Last week, a shareholder proposal requesting an annual report on climate passed with 96% approval at Caterpillar (hat tip to Maynard’s Bob Dow for alerting us). Management recommended in favor of the proposal (see page 52 of the company’s proxy statement). Specifically, the proposal called for:
Shareholders request that Caterpillar issue a report within a year, and annually thereafter, at reasonable expense and excluding confidential information, disclosing interim and long term greenhouse gas targets aligned with the Paris Agreement’s goal of maintaining global temperature rise at 1.5 degrees Celsius, and progress made in achieving them. This reporting should cover the Company’s full scope of operational and product related emissions.
It’s becoming more common for the board to support shareholder proposals or choose to not make a recommendation, according to a recent report from Georgeson that I blogged about last week on our Proxy Season Blog. It’s unclear what the long-term consequences of that approach will be for companies – goodwill amongst shareholders? More proposals? Additional disclosure & scrutiny? For now, the most immediate result is that some shareholder proposals are achieving a very high level of support.
Some are viewing this result as favorable for “say on climate.” But this type of proposal is slightly different than “say-on-climate” – so the voting results don’t tell the whole story for that angle. As the say-on-climate proposals were emerging in fall of 2020 and during the 2021 proxy season, I blogged about early misgivings among investors. Just in the past few weeks, Vanguard updated its “Perspective on Say-on-Climate Proposals” to say:
– At this time, Vanguard does not proactively encourage companies to hold a “Say on Climate” vote given the lack of established standards or widely accepted market norms that govern these votes.
– When a company chooses to hold a “Say on Climate” vote, Vanguard expects the board to provide clear disclosure of the rationale for the vote, to articulate the oversight mechanisms and implications of the vote, and to produce robust reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework.
– Vanguard does not seek to direct company strategy. We view “Say on Climate” votes as a signal on the coherence and comprehensiveness of the reporting and disclosures a company provides to explain its climate plan to the market, rather than an endorsement of, or an expression of lack of confidence in, the plan itself.
This Insightia blog notes that investors, asset managers and proxy advisors continue to worry that plans are just another path to greenwashing – winning high support even though they aren’t clearly aligned with Paris Agreement goals. Here are a couple of nuggets:
– Proxy adviser Glass Lewis shared with Insightia Monthly in March that its fears about the campaign have been “fully realized”, with some “objectively bad climate plans winning upwards of 90%+ support.”
– ShareAction’s claims that climate transition plans from Barclays and Standard Chartered were insufficient, on the grounds that they featured loopholes to ensure continued fossil fuel financing, fell largely on deaf ears. Both U.K. banks’ climate plans won upwards of 80% support at their 2022 annual meetings.
For now, the investors that are actually casting the votes seem enamored with the ability to have a “say” – and some companies seem happy to provide it. But with say-on-climate resolutions calling for annual reporting, more transparency is on the way. That means it probably won’t take long for these plans – and anyone involved with establishing & executing them – to draw more scrutiny. Not to mention, companies that set goals may find themselves with greater disclosure obligations (and liability risks) under the SEC’s proposed climate disclosure rules.
Emily blogged yesterday that proposals to eliminate dual-class structures are receiving record support this proxy season. A new $1 trillion coalition of investors – including the CII, New York City Comptroller, and several state retirement funds – is committing to stopping unrestrained dual-class structures as companies go public. Here’s an excerpt from the announcement:
The group, which is expected to grow over time to include additional asset owners and potentially asset managers, will dialogue with key market participants and policymakers, emphasising the importance of the proportionate shareholder voice to effective stewardship and long-term sustainable company performance – and ultimately preventing the further enabling of dual-class share structures, without strict mandatory time-based sunset clauses, in jurisdictions like the US and UK.
In the first phase of the initiative, ICEV will undertake a campaign with pre-IPO companies and their advisers, as well as policymakers, commentators and index providers in priority jurisdictions. This will take place through engagements with both private and public market participants as well as in policy forums.
The announcement includes a reminder that CII has drafted legislation that would require national stock exchanges to bar listings of new dual-class companies unless they have seven-year sunset provisions, or if each class, voting separately, approves the unequal structure within seven years of the IPO.
These Conferences are in a league of their own in terms of the expert lineup and the focus on practical guidance. With a record number of shareholder proposals this year, universal proxy coming into effect, a deluge of SEC rulemaking, and unprecedented scrutiny of corporate disclosures & actions, attending is the best thing you can do to arm yourself for the 2023 proxy season.
ESG is at the forefront of board agendas, regulatory agendas, enforcement agendas, and shareholder agendas. Yet, it’s very difficult to get useful information about what real-world steps to take to make progress, to measure results, and to validate the data needed to support disclosures. Join our lineup of experienced practitioners virtually on October 11th for candid, practical guidance – in these sessions:
– ESG Hot Topics: Forewarned is Forearmed
– Carbon Accounting Risks: Offsets, Disclosures & More
– ESG Litigation & Investigations: Are You at Risk?
– ESG’s Employment Law Landmines & How to Avoid Them
– DEI Trends in the Midst of Rapid Change
– Your ESG Team: Candid Board & Staffing Considerations
Question: Would the staff of the Division of Corporation Finance or the Division of Trading and Markets consider a future or forward contract that permits cash or physical settlement to be “intended to be physically settled” and therefore excluded from the definitions of “swap” and “security-based swap” if, at the time the parties enter into the contract, the underlying securities cannot be legally transferred, or the transfer of the underlying securities is restricted by contract?
Answer: No. In Release 33-9338, the Commission stated that the analysis as to whether sales of securities for deferred shipment or delivery are intended to be physically settled is a facts and circumstances determination. However, the Commission also stated in Release 33-9338 that the purchase and sale of the underlying securities occurs at the time when the parties enter into the contract, and that the determination of whether an instrument is a swap or security-based swap should be made prior to execution, but no later than when the parties offer to enter into the instrument. To the extent that at the time of sale the securities underlying a future or forward contract could not be legally transferred, or the transfer of the underlying securities would be restricted by contract, the staff of the Division of Corporation Finance and the Division of Trading and Markets would not consider the contract to be “intended to be physically settled” for purposes of the definitions of “swap” and “security-based swap.”
Accordingly, for the staff to conclude that a sale of securities for deferred shipment or delivery is intended to be physically settled, it is a necessary prerequisite that at the time the parties enter into the contract (i) the offer and sale of the underlying securities must be registered in compliance with Section 5 of the Securities Act or an exemption from registration must be available with respect to the underlying securities, and (ii) any applicable contractual provisions restricting the transfer of the underlying securities must be satisfied or otherwise waived. [June 9, 2022]
Swaps and derivatives were heavily scrutinized following the 2008 financial crisis and the Dodd-Frank Act. This article from the July-August 2013 issue of The Corporate Counsel newsletter describes some of the resulting requirements.
A couple years ago, we ran our 1st, 2nd and 3rd Annual “Cute Dog” Contests. We had to hit pause while John recovered from his disappointment. But as we head into a weekend of remembrance, at the end of a couple of very long & difficult weeks, it’s time to pick back up with a short slate of contestants. We’ve even welcomed a cat entry, to keep things interesting!
The poll is at the bottom of the blog. Send us your pet pics for our next poll, and compete for your chance at fame and notoriety!
1. Orrick’s Soo Hwang – Chuck & Doug, the “Party Animals”
2. Our own Emily Sacks-Wilner – Simba the “Supervisor”
3. My Dog-Nieces – Dot & Josie, the “Dynamic Duo”
Vote Now: “Cute Dog” Contest
Vote now in this anonymous poll for the dog (or cat!) that you think is the cutest:
In what could be a very bold move – with possible repurcussions for other audit giants – EY is reportedly considering a split of its audit & advisory businesses. That’s according to this WSJ article, which likens the magnitude & impact of this change to the collapse of Arthur Andersen. Here’s more detail from the WSJ:
How exactly the restructuring would work isn’t clear. The split could bolt some services, such as tax advice, onto the pure audit functions, one of the people familiar with the discussions said. The breakaway firm could then offer consulting and other advisory services to nonaudit clients.
Any change would have to be approved by a vote of the partners world-wide. EY’s global network consists of separate firms in each country that share technology, branding and intellectual property.
EY conducts a strategic review of its business lines every couple of years in which it weighs regulation, technology developments and competition with other firms, the people said.
As I blogged a few months ago, the SEC was conducting an enforcement sweep on conflicts of interest at the big audit firms. Last fall, the SEC’s Acting Chief Accountant also reminded auditors & audit committees of the importance of auditor independence. The concern is that consulting and other non-audit services may cloud independence and influence judgment on financial audits – and consulting relationships are continuing to grow.
This breakup would be a big deal if it happens – but it wouldn’t be completely novel. The article points out that Big Four firms are already splitting off audit operations from the rest of their services in the UK, due to regulatory demands there and scandals – and people have been predicting it could happen here too, for at least a couple of years. This actually wouldn’t even be the first time that EY has broken off a consulting arm – it sold its IT consulting division to France’s Cap Gemini 22 years ago. WilmerHale’s David Westenberg pointed out that the potential EY split is essentially what Andersen/Accenture did circa 2000, before Enron.
Earlier this week, YJ Fischer, Director of the SEC’s Office of International Affairs, used this speech to sound alarm bells with respect to the continued listings of China and Hong Kong-based companies. Here’s an excerpt with the four main points:
– First, PCAOB-registered public accounting firms must provide the PCAOB with access to their audit work papers, and, any claim that audit work papers cannot be produced because they contain national security materials is questionable at best;
– Second, although there have been ongoing and productive discussions between US and Chinese authorities regarding audit inspections and investigations, significant issues remain and time is quickly running out;
– Third, even if US and Chinese authorities reach an agreement in the near future to commence PCAOB audit inspections and investigations in China and Hong Kong—and I want to emphasize this point—such an agreement will only be the start towards satisfying the PCAOB’s statutory mandate; and
– Finally, should the issuers or the relevant Chinese authorities wish, they can effectuate the voluntary delisting of China-based issuers that they deem “too sensitive to comply” with PCAOB requirements, but allow other companies and audit firms to comply fully with the PCAOB inspection and investigative processes, thereby allowing the remainder of China-based issuers to avoid potential trading prohibitions in the US.
The speech includes a good refresher on the Holding Foreign Companies Accountable Act, which was passed in 2020:
– First, the HFCAA directs the PCAOB to determine whether it is unable to inspect or investigate completely registered firms located in a foreign jurisdiction because of a position taken by an authority in that jurisdiction.
– Second, the HFCAA directs the SEC to identify issuers that file annual reports that include an audit report prepared by auditors covered by the PCAOB’s determination.
– Finally, after three consecutive years of an issuer being identified by the Commission under this process, the HFCAA requires the SEC to impose a trading prohibition on the securities of those issuers.
Since the HFCAA was signed into law, the PCAOB has determined that there are two jurisdictions — China and Hong Kong — where local authorities prevented the PCAOB from inspecting or investigating audit firms completely. And, in a largely administrative process, the SEC has commenced the process of identifying issuers that have filed annual reports with an audit report prepared by an audit firm in a jurisdiction subject to the PCAOB’s determination under the HFCAA. These issuers may face potential trading prohibitions and, ultimately, delisting as soon as 2024. As of May 20, 2022, the Commission had conclusively identified 40 such issuers.
It has been a very busy week for HFCAA determinations, because there are now 128 conclusively identified issuers and another 20 that have been provisionally identified. When I checked in on this two months ago, there were no conclusively identified issuers and only 6 “maybes”! The list already includes Baidu and Weibo. Eventually, it will likely include all China-based stocks that trade on US exchanges, including Alibaba.
This Bloomberg article says that some analysts think that the Chinese & US governments may be able to strike a deal that would avoid delistings – but it could take a year to work that out.
At an open meeting yesterday, the SEC issued a pair of proposals that would affect disclosure and portfolio policies of so-called “ESG” funds. Lawrence summarized both of these proposals on PracticalESG.com. Here’s an excerpt with thoughts on the “trickle-down” effect that this could have on companies:
Investment fund compliance can get very complex, very fast – so I’m not going to get into the weeds here. For companies that might be included in fund portfolios, these rules are yet another sign that the SEC is cracking down on perceived “greenwashing” in an industry that reached $2.78 trillion in assets during the first quarter of this year, up from less than $1 trillion only two years ago, according to this WSJ article and Morningstar data. These proposals follow an enforcement action against an ESG investment fund earlier this week.
With investors under pressure to prove their ESG credentials and provide enhanced disclosure, they’ll in turn be passing more information requirements along to portfolio companies. That means it’s more important than ever to be in regular conversation with your investors, so that you aren’t caught flat-footed by information requests – and to stay in line with peers and emerging best practices (because demands can accelerate quickly).
It also means there’s an opportunity for ESG-focused companies that are seeking capital. There may be a big rush to ESG assets if funds are faced with the choice between compliance or a name change. The ESG investment fund space may also shrink, which is what happened in the EU when regulators realized that so-called ESG funds were not actually performing screens. As I noted in my book, Killing Sustainability (available to PracticalESG.com members on our “Guidebooks” page):
The EU Commission passed the Sustainable Finance Disclosure Regulation (SFDR), which became effective March 2021. in anticipation of the effective date, however, ESG-tagged investments in Europe shrank by $2 trillion from $14 trillion in 2018 as funds deleted references to ESG, responsible or green in their names/descriptions.
Comments for both of the proposals are due 60 days after the date the proposal is published in the Federal Register. It is interesting that this proposal was given a 60-day comment period initially, in contrast to the climate disclosure rule.
State Street Global Advisors recently issued its annual stewardship report. The 80-page recap details 2021 engagements, voting activity, and explains how SSGA’s ESG function is organized (and new headcount). It gives clues on what to expect in the off-season and next year. Here are some excerpts:
– Climate Transition: We are planning a targeted engagement campaign in 2022 to encourage the most significant carbon emitters that we invest in to disclose climate transition plans. SSGA is concerned about “brown-spinning” and wants to see responsible transition planning. The report highlights case studies beginning on page 39. Interestingly, SSGA supported 84% of say-on-climate proposals worldwide, but continues to have reservations that it will insulate directors from accountability.
– Board Gender Diversity: In 2022, we expect that all companies we invest in, across the globe, will have at least one woman on their board. If we do not see companies engaging on this topic, we are prepared to vote against the Chair of the board’s Nominating Committee or the board leader. Additionally, beginning in the 2023 proxy season, we will expect boards to comprise at least 30% women directors for companies in major indices in the US, Canada, UK, Europe, and Australia.
– R-Factor: We currently vote against companies that fail to improve their R-Factor score and show no signs of taking action to improve their score. In 2022, we will continue to vote against companies where we do not see action to improve their score; we will now also vote against companies that show a downward trend in their R-Factor scoring as well as those that consistently underperform their peers in the same market sector.
– 2022 Engagement Priorities: We will continue to focus on our key stewardship priorities of climate change, diversity, equity and inclusion, human capital management, and effective board leadership. This commitment is clearly demonstrated through material changes to our voting policies. In 2022, we expect to ask companies to report against the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD), and we will publish our own TCFD report. This year we announced that in the upcoming 2022 proxy season we will take voting action against responsible directors if (1) companies in the S&P 500 and FTSE 100 do not have a person of colour on their board and (2) companies in the S&P 500 do not disclose their EEO-1 reports.
