The SEC on ESG Disclosure – Latest Developments

At the 18th Annual Institute on Securities Regulation in Europe last week, SEC Director Bill Hinman spoke about the benefits of the SEC’s current, flexible approach to environmental, social and governance (ESG) disclosure for public companies. He noted that current disclosure requirements are largely principles-based and “apply in areas where the disclosure topics may be complex, associated with uncertain risks and rapidly evolving.” Such an adaptable principles-based disclosure regime, Director Hinman posited, is well suited for addressing often complex, risk-laden and rapidly evolving ESG topics, including how companies consider climate change risks, labor practices or board diversity in their decision-making.
Continue Reading

EU Proposes Legislation to Establish Low-Carbon Financial Market Benchmarks

Last week the European Parliament and European Union (EU) member states reached a tentative agreement on proposed legislation that would set standards for low-carbon benchmarks in the EU. In financial markets, a benchmark is essentially an index, or a standard or measure pegged to the value of a “basket” of underlying equities, bonds or other assets or prices, that is used for a variety of investment purposes, such as evaluating the performance of a security, mutual fund, or other investment. Many in the investing community rely on low-carbon benchmarks to create investment products, to measure the performance of investments and for asset allocation strategies.
Continue Reading

PRI to Require Reporting on Climate Change Risks

Last week, the UN Principles for Responsible Investment (PRI), the largest investor network focused on sustainable investing, challenged its over 2,250 signatories to step up their financial reporting when it announced that, beginning in 2020, all signatories will be required to report on climate change risks. PRI requires signatories, which include international asset owners, investment managers, and service providers that collectively manage over $83 trillion in assets, to report various environmental, social, and governance (ESG) metrics on an annual basis. PRI currently requests voluntary reporting on four indicators of climate risks: governance, strategy, risk management, and metrics and targets. Beginning in 2020, as part of their efforts to improve ESG-related disclosure, PRI plans to make risk indicators on both climate-related governance and strategy mandatory to report but voluntary to disclose.
Continue Reading

Growing Pressure from Investors Is Resulting in Increased Climate Change Related Commitments by Some Public Companies

We’ve written previously about Climate Action 100+, an investor led group representing over $32 trillion in assets under management, and its campaign against 161 or so of the largest publicly traded companies seeking to have these companies improve their greenhouse gas emitting practices.

Climate Action 100+ has experienced recent successes in its engagement efforts with a few companies, the details of which are available on its website.  In particular, a few companies have agreed to increased public reporting of their climate change strategies and, most notably, to adopt executive compensation metrics tied to greenhouse gas reduction targets. Recently, the group issued a report describing what it believes the steel industry should do to reduce greenhouse gas emissions and related public disclosure of those efforts.
Continue Reading

How State Street Intends to Focus on Corporate Culture in Engagement

State Street’s letter to board members advises companies that this year they intends to focus on corporate culture as one of many key intangible value drivers.  Through engagement, they have found that “few directors can adequately articulate their company’s culture or demonstrate how they assess, monitor and influence change when necessary.”

When engaging with directors and management on corporate culture, State Street will expect to understand the following:

  • Can the director(s) articulate the current corporate culture?
  • What does the board value about the current culture? What does it see as strengths? How can the corporate culture improve?
  • How is senior management influencing or effecting change in the corporate culture?

Continue Reading

CII Analysis of Board Evaluation Disclosure

CII has published an update to its analysis of disclosure on board evaluations in proxy statements, highlighting as “Seven Indicators of Strength” a wish list of information.

The report contains multiple qualifications and statements designed to reassure companies, including that they are not expected to reveal any specific details about the results of the evaluations, but instead the disclosure should focus on the process for continued improvement.  In addition, the seven benchmarks selected in the report are not intended to be prescriptive, as they are observations of what CII believes investors find to be useful information based on CII’s review of the proxy statements of more than “100 prominent companies”.
Continue Reading

Credit Ratings Agencies Increasing their Focus on ESG Risks

Fitch Ratings announced on Monday that it has launched a new integrated scoring system that shows how environmental, social and governance (ESG) factors, such as climate change, human rights and labor issues, impact individual credit rating decisions.

Its ESG Relevance Scores are sector-based and entity-specific. Fitch has started with over 1,400 non-financial corporate ratings, which it is initially making publicly available at www.fitchratings.com/site/esg.  In contrast to other third-party ESG ratings available in the market today, Fitch states that these scores do not reflect judgments as to whether an entity has positive or negative ESG practices, but rather discloses how an environmental, social and/or governance issue specific to the entity influences its current credit rating. 
Continue Reading

SEC Continues to Target Companies for Financial Reporting Failures

At the very end of the year, the SEC announced the entry of an administrative order instituting cease-and-desist proceedings in connection with financial reporting at a major rental car company, including earnings guidance.

According to the order, “under persistent pressure to meet budgets, and to generate opportunities to help close company-wide budget gaps or revenue shortfalls,” the company did not comply with GAAP in 2012 in accounting for contingencies, particularly in determining when to increase the allowance for or the amount to write-off related to recovering money to offset expenses for vehicle damage.  The methodology was changed several times in 2013 for determining the allowance or the amounts of aged debt to be written off, each assuming more favorable collection results than historical data reflected and with favorable impact to the company’s financial statements.  
Continue Reading

SEC Finds Violation of “Equal or Greater Prominence” Requirement of the Non-GAAP Disclosure Rules

The SEC instituted a cease-and-desist proceeding in a fairly straightforward enforcement action that nonetheless emphasizes the importance of the requirement that GAAP measures must be provided with “equal or greater prominence” when a company discloses non-GAAP measures.

The SEC found that a company provided non-GAAP financial measures, such as adjusted EBITDA, adjusted net income and free cash flow before special items, without giving equal or greater prominence to the comparable GAAP measures.

In the headline for the FY 2017 earnings release, the company presented its adjusted EBITDA for the fiscal year and stated that it was up 8% year-over-year, without mentioning its net income or loss (the comparable GAAP financial measure) in the headline.
Continue Reading

SEC Adopts Hedging Policy Disclosure Rules and Requests Public Comment on Quarterly Reporting

The SEC yesterday announced that it has adopted the Dodd-Frank hedging policy disclosure rules and issued a request for comment on quarterly reporting.  We will provide additional information in the form of client memos, but preliminary information based on the fact sheets published includes:

Hedging Rules.  Compliance is required in proxy statements during fiscal years beginning on or after July 1, 2019.  Companies must disclose any practices or policies it has adopted about the ability of its employees (including officers) or directors to buy securities or other financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director. 
Continue Reading

LexBlog