As I mentioned last month, I am looking back on 15 years of contributing to CCRcorp publications and reflecting on some of my favorite blogs, podcasts, webcasts, conferences and publications over the years. Shortly after I first joined the organization back in 2007, Broc sent me to the Radio Shack store in my local mall (yes, there were still Radio Shack stores in existence in 2007) to purchase a device that would allow me to record calls on a landline telephone. With that device in hand, I was able to start participating in the “Inside Track” podcast series. At that time, I don’t think I had ever listened to a podcast, so it was certainly all new to me and I was a bit nervous recording my first few podcasts. I came to really like the podcast format – it is a great way to cover a topic or a series of topics in a way that does not involve writing something, which can be very painful sometimes!
My favorite podcasts were far and away the Dave & Marty Radio Show podcasts. Our first “broadcast” was back in December 2009, and we sounded surprisingly subdued in that first recording! In the first of the Fond Farewell Episodes of the Dave & Marty Radio Show, I recounted how the podcast came about and how much we enjoyed recording it over the years. I am so glad now that we recorded all of the episodes that we did, because it is really comforting to go back and hear my great friend’s voice again and listen to his stories. I knew that Marty would have wanted me to carry on with podcasting, so that inspired me to launch the Deep Dive with Dave podcast series that I record today.
Yesterday, Ceres announced new guidance for investor engagement with companies on governance of climate risk. Ceres notes that investors and proxy advisors can use the 2022 Ceres Guidance for Engaging on Climate Risk Governance and Voting on Directors for engaging with portfolio companies on the risks and opportunities emerging in the transition to a net zero emissions economy and to inform their voting decisions on electing board directors. The reports states:
The Guidance provides details on topics that investors and proxy advisory firms may want to consider to inform their company engagements and decisions on whether to support the election of directors responsible for climate change risk oversight. The Guidance covers practices in governance, reporting, and lobbying around climate change-related risks and opportunities, i.e., the direction in which all U.S. public companies should be moving on their journeys to address the net zero transition. Depending on their respective internal practices, investors and proxy advisory firms may determine if voting against or making a recommendation to vote against directors is appropriate for companies that lack one or more of these practices. As climate risk oversight continues to evolve, Ceres expects to update this Guidance.
This paper sets out the PRI’s views on the investor case for responsible corporate political engagement. We explain why investors working towards sustainability objectives must ensure that their portfolio companies are conducting political engagement in a responsible manner. We include high-level principles on what this activity entails, based on existing views in academic and practitioner literature. We also discuss the key findings from the PRI-supported research, undertaken by the OECD, that maps out political engagement regulations across selected jurisdictions.
The PRI notes that corporate political engagement can be responsible when the company’s activities:
Adhere to the letter and spirit of existing regulations and international best practice;
Are conducted in line with business principles that ensure integrity and sustainability goals that have been set out in international agreements or national policy targets;
preserve the long-term interests of the company, including the broad interests of diversified shareholders and those of stakeholders;
Inspire trust and are grounded in robust governance and transparency; and
Lead to well-informed, inclusive and effective public policy decisions that contribute to a stable economic system, minimise firm and system-level risks as well promote positive real-world sustainability outcomes.
The PRI expresses a concern that “unchecked political involvement can raise governance risks at a company level and increase risks of policy capture” and suggests key steps that investors can take to understand and address these risks.
As expected, the rule proposals keep coming from the SEC. The Commission provided notice of an open meeting on February 9 that will cover several items. In addition to two rule proposals from the Division of Investment Management (with one of those dealing with cybersecurity risk management for registered investment advisers and investment companies), the Commission will consider a proposal from the Division of Trading and Markets to shorten the standard settlement cycle for most securities transactions, as well as a proposal from the Division of Enforcement’s Office of the Whistleblower and the General Counsel’s office to amend the whistleblower rules.
The SEC recently announced that it is seeking candidates for appointment to the Investor Advisory Committee, which was established under the Dodd-Frank Act to advise the Commission on protecting investors and improving securities regulations. In August 2020, the SEC announced new procedures regarding the process to nominate candidates for appointment to the Investor Advisory Committee. Candidates for vacancies on the Committee will be identified by a nominating committee composed of staff from across the SEC’s divisions and offices. The nominating committee will identify candidates based on functional membership categories published on the SEC’s website. Members of the public are encouraged to express their interest in serving on the Investor Advisory Committee.
We have recently seen the Investor Advisory Committee being active in helping to shape SEC policy. Last year, Investor as Owner Subcommittee of the SEC’s Investor Advisory Committee developed recommendations on proposed changes to Rule 10b5-1 that were adopted by the Investor Advisory Committee and the SEC’s Rule 10b5-1 rule proposals incorporated a number of those recommendations.
The PCAOB has announced that it created of two new advisory groups — the Investor Advisory Group and the Standards and Emerging Issues Advisory Group. The PCAOB says that these advisory groups “will enable the PCAOB to obtain essential input and insights from investors and other stakeholders on a wide variety of matters related to improving audit quality.”
The Investor Advisory Group will advise the PCAOB on matters concerning the PCAOB’s mission to oversee the audits of public companies, and related matters (such as the audits of broker-dealers). The PCAOB says that this group will “protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports, including providing investors’ perspectives on key areas of concern and potential emerging risks related to PCAOB oversight activities.”
The Standards and Emerging Issues Advisory Group will replace the Standards Advisory Group created in early 2021, and advise the PCAOB on existing standards, proposed standards, potential new standards and, if requested by the Board, on matters other than standards that are of significance to the PCAOB, including emerging audit issues. The PCAOB says that this group “will provide for enhanced public engagement with a diverse group of investors and other stakeholders.”
The PCAOB is now seeking public comment on the proposed structures of these two new advisory groups, as well as nominations for membership in each group. The deadline for nominations is February 28. Nominations are open to both new prospective participants and members who have served on the PCAOB’s previous advisory groups.
The Center for Audit Quality (CAQ) and Deloitte recently teamed up to prepare the “Audit Committee Report: Common Threads Across Audit Committees.” The report is based on a survey of 246 audit committee members from U.S.-based public companies with a market capitalization greater than $700 million. The report presents findings in a number of key areas for audit committees, including audit quality, financial reporting and internal controls, fraud risk, enterprise risk management, cybersecurity and data privacy security, ethics and compliance and third party risk and audit committee engagement.
Yesterday, the Staff issued its annual Staff Report on Nationally Recognized Statistical Rating Organizations (NRSROs), providing a summary of the Staff’s examinations of NRSROs and discussing the state of competition, transparency, and conflicts of interest among NRSROs. This report is required by Section 6 of the Credit Rating Agency Reform Act of 2006 and Section 15E(p)(3)(C) of the Exchange Act. The report is prepared by the SEC’s Office of Credit Ratings.
The report covers a lot of ground in the realm of credits ratings, but one particular area caught my attention. As noted in the report, during 2021 inspections of NRSROs, the Staff focused on several areas of risk related to ESG factors. The report notes:
Development in the area has grown rapidly, and competition has increased among NRSRO and non-NRSRO providers, leading the Staff to identify several areas of potential risk to NRSROs. These include the risks that, in incorporating ESG factors into ratings determinations, NRSROs may not adhere to their methodologies or policies and procedures, consistently apply ESG factors, make adequate disclosure regarding the use of ESG factors applied in rating actions, or maintain effective internal controls involving the use in ratings of ESG-related data from affiliates or unaffiliated third parties. The Staff also identified the potential risk for conflicts of interest if an NRSRO offers ratings and non-ratings ESG products and services.
The Staff notes that examples of non-ratings ESG products and services include: (i) evaluations of the environmental benefits of a project financed with the proceeds of a “green” bond issuance; (ii) ESG scores based on the expected impact of ESG factors on a company’s growth, profitability, capital efficiency, and risk exposure; and (iii) assessments of a company’s risk from climate-related scenarios. The Staff indicates that these products and services are not credit ratings and are therefore not directly regulated by the SEC’s Office of Credit Ratings.
A few months ago, I covered the efforts of the SEC’s Office of the Advocate for Small Business Capital Formation to expand the resources available to small business seeking capital. Following up on the capital raising navigator that was launched last year, the Office has now launched its “Building Blocks” resource page. The page features several blocks with questions such as “what is a general solicitation?” and “what is the role of accredited investors?” and clicking on those blocks directs you to more detailed resources which answer the question. On the Building Blocks page, the Staff solicits suggestions for more questions to be answered, and one could envision this page filling up with building blocks given all of the questions that small businesses have about capital raising.
