As I blogged a few months ago on our Proxy Season Blog, this year ISS also conducted a separate policy survey about climate-related matters. The proxy advisor announced the results of that survey on Friday as well. 164 investors responded, along with 152 companies, advisors and affiliates. Here are the takeaways:
1. Climate-Related Board Accountability: A significant majority of all categories of respondents expect a company that is considered to be a strong contributor to climate change to be providing clear and detailed disclosure, such as according to the Task Force on Climate-related Financial Disclosures. A smaller majority of investor respondents support all of the criteria listed except “medium-term Scope 1 & 2 targets” and “starting to show a declining trend in absolute GHG emissions.”
Other than detailed disclosure, the other criteria that were popular among investors were demonstrating improvement in disclosure and performance, declaring a long-term ambition to be in line with Paris Agreement goals, disclosing a strategy and capital expenditure program in line with Paris goals, and showing that its corporate and trade association lobbying activities are in line with Paris goals.
The comments by investors were strongly supportive of companies’ setting goals in line with the more stringent 1.5 degrees of warming limit than the “well below 2 degrees” target that was in the Paris Agreement as it was adopted in 2016. Corporate responders also were strongly supportive of disclosure and demonstrating improvement, although support drops precipitously for ambition and targets in line with Paris goals.
2. Easier Expectations for Some Companies: Regarding the question about whether companies not deemed to be strongly contributing to climate change should be held to similar standards as those that do, one-third of investor respondents and a majority of non-profit respondents preferred to see minimum expectations the same regardless of company contribution to climate change, but the most common response by investors and corporate responders was that there should be some level of expectations but that they should be lower.
3. Say-on-Climate – Management Proposals: As ISS looks to further develop its framework for analyzing climate transition plans presented by companies, the dealbreakers indicated by investor respondents were similar to the responses about board climate accountability. The top five dealbreakers for investor respondents were a lack of the following: detailed disclosures (such as according to the TCFD framework), a long-term ambition to be aligned with Paris-type goals, a strategy and capital expenditure program, reporting on lobbying aligned with Paris goals, and a trend of improvement on climate-related disclosures and performance.
4. Climate Transition Plans – Vote Targeting: The highest numbers of both investors and non-investors who responded answered that, when a climate transition plan is on the ballot, they considered that the plan is the primary place to vote to express sentiment about the adequacy of climate risk mitigation but that escalation to votes against directors may be warranted in future years if there is multi-year dissatisfaction.
5. Say-on-Climate – Shareholder Proposals: Responses to the question about when Say-on-Climate shareholder proposals requesting a regular advisory vote on a company’s climate transition plan would warrant shareholder support, the answers reflected a split in sentiment. The answer with the highest support from investors was “Always: even if the board is managing climate risk effectively, a shareholder vote tests the efficacy of the company’s approach and promotes positive dialogue between the company and its shareholders.”
However, just a little below that for investors but the most frequent response from corporate respondents was that it should be case-specific and would be warranted only when the company’s climate transition plan or reporting fell short. Fourteen percent of investor respondents answered such a proposal never warranted support and preferred voting directly against directors if the company was not adequately managing climate risk. Just over thirty percent of corporate respondents answered that a shareholder Say on Climate was never warranted because it was a matter for the company to decide.
This was a global survey – 18% of the responding investors were US-based. As I’ve blogged, US-based investors seem less gung-ho about shareholder say-on-climate proposals, due to a concern that these proposals will insulate directors and slow down change. Geography may be driving some of the split on that question, but the survey doesn’t delve into that level of detail.
The survey also includes responses that affect ISS’s specialty climate voting policy. There appears to be consensus that high-impact companies should be subject to more stringent evaluations. Most respondents favored the policy assessing a company’s alignment with net zero goals.
We’ve been watching with intrigue the steps that the SEC is taking to put an end to “fake SEC filings” and make the filing process more reliable. My latest blog on this saga was earlier this year, when the Commission amended Reg S-T. Now, the SEC has also announced that it’s considering a big EDGAR upgrade that could change how filers access the system and manage people who file on their behalf. Here are a few details (see the SEC’s info page for more):
1. Requirement to obtain individual account credentials and use of Login.gov: If the SEC implements the potential technical changes to EDGAR filer access and account management processes, each individual who seeks to file on EDGAR would need unique account credentials from a third-party service provider to log in to EDGAR filing websites.
2. Filer Admins & Users: Each filer would designate at least one filer administrator, an individual authorized by the filer to manage individual users.Individuals authorized to make submissions on behalf of the filer would be known as the filer’s users.
3. Transition: If the potential technical changes to EDGAR filer access and account management processes are implemented, all current EDGAR filers would be required to transition their accounts to the new processes.
If you have opinions, you can provide those via the SEC’s request for comment. You can also sign up to test the beta version of “EDGAR Next” starting next Tuesday, October 12th.
I am a big believer in the saying “if it ain’t broke, don’t fix it.” I am not entirely sure where this saying comes from (and trying to figure that out sent me down a bit of a rabbit hole), but suffice it to say, there are plenty of things that we deal with as securities and governance professionals that are best left alone because they work just fine. I think disclosure committees often fall neatly into this category, because there have been relatively few developments which have necessitated significant changes to the disclosure committee’s responsibilities over the years, and disclosure committee charters are usually flexible enough to allow the committee to adapt to changes in rules and practices over time.
All of that said, I do think that a disclosure committee tune-up may be advisable right now. As this Morrison & Foerster alert notes, this year the SEC has ramped up its actions against companies for ineffective disclosure controls and procedures with respect to cybersecurity incidents, with the agency now focusing on how companies ensure that cybersecurity incidents are identified and communicated to management so that appropriate disclosure decisions can be made on a timely basis. Further, a push for more voluntary environmental and social disclosures, as well as the prospect of mandatory SEC disclosure in the coming months, has focused attention on the disclosure controls and procedures that companies have in place for those disclosures. As Corp Fin’s recent sample letter on climate change disclosures has demonstrated, the Staff is looking closely at how disclosures about climate change included in CSR and sustainability reports relates to the disclosures that the company includes in its SEC filings. Here are my suggestions for areas that the disclosure committee should consider:
Does the disclosure committee have the right mandate? Disclosure committees were established when disclosure controls and procedures requirements were adopted as part of the SOX certification rulemaking, but in the almost 20 years since that time, we have certainly observed some “mission creep” for the disclosure committee. As a result, it is advisable to review the disclosure committee charter to see if it accurately describes the scope of the committee’s responsibilities and its role in the disclosure process, including the committee’s role in analyzing and assessing whether disclosure is required under SEC or other requirements.
Are the right people in the room? Given the SEC’s focus on cybersecurity disclosure controls and procedures, does the disclosure committee include a representative from the company’s information technology function, or does someone from that function report to the committee on a regular basis? Further, does the disclosure committee have an appropriate level of involvement in the company’s ESG disclosure efforts, and are there representatives on the committee who can assist with understanding what is being disclosed in SEC reports and in other communications and how that disclosure is developed?
Is the disclosure committee in a silo? Is the disclosure committee properly positioned within the organization, and does it have the appropriate authority to have access to the raw data that it needs to make informed recommendations for disclosure decisions on a timely basis? In some cases, the disclosure committee may be too tilted toward the company’s financial reporting function, which can cause it to lose sight of, and not have appropriate access to information about, broader disclosure topics such as cybersecurity and ESG.
Does the disclosure committee have the right framework in place for assessing materiality? One of the most important roles that the disclosure committee serves is assisting management with making informed decisions about the materiality of information. As we all know, materiality is not a static concept, so it is advisable for the disclosure committee to take steps to articulate the framework that is used for analyzing and determining whether information is material, and tweak that framework as necessary given changes at the company, new SEC rules and evolving investor expectations.
Does the disclosure committee have an active role in the design and evaluation of disclosure controls and procedures? The members of the disclosure committee are usually best situated to determine if the company’s disclosure controls and procedures are operating effectively, and have the best perspective on what improvements may be necessary or when changes are necessary due to new SEC requirements. As a result, the disclosure committee should have clearly articulated responsibilities with respect to disclosure controls and procedures, and a mechanism should be in place for recommending regular adjustments and following up on their implementation.
One topic that disclosure committees are particularly focused on these days is the prospect for SEC disclosure requirements concerning climate change risks, which the SEC has identified as a top regulatory priority. Back in July, SEC Chair Gary Gensler indicated in a speech on the U.N. Principles for Responsible Investment “Climate and Global Financial Markets” webinar that he had asked for climate disclosure recommendations from the staff for consideration by the Commission by the end of the year.
It has now been reported that, during a recent interview at the Council of Institutional Investors Fall conference, Gensler indicated that climate rule proposals may not be considered by the Commission until late this year or early next year, and that human capital disclosure rules would follow in a very active period between now and next spring.
What we can expect from the SEC on these and other rulemaking initiatives (and when) will be topics that we will discuss in detail at our upcoming conferences, which are now less than two weeks away! Be sure to register today!
Shareholder proposals relating to the environment had a big year during the 2021 proxy season. As noted in D.F. King’s Proxy Season Review and Fall Engagement Guide, nearly half of all environmental proposals that made it onto ballots this year received majority shareholder support, compared to none just two years ago. Requests for climate change reporting received the highest number of submissions, as well as the highest number of proposals in this category that received majority shareholder support, followed by proposals requesting reporting or targets for GHG emissions. 80% of the GHG emissions-related proposals that made it onto ballots received majority shareholder support this year.
The breakout star of environment proposals in 2021 was the Say-on-Climate proposal. This proposal requested an annual advisory vote on a company’s climate-related plans. One say-on-climate proposal received majority shareholder support. The proposals received a lot of attention in 2021 and, as a result, they are likely to be featured in future shareholder proposal campaigns. This raises the inevitable comparison, could Say-on-Climate evolve into a universal requirement like Say-on-Pay?
It is easy to forget that, prior to the enactment of the Dodd-Frank Act’s Say-on-Pay requirement in 2010, the concept of getting an annual advisory vote on executive compensation had started in the United States as a shareholder proposal campaign. Following the lead of the Say-on-Pay votes that had been instituted in the United Kingdom and some other jurisdictions, shareholder proponents begin submitting Say-on-Pay resolutions to U.S. public companies in 2007, as concerns about excessive executive compensation reached their peak and new SEC rules went into effect requiring more comprehensive disclosure about executive compensation. By 2009, in response to the financial crisis, Congress picked up the baton and mandated Say-on-Pay votes for certain financial institutions, and the broader Say-on-Pay mandate took hold when the Dodd-Frank Act came together one year later.
One of the things that clearly facilitated the rise of Say-on-Pay proposals was the 2006 executive compensation disclosure rule changes, which established CD&A and more detailed compensation disclosures. By comparison, we could see how Say-on-Climate proposals could benefit from SEC-mandated disclosures on climate change risks, which we are expecting to see from the SEC in the near future.
While it is too soon to tell what path Say-on-Climate proposals are on, companies should be monitoring their progress and considering their ultimate impact, much like we did with Say-on-Pay proposals back in the 2000s.
Earlier this week, the SEC announced that it had barred two individuals from the whistleblower award program. According to the SEC, each of these individuals filed hundreds of frivolous award applications.
These bars were issued pursuant to the 2020 amendments to the SEC’s whistleblower program rules. New Exchange Act Rule 21F-8(e) authorizes the Commission to permanently bar a claimant from the Whistleblower Program based on submissions or applications that are frivolous or fraudulent, or that otherwise hinder the effective and efficient operation of the Whistleblower Program. The SEC’s adopting release for this rule defines “frivolous claims” as “those that lack any reasonable or plausible connection to the covered or related action.”
These bars are permanent, applying to any pending applications from the claimant at any stage of the claims review process as well as to all future award claims.
At the Small Business Capital Formation Advisory Committee meeting earlier this week, SEC Chair Gary Gensler focused his remarks on SPACs. He noted concerns about the PIPE investors getting a better deal than retail investors, as well as the costs associated with SPACs, including sponsor fees, dilution from the PIPE investors, and fees for investment banks or financial advisers. Gensler reiterated that he has asked the staff “for recommendations about how we might update our rules so that investors are better informed about the fees, costs, and conflicts that may exist with SPACs.”
It is good to know that, with major issues looming such as a government shutdown and the need to extend the debt ceiling, some of our representatives in Congress are focused on pieces of legislation like the Mind Your Own Business Act of 2021. Senator Marco Rubio announced that he had introduced this legislation last week, with the purpose of enabling shareholders to hold “woke” corporations accountable. The announcement states:
Specifically, the legislation would require corporate directors to prove their “woke” corporate actions were in their shareholders’ best interest in order to avoid liability for breach of fiduciary duty in shareholder litigation over corporate actions relating to certain social policies. It would also incentivize corporate management to stop abusing their positions to advance left-wing social policies by increasing their personal liability to shareholders for breaches of fiduciary duty resulting from those policies.
The provisions of the legislation include the following:
Requiring large public companies listing on national stock exchanges to provide shareholders with significant holdings with certain privileges with respect to claims for breach of fiduciary duty under covered circumstances, including if a company takes an action on a primarily non-pecuniary basis in response to State law, boycotts a class of persons or industry on a primarily non-pecuniary basis, or uses primarily non-pecuniary public reasoning for an action.
Corporate defendants would be bound by presumptions that pecuniary interest does not include common defenses used to defend exercises of business judgment, including the media image of the company or employee morale.
For claims of breach of fiduciary duty against management brought by shareholders under these covered circumstances, management would have the burden of proof and, if found in breach of their duties, be liable without indemnification by the company for a minimum amount of damages and attorney’s fees.
We will monitor the progress of this legislation, but my guess is that, in the current political environment, this one might be singing “I’m just a bill/Yes, I’m only a bill/And I’m sitting here on Capitol Hill.”
The SEC announced that John Coates, who served as Acting Director of the Division of Corporation Finance and then as Acting SEC General Counsel, will leave the SEC in October to return to teaching at Harvard University. Dan Berkovitz, who now serves as a Commissioner of the CFTC, has been named SEC General Counsel. Michael Conley, currently the SEC’s Solicitor, will serve as Acting General Counsel until Berkovitz joins the agency. As noted in the SEC’s announcement, SEC Chair Gary Gensler and Berkovitz previously worked together when Berkovitz served as the CFTC’s General Counsel from 2009 to 2013.
