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SEC Chairman Clayton Testifies Before Senate Banking Committee

On Tuesday, December 10, 2019, Chairman Jay Clayton testified before the Senate Committee on Banking, Housing, and Urban Affairs (Committee) on the “Oversight of the Securities and Exchange Commission.” After Committee Chairman Mike Crapo delivered his opening remarks, which were supportive of the agency, Chairman Clayton gave an overview of the agency’s initiatives over the past year. Given that most of the governance-related topics that Chairman Clayton addressed were also raised back in September before the House Financial Services Committee, which we discussed, there were no real surprises.

Nonetheless, Chairman Clayton verbally reiterated that during SEC examinations, examiners will be looking for and reviewing the nature and extent of climate change disclosures, made both inside and outside SEC filings.
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Davis Polk Client Memo: Human Capital and Climate Risk Disclosure – Analysis of 2019 Mandatory and Voluntary Reporting

To help guide public companies in preparing their annual reports and proxy statements for the 2020 season, we examined the climate change and human capital management disclosures that have been provided by the largest public companies in six industries. A key finding is that to date 10-Ks and proxy statements have generally contained only disclosures that are required by law. Nonfinancial information – which may be important to certain stakeholders, though may also be immaterial under federal securities laws – is overwhelmingly limited to standalone, voluntary ESG reports. Our memo looks at broad trends shaping this ever-changing disclosure landscape and what may be to come.
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What Risk Trends in 2020 Should Be on Directors and Officers’ Radar Screens?

Last week, a global insurance company identified what it believes are the risk trends in 2020 that “have significant implications” to directors and officers (D&Os). The firm’s perspective provides a window into the types of trends insurers and underwriters are watching.

1. “Bad news” events resulting in more litigation

The insurer notes that there has been a rise in nonfinancial-based claims against D&Os stemming from what the firm calls “bad news” events, such as cybersecurity attacks, toxic culture (i.e., #MeToo movement), product liability, corruption and environmental disasters. The insurer warns that “bad news” events can prompt a regulatory investigation or cause share prices to fall, which the report states can “often result in significant securities or derivative claims.
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SEC Commissioners Testify Before House Financial Services Committee on ESG, Proxy and Other Topics

On Tuesday, September 24, 2019, SEC Chairman Jay Clayton, along with Commissioners Jackson, Lee, Peirce and Roisman, testified before the House Financial Services Committee (Committee) in a hearing titled “Oversight of the Securities and Exchange Commission, Wall Street’s Cop on the Block.” Chairwoman Maxine Waters observed that the last time all the SEC Commissioners had been before the Committee was over a decade ago, in 2007.

The SEC submitted written remarks that begin with the agency’s “tripartite mission—to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation . . . .” The remarks describe the agency’s strategic plan and highlight the 2019 initiatives in the following areas: (1) enforcement and compliance; (2) market developments and risks; (3) regulatory and policy agenda; and (4) investor education.
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Key Findings of ISS 2019 Benchmarking Policy Survey

Yesterday, Institutional Shareholder Services Inc. (ISS) announced the results of its 2019 Global Policy Survey (a.k.a. ISS 2019 Benchmark Policy Survey) based on respondents including investors, public company executives and company advisors. ISS will use these results to inform its policies for shareholder meetings occurring on or after February 1, 2020. ISS expects to solicit comments in the latter half of October 2019 on its draft policy updates and release its final policies in mid-November 2019.

While the survey included questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fell into the following categories: (1) board composition/accountability, including gender diversity, mitigating factors for zero women on boards and overboarding; (2) board/capital structure, including sunsets on multi-class shares and the combined CEO/chair role; (3) compensation; and (4) climate change risk oversight and disclosure.
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ESG in the US: Current State of Play and Key Considerations for Issuers

Davis Polk recently contributed a chapter to The International Comparative Legal Guide: Corporate Governance 2019 titled ESG in the US: Current State of Play and Key Considerations for Issuers. With the growing importance of environmental, social and governance (ESG) issues to public companies and their investors, this chapter aims to provide insights on the current ESG landscape – from the voting policies and ESG investing platforms of top asset managers to the dizzying array of ESG disclosure regimes and third-party raters.

Read the Full Chapter >
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ISS Launches Annual Benchmarking Policy Survey

Yesterday, Institutional Shareholder Services Inc. (ISS) announced its annual Benchmarking Policy survey. ISS will use survey responses to inform its policies governing 2020 shareholder meetings. Institutional investors, public companies, board directors, corporate advisors and other market participants are welcome to participate. Participants can make survey submissions until 5:00 PM ET on August 9, 2019.  ISS typically publishes the survey results a few weeks thereafter.

While the survey includes questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fall into the following categories: (1) board composition/accountability, including gender diversity and overboarding, (2) board/capital structure, including dual or multi-class shares and combined CEO/chairs, (3) compensation and (4) climate change risk oversight and disclosure.
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U.S. House Financial Services Committee Hearing on ESG Disclosure

In a House Financial Services Committee hearing yesterday, committee members debated the merits of five draft bills that would require public companies to disclose information on several environmental, social and governance, or ESG, topics including climate change risk, political expenditures and human rights risk. Hosted by the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, the hearing included witnesses representing CalPERS, Global Reporting Initiative (GRI), Ceres, Decatur Capital Management, an investment management firm, and Patomak Global Partners, a consulting firm for which former SEC Commissioner Paul Atkins serves as CEO.

Mandatory or Voluntary Disclosure? The committee memorandum prepared by the majority staff prior to the hearing stated that “investors have increasingly been demanding more and better disclosure of ESG information from public companies.” The target for improving this disclosure has been the SEC, which received an October 2018 petition from a coalition of investment managers, public pension funds and non-profit organizations requesting that the agency develop a robust ESG disclosure framework.
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Principles for Responsible Banking Gain Support of First Large U.S. Bank

Last week, Citi announced its support of the Principles for Responsible Banking (the Principles), joining a list of banks from around the world that have committed to becoming signatories. The Principles were developed by a group of 28 banks, jointly representing more than $17 trillion in assets, on behalf of the wider United Nations Environment Programme Initiative (UNEP FI). Citi has been a member of UNEP FI, a partnership between UNEP and the global financial sector, since 1997 and has undertaken several initiatives related to sustainability in the recent past.

So far, the majority of endorsers of the Principles are non-U.S.
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CFTC Holds a Public Meeting to Address Climate-Related Financial Risks

The Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee (MRAC) held a public meeting yesterday focusing on climate-related financial risks. The meeting featured presentations by regulators, market participants and academics.

Opening Statements

CFTC Commissioner Rostin Behnam, the sponsor of MRAC, stressed the economic costs of natural disasters in his opening remarks, also noting that climate change affects several parts of the U.S. economy. CFTC Chairman J. Christopher Giancarlo emphasized in his opening remarks that the CFTC supports the work of MRAC and all five of the Commission’s advisory committees, including looking at climate change and other externalities like Brexit and new asset classes such as cryptocurrency.
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