The comments on the SEC’s pair of proposals for ESG investment funds are showing that these rules could increase pressure for portfolio companies, which is something that Lawrence said to watch for when he blogged about the proposals earlier this year. Here’s an excerpt from BlackRock’s recent comment letter to the SEC on the proposal to enhance disclosure about investment companies & advisers’ ESG practices:
Final rules on corporate GHG disclosures should be implemented before requiring fund level disclosures. Climate risk is financial risk and as a fiduciary to our clients, we have taken a number of steps to address climate-related financial risk, including by providing greater transparency. However, climate metrics continue facing methodological and data challenges. Corporate level disclosure requirements should precede requirements for fund level disclosures to provide market participants with climate-related information, including greenhouse gas (“GHG”) metrics.
We also respectfully disagree with the SEC’s proposal for funds to resort to “best efforts” when disclosure of GHG emissions is not available. Locating and estimating information that is not required to be publicly available is an undue burden and likely to lead to disclosure across funds that is not comparable or consistent across funds, negating the purpose of the SEC’s proposed amendments.
Moreover, in the absence of mandatory GHG emissions reporting across the public and private markets, the proposed rule would force funds to step into what we believe is an inappropriate role of policing their portfolio investments through negotiating for and monitoring data needed for their own disclosures. Further, as we noted in our response to The Enhancement and Standardization of Climate-Related Disclosures for Investors, we respectfully request that the SEC consider its approach with respect to Scope 3 emissions which is distinct from Scope 1 and 2, given the higher degree of estimation and methodological complexity in the former.
The proposals for investment advisers also contemplate requiring more disclosure about ESG voting & engagement strategies. Here’s an excerpt from the SEC release:
We also are proposing amendments to fund annual reports to require a fund for which proxy voting or other engagement with issuers is a significant means of implementing its strategy to disclose information regarding how it voted proxies relating to portfolio securities on particular ESG-related voting matters and information regarding its ESG engagement meetings
BlackRock has recommendations for that part of the proposal as well:
Recognize that engagement and proxy voting are standard parts of asset management. Engagement and proxy voting are a standard part of asset management, for both active and index products, and are not definitive characteristics of an ESG-Focused Fund, or even definitive characteristics of ESG integration. Engagement is a mechanism for investors to seek clarity and provide feedback to companies on governance topics; particularly for index funds, it is not done to exert power over a company’s management team’s decision-making or engineer specific outcomes.
It is crucial to note that stewardship engagement and proxy voting are at their core about encouraging transparency and enabling investment managers to hold company leadership to account where board directors or executive management seem not to have acted in long-term shareholders’ interests. As the bedrock of engagement is governance, which is the “G” of “ESG”, all engagement has an ESG component and indeed nearly 90% of our engagements in 2021 covered a governance topic.
When “E and “S” topics are raised in engagement meetings, the intent is to seek greater transparency for our investors on those issues to make informed investment decisions not to dictate a specific outcome to company management. Additionally, the detailed nature of the disclosure required on both engagement and proxy voting is unnecessary, potentially misleading and, particularly in relation to voting, duplicative of already existing disclosure in Form N-PX and the fund’s annual shareholder report.
BlackRock’s comment letter also warns that parts of the SEC’s proposal could actually worsen “greenwashing” and investor confusion. Like many of the SEC’s recent “ESG”-related rulemaking initiatives, the two proposals aimed at investment companies & investment advisers are drawing a lot of suggestions for improvement.
You can still register for our always-popular conferences – the “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – to be held virtually Wednesday, October 12th – Friday, October 14th. With new SEC rules, record numbers of shareholder proposals, and relentless regulatory & investor scrutiny, your proxy disclosures – and the actions that support them – are more important than ever. Our Conferences provide practical guidance about rule changes, Staff interpretations, emerging disclosure risks, investor and proxy advisor positions, executive pay expectations, the board’s role, and more.
Here’s who should attend:
– Anyone responsible for preparing and reviewing proxy disclosures – including ESG and executive pay disclosures and responses to shareholder proposals.
– Anyone responsible for implementing executive and equity compensation plans or who counsels or advises boards on their oversight responsibilities, including CEOs, CFOs, independent directors, corporate secretaries, legal counsel, HR executives and staff, external reporting teams, accountants, consultants, and other advisors.
For more details, check out the agenda – 18 panels over 3 days. Our speakers are fantastic and this is truly a “can’t miss” event for anyone involved with proxy disclosures, corporate governance, and executive compensation.
Conference attendees will not only get access to our unique & valuable course materials (coming soon) – we’ll also be making video archives and transcripts available after the conference, so that you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures and engagements. Plus, our live, interactive format gives you a chance to earn CLE credit and ask real-time questions.
Register today! In addition, check out the agenda for our “1st Annual Practical ESG Conference” – which is happening virtually on Tuesday, October 11th. This event will help you avoid ESG landmines and anticipate opportunities. You can bundle the Conferences together for a discount.
I blogged yesterday about my dismay in reading that today’s retail investors find equity investing to be hopelessly complicated. Law Profs Christina Sautter & Sergio Alberto Gramitto Ricci sent a word of encouragement, by pointing me to their latest paper. It was just posted last week and addresses the important topic of “investing education” in the age of mobile apps & financial inclusion. The paper is a response to another recent analysis – “Regulating Democratized Investing” – by Abraham Cable, which proposes a way to encourage investor choice & access on new apps, without people losing their life savings in misguided day trading.
In their paper, Christina & Sergio walk through the rise of “finfluencers” – social media influencers who have become informal educators to a huge number of retail investors, for better or for worse. Companies that get mentioned often have to contend with misinformation & rumors. The professors suggest that mandatory investing education at the high school level would help the public navigate information sources (and save corporate secretaries from headaches).
Here’s the part that I found especially thought-provoking:
Private Ordering: … In the future, Fisch’s “just-in-time education” recommendation could also be extended to proxy materials and proxy voting to make materials and corporate governance more accessible and engaging for retail investors. Although many retail investors care about corporate governance engagement, they are not generally well versed in corporate governance legal terminology. There are examples on social media of retail shareholders showing a lack of knowledge regarding the meaning of a “record date,” what happens on the record date, and when voting occurs.
Retail investors are not just unfamiliar with corporate law terminology but also the mechanics of corporate governance as well as the substantive issues at play in proxy items. For example, some technicalities like a partially completed proxy card resulting in the remainder of votes being cast in accordance with management recommendations is not necessarily intuitive. Investing education courses should include instruction not just on investing but these intricacies of corporate governance to empower retail investors.
Including Corporate Governance in Education: Civics education has been found to nurture political engagement with positive ramifications on equality and citizens’ agency. In a globalized world, with corporations rivaling nation states in power and influence, the benefits of widespread investing education cannot be overstated. Corporate governance allows citizens to partake in decision making affecting virtually all aspects of their lives. Share ownership is the key that provides access to corporate governance.
Including corporate governance in investing education curricula not only completes the set of knowledge necessary for investing in companies’ shares, but also enhances the agency of investors as citizens. Investing education bridges the gap between citizens and Wall Street. It also provides citizens with the tools to engage with the companies in which they invest.
There you have it: a call to action for corporate governance experts to save the world. Maybe I can finally convince my non-lawyer friends to follow this blog.
In a new 18-minute episode of our “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Rachel Kahn-Troster, Executive VP at the Interfaith Center on Corporate Responsibility, about her unique career path and mentor experiences.
Rachel also shares her thoughts on how companies can continue to improve on human rights issues – and how she works with ICCR members to engage with companies on this and other topics. It’s worth hearing Rachel’s perspective, because as I blogged earlier this week, members of the ICCR coalition engaged in a record level of activity during the 2022 proxy season.
PwC recently published its annual roundup of comment letter trends – detailing the types of issues that Corp Fin has raised on company filings, from July 2021 through June 2022. Here’s the “Top 10” – and how the comment volume is trending compared to last year at this time:
1. Non-GAAP – up
2. MD&A – up
3. Segment reporting – down
4. Risk factors: climate change matters – up
5. Revenue recognition – down
6. Fair value measurement – unchanged
7. Disclosure controls and ICFR – unchanged
8. Inventory and cost of sales – unchanged
9. Form compliance and exhibits – unchanged
10. Business combinations – unchanged
In terms of real-time trends, Dave recently blogged about continued inquiries about disclosure on the war in Ukraine, and John blogged about comments on inflation & supply chain pressures. We also just posted the latest edition of our “SEC Comment Letter Process Handbook” – 47 pages of practical insights to help you anticipate comments and navigate responses. Special thanks to Sidley’s Sonia Barros and Sara von Althann for contributing their expertise to this resource, which helps our entire securities law community!
On the heels of an insider trading action and reported investigation into Coinbase, the SEC is sending another strong signal that it intends to regulate digital assets (one way or another). Earlier this week, the agency announced charges against a group of entities and their founder for their roles in unregistered crypto offerings. Here are some of the allegations from the 17-page complaint:
1. From at least 2017 through the present, Dragonchain conducted an unregistered offering of a crypto asset called a “Dragon” (“DRGN”), illegally raising over $16 million in proceeds through unregistered offers and sales of these securities to approximately 5,000 investors in the United States and abroad. Dragonchain used these proceeds to try to develop a type of blockchain technology – a peer-to-peer database spread across a network of computers – that businesses can incorporate into their daily activities. Dragonchain offered and sold DRGN tokens through channels that included a Dragonchain website, social media, conference appearances, and Telegram.
2. In 2017, Dragonchain minted DRGNs and conducted an offering of 55% of them in two phases: (1) a discounted “presale” in August 2017 to members of a crypto investment club, and (2) an initial coin offering (“ICO”) in October and November 2017 marketed predominately to crypto investors. Through this offering, Dragonchain raised approximately $14 million.
5. Dragonchain’s marketing materials explicitly stated that the value of the token would increase as adoption of its technology grew. Dragonchain told purchasers that the value of DRGNs would rise as the Dragonchain “ecosystem” matured. Dragonchain also stated that it would use proceeds of the offering to develop additional features and market its technology to businesses, thereby promoting adoption of its technology.
6. Dragonchain also made clear to investors that DRGNs would be “listed” on trading platforms. Roets, Dragonchain’s founder, personally told investors that he understood that liquidity and the ability to exit an investment quickly was an advantage of being a crypto investor over a traditional investor.
7. Dragonchain retained social media forum moderators and crypto influencers who regularly discussed DRGNs’ investment value, trading prices, and market capitalization, and Dragonchain’s Twitter profile regularly reposted others’ investment value-related tweets about DRGNs.
11. The Dragon Company, meanwhile, used DRGNs to pay service providers for a variety of services provided to Dragonchain during 2019 through 2022, thereby selling DRGNs through an illegal unregistered offering.
After painting that picture, the SEC refers back to its 2017 Section 21(a) Report, which was issued before Dragonchain’s offering and found that the crypto assets at issue there were “investment contracts” – and therefore, securities. The complaint then continues with another 7+ paragraphs of facts that the SEC believes show a violation of Sections 5(a) and 5(c) of the Securities Act. The SEC is seeking permanent injunctions, disgorgement, and civil money penalties.
The company had been notified in advance of this investigation – and sent an open letter to the SEC in response. With the way things are going, there will probably be more crypto enforcement actions to come.
In an attempt to support growth in retail investing, the World Economic Forum recently partnered with BNY Mellon and Accenture to survey what leads people to participate – or not – in capital markets. The 95-page report includes this sad finding:
– Gaps in financial education are the primary barrier to investing: In France, Germany, the UK and US, retail investors feel they have a comparatively better understanding of newer, less established products (e.g. cryptocurrency and non-fungible tokens or NFTs) compared to more traditional asset classes (e.g. bonds and stocks).
Diving deeper, nearly 40% of investors said they don’t understand stocks or bonds. Another 18-24% said they don’t know where to access these products! Meanwhile, 40% of global retail investors hold crypto, and Bitcoin is making its way into retirement portfolios.
Having spent my entire career to-date in the public company and capital markets space, being the type of person who mostly just holds boring old index funds, and having just written a blog about complicated regulatory questions & uncertainties surrounding digital assets, this news fills me with both dismay and FOMO. Maybe what stocks need is a spokesperson who is younger than 90 (no offense, Warren & Charlie). According to the survey, 70% of retail investors are under 45 years of age.
Despite crypto’s rise, we’re nowhere near an inflection point. This Reuters article says that the value of the global equity & bond markets still dwarf crypto – $124.4 trillion and $126.9 trillion in 2021, respectively, compared to $3 trillion for crypto (and that’s before the 2022 slide). The survey details how this class of “investments” (?) comes with its own challenges…
The SEC’s Enforcement Division is taking a close look at ESG funds’ share lending & proxy voting practices and related disclosures, according to this Bloomberg article. Specifically, the SEC wants to know whether ESG funds that market their influence on corporate action are recalling loaned shares before votes occur.
As covered in our “Share Lending” Practice Area, this complicated practice can impact voting outcomes. Here’s an excerpt from Bloomberg explaining why the SEC is now connecting it to ESG claims:
Investment firms typically lend out shares to other financial firms to settle trades or to help short sellers wagering against a company. Asset managers have argued publicly that there are policies in place to prevent firms from borrowing securities solely for the purpose of voting on shareholder resolutions.
For ESG fund managers, the practice of short-selling can raise specific challenges. Short-term bets against companies could make it harder for an ESG fund manager to influence a portfolio company to become more sustainable over a longer period. It also creates the awkward appearance of aiding investors who are betting against the companies that the fund has deemed worthy investments.
Furthermore, supporters of the practice say, money managers can recall shares if they want to vote on shareholder resolutions to exercise their influence and power over an ESG-related issue facing a company.
The SEC has been signaling for a while that ESG funds’ proxy votes are of interest. John predicted over a year ago that ESG-themed mutual funds would be a “target-rich environment” for the SEC’s ESG enforcement task force, and that seems to be playing out with first-of-their kind enforcement actions.
On top of that, in May, the Commission issued a pair of proposals that would require funds to disclose more info about their proxy voting & ESG engagement strategies and would tighten ESG-fund naming conventions. (Lawrence blogged about those proposals – and the impact on portfolio companies – on PracticalESG.com.) Just this week, SEC Chair Gary Gensler tweeted a reminder that comments are due. Enforcement could get even more active if and when those rules are adopted. And as investors are held to closer account for their proxy votes, companies may see support for ESG proposals tick upward.
As I noted last week on the Proxy Season Blog, a record 797 shareholder proposals were submitted for meetings through June 30th of this year. Just over 500 of those came from members of the ICCR coalition, according to the 4-page proxy-season recap that it recently published. Here are a few key themes:
– New resolution topics more than doubled last year and included carbon credits, competitive employment standards, and ghost guns.
– Banking was the leading industry receiving ICCR member proposals. There was also an increase in the number of companies receiving multiple resolutions.
– The most successful proposals requested lobbying expenditures disclosure, racial equity audits, and Paris-aligned climate lobbying.
If you want a sense for the types of proposals that might cross your desk in 2023, the tea leaves seem to be pointing towards continued momentum for climate disclosure & lobbying, transparency on other lobbying/political spending, racial justice audits and DEI disclosure. Governance topics are still in the mix, too. If you’re looking to benchmark & strategize on responses, the ICCR write-up includes “featured withdrawals” by topic, showing what certain companies agreed to do.
We’ll be providing lots of practical guidance about preparing for the next wave of shareholder proposals at our upcoming “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – which are being held virtually, October 12-14th. Don’t miss these sessions:
– Climate Disclosure: What to Do Now
– Environmental Proposals: Beyond Climate
– Social Proposals: What’s Next
– Shareholder Proposals: Working with the Staff
– Navigating ISS & Glass Lewis
Here’s the full agenda – 18 sessions over 3 days, with a lineup of leading speakers who will tell it to you straight. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
Out of this year’s 797 shareholder proposals, 43 were submitted by so-called “anti-ESG” proponents who are trying to push for things like “non-discrimination audits” and reports on the impact of DEI initiatives on groups that do not have a history of under-representation. That’s according to this Morningstar article, which also says that these proposals averaged only 7% support this year. Only 4 received support of 20% or more, and none passed.
Emily flagged this emerging issue back in March. Because the actions for which these proposals advocate often twist what investors are trying to support through voting policies, it’s forcing stewardship teams to read resolutions & supporting statements even more carefully. For that reason, companies may want to give more context in the proxy statement by including the proponent’s identity, as John noted more recently.
Morningstar says that the anti-ESG proposals primarily have been submitted by the National Legal and Policy Center, the National Center for Public Policy Research, and Steven J. Milloy. The article gives a full breakdown of who received the proposals, what topics they covered, and the level of support they received.
It’s likely that these proponents will keep at it next year – and they may get savvier. Sometimes, the resolutions and supporting statements do actually match what “mainstream” investors tend to support and, as has always been the case, are just a way for the proponent to speak their mind at the meeting. The part that’s harder to swallow is that many of the proposals appear to be motivated more by gamesmanship, attention-seeking and calling out “Corporate America” than by a sincere view that the requested action promotes business success.
