According to a recent Ceres report, while companies are making earnest statements about their efforts to combat climate change, a lot of what they’re saying is hot air. Here’s an excerpt from a Politico article on the report:
Companies talk a big game on climate. More than 3,000 have pledged to cut emissions and glossy sustainability reports have become routine. But how much of that is just talk? A lot of it. In the U.S., 60 percent of the biggest companies haven’t engaged directly with lawmakers to lobby for climate change mitigation policies. That’s the conclusion of sustainable finance nonprofit Ceres, which tabulated the activity of nearly 100 of the country’s largest and most influential companies.
Nearly all the companies Ceres examined have promised emissions cuts. But more than 1 in 5 have lobbied against science-based climate policies. Others are silent. Ceres called it a “troubling inconsistency.”
Okay, fair enough. But I also think that Ceres has set the bar kind of high here. For example, the report notes that 92% of the companies assessed plan to clean up their own operations by setting emission reduction goals, 88% have formally given their boards responsibility to oversee the company’s efforts on sustainability & climate change issues, and 74% acknowledge that climate change is a material risk to their businesses. That sounds pretty good to me, but then Ceres goes on to say this:
Yet, 51% of the companies disclose climate change policy solely as an adverse event in their financial filings, indicating that they are primarily focused on short-term compliance impacts rather than the longer term, significant costs associated with unabated climate change. Companies should balance their disclosure of short-term compliance costs with an analysis of the medium- and long-term costs of inaction and the financial payoffs of policies that mitigate climate change.
To me, this is an example of the kind of disclosure mission-creep that stands a really good chance of undermining the whole ESG disclosure project. These are for-profit businesses, not climate change advocacy groups. They shouldn’t be expected to preach the climate change evangel in their SEC filings, and I doubt very much that many of them are in a better position than anyone else in the market to speculate about the long-term financial payoffs of their actions.
The International Capital Markets Association recently issued an updated version of its “Green Bond Principles” document, which outlines best practices for issuers of green bonds. This Sidley memo reviews the most recent update. Here’s the intro:
In June 2021, the International Capital Market Association (ICMA) published an updated version of its Green Bond Principles (GBPs). First published in 2014, the GBPs are a voluntary framework for issuers to follow when issuing green bonds, aimed at promoting the role of debt capital markets in financing the transition to environmental sustainability by promoting transparency and disclosure, thereby reducing the risk of “green washing.”
The recent updates to the GBPs do not revolutionize the key concepts underlying the GBPs; rather they reflect recent market and regulatory developments. In the GBPs, ICMA strikes a balance between streamlining market practice in a set of defined guidelines and framing developing practice into an industry-wide standard for green bond disclosure.
The four key GBPs – (i) use of proceeds, (ii) process for project evaluation and selection, (iii) management of proceeds, and (iv) reporting – remain substantively unchanged, but they have been expanded by additional, detailed guidance. Transparency has always been the underlining objective of the GBPs, and this has been enhanced with the introduction of two new recommendations: Green Bond Frameworks and the use of an external reviewer to assess the alignment of green bonds with the GBPs.
On a related note, check out this Moody’s publication on the burgeoning growth in the broader sustainable finance category during the first quarter of 2021. Moody’s says that sustainable financings set a new quarterly record of $231 billion during 2021’s first quarter, more than triple the amount issued during the first quarter of last year & 19% higher than the $195 billion issued during the fourth quarter of 2020.
Tune in tomorrow for the webcast – “Insider Trading Policies & Rule 10b5-1 Plans” – to hear Dave Lynn of TheCorporateCounsel.net & Morrison & Foerster, Meredith Cross of WilmerHale, Alan Dye of Section16.net & Hogan Lovells and Haima Marlier of Morrison & Foerster provide practical guidance about what you should be doing to stay on top of your own insider trading policies & 10b5-1 plans during a period of close SEC scrutiny. Topics include the new enforcement environment, the focus on 10b5-1 plans, the intersection of insider trading policies & 10b5-1 plans, blackout period trends, pre-clearance procedures and several others.
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The SEC’s latest Reg Flex Agenda included proposing rule amendments to “enhance issuer disclosures regarding cybersecurity risk governance.” The SEC has targeted October 2021 as the date for a rule proposal, and this Mayer Brown memo says that the agency is unlikely to stop there. Instead, it’s reasonable to expect that the SEC will seek to address perceived deficiencies in the 2018 Guidance, by, among other things, providing clearer guidance on what constitutes “materiality” and “timeliness” when it comes to notices of cyber-attacks.
The memo makes a number of suggestions as to how companies can prepare for SEC rulemaking in this area. This excerpt addresses the need for companies to review their existing policies and procedures:
The 2018 Guidance encourages public companies to develop substantive cybersecurity risk management policies and procedures. Specifically, the guidance provides that these policies should include clear instructions on how to identify and elevate information to key stakeholders and senior leaders so that appropriate disclosures can be made regarding cybersecurity incidents and risks.
Companies that incorporated this guidance in 2018 should review whether they are comfortable with their policies and procedures now that this guidance is likely to become mandatory. Companies that have not enhanced their policies must now review the existing policies to expressly consider cybersecurity risks as potentially material and should begin preparing now to review and update their disclosure controls to verify that they are sufficient.
Other areas that the memo recommends companies address include preparing criteria for determining materiality, enhancing board oversight and employee training, and reviewing cybersecurity disclosures in prior filings.
This Audit Analytics blog discusses events concerning a company’s control environment that should serve as “red flags” for investors. Nothing discussed in the blog is a surprise – material weaknesses in ICFR, weak disclosure controls, late filings and cybersecurity breaches all make the list. But the blog also walks through the reasons why each of these events are red flags, and the discussion is both succinct and useful. If you ever find yourself having to educate a new public company officer or director about the potential consequences of a late filing, you might find this excerpt on why a late filing is a red flag helpful:
A late or non-timely (NT) filing is a key indicator of the health of a company’s financial reporting and internal control environment. SEC filings, such as annual and quarterly reports, are required to be filed within a certain timeframe. As this is a continuous, recurring requirement, the inability for a company to file one of these periodic reports on time is a significant red flag.
Aside from a negative stock market reaction, late filings can impose other costs on shareholders. Timely filing of reports is a critical requirement, and a delinquent report can trigger debt covenant violations or regulatory penalties, including de-registration with the SEC. In the event of a prolonged failure to file, a company can eventually be delisted from its stock exchange.
While there is a litany of reasons a company may be unable to timely file a report – a recent auditor change, the new discovery of a material weakness in controls, the need to restate financial statements, etc. – it generally indicates other issues with financial reporting and the control environment and heightens the risk for adverse events in the future.
We are very sorry to have to say farewell to our friend and colleague Lynn Jokela. After two years as our Associate Editor, Lynn has decided to return to practicing law and has accepted an in-house position. During her tenure here, Lynn has been everything you could ask a colleague to be. She’s an incredibly bright and hard-working person and she has brought a distinctive voice to our handbooks and blogs. Lynn, we wish you every success in your new position – and we’ll definitely miss you!
With 10-Q deadlines just around the corner for many companies, this Bryan Cave blog provides a reminder about the need to take a hard look at prior risk factor disclosures to see if any need updating. This excerpt addresses an area of the risk factors section that many companies will be scrutinizing closely – Covid 19 risk disclosures:
As a number of business sectors improve, it may be advisable to revise COVID-related risk factors to reflect the changing economic climate. In some cases, the focus may need to shift to address challenges in increasing production, managing supply chains, hiring workers or otherwise responding to increasing customer demand. In other cases, companies that benefited from dramatic changes in the economy during the pandemic peak may need to address potential risks associated with a return to normalcy.
For example, consider whether recent growth trends are viewed as sustainable in light of the MD&A requirement to discuss “known trends or uncertainties” that the company “reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income.” At the same time, it may be appropriate to continue to caution investors as to uncertainties as to the future course of the pandemic – particularly as concern with the impact of variants evolves.
Last month, I blogged about the need to keep in mind the implications of Form 10-Q’s risk factor updating requirement on the problem of “hypothetical” risk factors. The blog highlights that concern too, and specifically points out the need to consider the impact of current events (e.g., heatwaves, cyberattacks & the President’s executive order on competition). Risk factors touching on these events should be reviewed to determine whether clarification that a risk is no longer hypothetical is necessary.
Earlier this month, the SCOTUS granted cert in Pivotal Software v. Tran, which raises the issue of whether the Private Securities Litigation Reform Act’s discovery-stay provision applies to Securities Act lawsuits filed in state or federal court, or just to federal court filings. This excerpt from a recent Kramer Levin memo summarizes the potential significance of this case:
Congress enacted the automatic stay provision to address the concern that, without it, securities class action plaintiffs could use burdensome discovery requests to force early settlements of meritless claims, thereby encouraging the filing of meritless actions. State courts are split as to whether the PSLRA automatic stay applies in actions brought in state courts, and the issue has arisen with increasing frequency in the wake of the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018).
In Cyan, the Court affirmed that federal and state courts have concurrent jurisdiction over Securities Act claims, and that a Securities Act claim brought in state court cannot be removed to federal court. After Cyan, plaintiffs have with greater frequency filed Securities Act cases in state courts, at least in part because plaintiffs may have the potential to seek costly and burdensome discovery before the legal sufficiency of their complaints has been upheld, and possibly forcing the settlement of claims whose sufficiency has not been tested.
The statute says that the automatic stay applies to “any action,” but despite that language, state courts have split on whether it applies in state court proceedings. Some of the courts that have held the stay doesn’t apply have concluded that applying the stay to state court proceedings would undermine the ruling in Cyan, while others have said that its application is inconsistent with the Securities Litigation Uniform Standards Act.
Over the years, I’ve represented a few directors who were considering resigning from public company boards, and it’s always a difficult situation. Even if the company is heading in a direction they don’t agree with or they have ethical concerns, few board members find it easy to step down. This recent Perkins Coie blog addresses those difficulties, and this excerpt provides some tips for directors on how to handle their departure in a responsible fashion:
1. Assess what’s making you uncomfortable.
2. Do all you can to seek to address the issues. That includes the need to create a record (that’s important, to come up with some sort of documentation) – that the board has taken all the possible steps to address any improper or possibly illegal actions identified at the company. You want to establish a clear record that you – and any fellow resigning directors – have done all you possibly can to address the malfeasance, illegality or impropriety. Then, in anticipation of resignation, circulate a draft statement of the reasons, the efforts taken, and how those efforts have been stonewalled.
3. Pass the baton. So then – before you leave remember that your successors on the board will need to grapple with many of the same issues. So do a thorough baton-passing to the directors who are remaining or coming on board.
We’ve known for some time that the SEC’s Division of Enforcement has been taking a hard look at SPAC deals, and yesterday it announced an enforcement action against, well, EVERYBODY involved in an allegedly fraudulent SPAC transaction. This excerpt from the SEC’s press release gives you a sense for how widely the Division of Enforcement cast its net:
The Securities and Exchange Commission today announced charges against special purpose acquisition corporation Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus Inc., and Momentus’s founder and former CEO Mikhail Kokorich for misleading claims about Momentus’s technology and about national security risks associated with Kokorich.
The SPAC, the sponsor, the target & both CEOs – that’s quite a haul! Apparently Momentus’s former CEO is continuing to litigate the charges against him, but the other defendants settled with the SEC. Under the terms of the SEC’s order, each of the settling defendants agreed to cease and desist from violations of certain antifraud provisions of the federal securities laws and to pay civil monetary penalties aggregating $8 million.
But that’s not all. Momentus and the other parties agreed to a number of undertakings. These include establishing an independent board committee to police compliance with the SEC’s order, retaining an independent consultant to review Momentus’s disclosure controls and implementing changes recommended by that consultant. The order also calls for the parties to offer rescission to PIPE investors, and for the sponsor to forego 250,000 founders shares.
Although the misleading claims at issue were initially made by the target, the SEC found fault with the due diligence investigation conducted by the SPAC and its CEO, which led to the filing of inaccurate registration statements and proxy solicitations.
