report warned that crypto-asset markets are fast evolving, and could reach a point “where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.” In its statement earlier this week, the FSB notes:
The recent turmoil in crypto-asset markets highlights their intrinsic volatility, structural vulnerabilities and the issue of their increasing interconnectedness with the traditional financial system. The failure of a market player, in addition to imposing potentially large losses on investors and threatening market confidence arising from crystallisation of conduct risks, can also quickly transmit risks to other parts of the crypto-asset ecosystem. It may have spill-over effects on important parts of traditional finance such as short-term funding markets. An effective regulatory framework must ensure that crypto-asset activities posing risks similar to traditional financial activities are subject to the same regulatory outcomes, while taking account of novel features of crypto-assets and harnessing potential benefits of the technology behind them.
The FSB plans to report to the G-20 Finance Ministers and Central Bank Governors in October on regulatory and supervisory approaches to stablecoins and other crypto-assets. The FSB plans to work with international standard-setting bodies on a global regulatory approach to crypto-assets.
The work of the board of directors seems to be always expanding, which makes it all the more important to implement an effective committee structure. Over on the Mentor Blog on TheCorporateCounsel.net, Emily recently highlighted findings that were published by The Society for Corporate Governance and Deloitte on the structure of board committees, based on a survey of nearly 180 public companies. Here are some highlights from the report:
– Forming new committees: Just 13% of respondents added or are considering adding at least one new standing committee. Among those that added a new committee, a technology committee was most common; others included cybersecurity, sustainability, and ESG-related committees.
– Expanding board oversight responsibilities: 55% of respondents reported their board expanded oversight responsibilities of one or more of its standing board committees. Many respondents indicated that their boards expanded committee oversight responsibilities to include ESG, either by delegating individual topics to specific committees or by delegating ESG as a whole to the nominating and governance committee.
– Onboarding program: 45% reported having an onboarding program for new committee members; however, the prevalence correlates positively with market cap size. Many respondent comments indicated that committee onboarding typically occurs as part of new director onboarding.
– Rotation of members: While mandatory rotation remains rare, 39% of large-caps and 27% of mid-caps indicated their boards have non-mandatory policies or practices to rotate committee chairs; for other committee members, such policy was reported by 36% of large-caps and 24% of mid-caps.
I look forward to speaking with a great group of panelists tomorrow during our Climate Disclosure Event: The New SEC Climate Disclosures: Key Action Items Now. This two part program will focus on the practical steps that you can take to prepare for the adopting of climate disclosure rules and the expectations of those that will be reading your climate disclosure.
Part 1 of the program is Preparing Your Climate Disclosure: Practical Steps to Take Right Now, and this session will cover:
How to convey to your bosses & colleagues the major differences between this proposal and traditional SEC reporting, and existing ESG disclosures;
Tips for overcoming the new challenges that this disclosure will create;
Key steps for companies to take right now to prepare for compliance;
Former regulators’ perspectives; and
Lessons learned from preparing our model disclosures.
Part 2 of the program is Who’s Reading Your Climate Disclosure: Action Items to Meet Their Needs, and this session will cover:
ESG data that investors and others want, compared to what’s SG data that investors and others want, compared to what’s currently available;
Types of questions and disclosure reviews companies can expect from regulators;
How companies can prepare disclosure with an eye toward minimizing questions & risks;
How asset managers, institutional investors and other external audiences use climate disclosure; and
A look at our model disclosure and how it anticipates these issues.
There is no cost to attend this virtual program, so be sure to register today. Live event attendees are eligible for a $100 discount off our PracticalESG Conference and/or a $200 discount towards an annual subscription to PracticalESG.com.