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SEC Committee Discusses ESG Disclosure Requirements and D&I

On March 19, 2021, the SEC’s Asset Management Advisory Committee (AMAC) held a meeting to discuss the December 2020 potential recommendations that its ESG Subcommittee provided to the SEC on ESG disclosure requirements. During the meeting, the Diversity & Inclusion (D&I) Subcommittee of AMAC also made potential recommendations to improve D&I in the asset management industry.
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SEC Signals Support for Single Global ESG Disclosure Framework

Today, the SEC released a statement by Division of Corporation Finance Acting Director John Coates on ESG disclosure. In this post, we provide our observations on what his statement may indicate about the direction of globally coordinated efforts on ESG disclosure.

Acting Director Coates is interested in developing global ESG disclosure standards, stating that the SEC “should help lead the creation of an effective ESG disclosure system.”
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SEC Chair Nominee Gensler and SEC’s 2021 Examination Priorities Highlight ESG and Climate Risk

SEC Chair Hearing.  Yesterday, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a nomination hearing to consider Gary Gensler’s candidacy for Chair of the Securities and Exchange Commission, or SEC. Throughout the hearing, Gensler fielded numerous questions on environmental, social and corporate governance and disclosure matters. This post synthesizes the most salient points from his testimony.
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Davis Polk Client Alert: SEC to Review Climate-Related Disclosure

Yesterday, the SEC released a statement on climate change disclosures. The statement directs the SEC staff to review company disclosures against its 2010 climate change disclosure guidance. In light of these events, this client alert provides our prior comprehensive summary of the SEC’s 2010 guidance and identifies what issuers should do in the short and long term to be prepared for future regulatory action.
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ISS Issues 2021 Governance QualityScore Methodology Updates

On February 8, 2021, ISS announced the updated methodology guide the firm uses to determine a company’s Governance QualityScore (GQS), its proprietary rating system designed to help institutional investors assess companies for governance quality and risk. Seventeen new factors have been added, which ISS states is the largest GQS methodology release in recent years.

What GQS Measures

GQS is a decile-based score meant to indicate the corporate governance risk relative to other companies in a respective index or region.
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BlackRock’s 2021 CEO Letter – What It Means for Public Companies, Issuers of Public Debt, Large Private Companies, and Their Boards

Yesterday, BlackRock released its annual Letter to CEOs, which is also commonly referred to as the “Fink Letter.” With the firm managing approximately $9 trillion in assets, this open letter is widely read by public companies, market participants and other stakeholders to better understand the mega investor’s outlook. This post boils down BlackRock’s 2021 letter to what we think is its essence.
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SEC Extends Review Period for Nasdaq’s Board Diversity Proposal

On the heels of our post of our summary deck yesterday on Nasdaq’s December 2020 Board Diversity Proposal, the SEC announced last night that it needs more time to consider Nasdaq’s proposal and associated comment letters.  With the extension, the SEC has until March 11, 2021 to either approve or disapprove the proposal, or institute proceedings to aid its determination.  
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Nasdaq’s Board Diversity Proposal

The SEC continues to consider and take public comment on Nasdaq’s December 2020 Board Diversity Proposal. That proposal, if approved as written, would require Nasdaq-listed issuers to disclose their board diversity composition annually and eventually have two “diverse” directors on their boards, or explain why not. Limited exceptions would also apply.

There’s been much speculation as to whether the SEC will approve these proposed amendments to Nasdaq’s listing requirements, decline to do so, or propose, at some point in time, its own board diversity disclosure requirements.
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State Street’s 2021 Proxy Voting Agenda

State Street Global Advisors (SSGA) released its eagerly awaited 2021 proxy voting agenda earlier this week and, unsurprisingly, climate change risk and the lack of racial and ethnic diversity are among the investor’s top priorities. In the annual letter from the President and CEO Cyrus Taraporevala (CEO’s Letter), companies are urged to increase their transparency around racial and ethnic diversity.
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Glass Lewis Makes Key Changes to Proxy Voting and ESG Proposal Guidelines – Full Summary

On November 24, 2020, Glass Lewis (GL) released its 2021 Proxy Voting Policy Guidelines for the United States and its 2021 “Environmental, Social and Governance (‘ESG’) Initiatives,” which outlines the firm’s approach to ESG shareholder proposals.  The policies are effective for shareholder meetings held after January 1, 2021.  Feedback on GL’s policies may be submitted using the link at the top of GL’s voting policy guidelines page.
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Glass Lewis Releases 2021 Proxy Voting Guidelines

Glass Lewis (GL) announced yesterday that its 2021 Proxy Voting Policy Guidelines for the United States are now available. In addition, the proxy advisor announced the release of its 2021 “Environmental, Social and Governance (‘ESG’) Initiatives,” which includes the firm’s approach to shareholder proposals.

We are preparing a more fulsome Briefing: Governance blogpost summary.  In the meantime, the following are a few key changes:

  • BOARD GENDER DIVERSITY.   

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ISS Releases 2021 Benchmark Policies Updates

On November 12, 2020, ISS announced the release of its 2021 benchmark policy updates that will apply to shareholder meetings occurring on or after February 1, 2021. The updated policies substantially adopt the policies as ISS proposed in October 2020 relating to (1) racial and ethnic diversity, (2) board oversight of environmental and social risks, including climate risks and (3) exclusive forum provisions, which we previously discussed here.
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ISS Releases 2021 U.S. Proxy Voting Guidelines Today and other Upcoming Key Dates for ISS and Glass Lewis

ISS and Glass Lewis (GL) have publicly shared some key upcoming dates for the 2021 proxy season. Below is a list of dates the firms have provided and, based on the most recent year(s), our estimated release dates for other frequently-used proxy advisor publications. Unless specified otherwise, the updated policies listed below will be posted on the ISS website or GL website.
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TCFD Releases Third Status Report on the Adoption of Its Climate-Related Disclosure Recommendations

Yesterday, the FSB’s Task Force on Climate-related Financial Disclosures, commonly referred to as the TCFD, issued its third status report describing companies’ progress in aligning with the TCFD recommendations. While the TCFD has observed great momentum in the global adoption and support of its recommendations since its last status report in June 2019, it states progress is still needed.
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G&A Finds Sustainability Reporting Increases for Russell 1000 Companies

On October 26, 2020, the Governance & Accountability Institute, Inc., or G&A, released a report on the sustainability reporting trends by Russell 1000 companies. The G&A report presents the Russell 1000 companies’ rate of (1) non-reporting on a sector basis; (2) utilizing, referencing or aligning selected standards or sustainability goals; (3) responding to a selected climate-related questionnaire; and (4) utilizing external assurances.
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ISS Proposes 2021 Benchmark Voting Policy Changes

On October 14, 2020, ISS released its proposed voting policy changes for 2021. The changes for the United States focus mainly in these three areas: (1) racial and ethnic board diversity, (2) board oversight of environmental, climate and social risks and (3) exclusive forum provisions.

ISS requests feedback on the proposed changes. Market participants can submit comments via email to policy@issgovernance.com
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SEC Asset Management Advisory Committee Provides Updates on Diversity and Inclusion Research and Recommendations

On September 16, 2020, the SEC’s Asset Management Advisory Committee, or AMAC, hosted a webcast to further discuss diversity and inclusion issues in the asset management industry initially addressed at its last meeting on July 16, 2020.  AMAC has held these meetings to provide incremental updates on its efforts to prepare and deliver to the SEC final recommendations on improving D&I in the asset management industry.  
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CFTC Identifies Climate-Related Financial Risks and Urges Action from Financial Regulators and Legislators

On September 9, 2020, the Climate-Related Market Risk Subcommittee of the U.S. Commodity Futures Trading Commission published a report, Managing Climate Risk in the U.S. Financial System, describing the links between climate change and the U.S. financial system.  The Report was largely the product of efforts from its sponsor, CFTC Commissioner Rostin Benham, but was prepared with input from the Subcommittee, comprised of over 30 stakeholders, including banks; investment firms and advisors; oil and gas companies; and public interest and non-profit organizations.
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BlackRock’s 2020 Investment Stewardship Report: Hits Record Level for Firm in Engagements and Director Accountability

BlackRock released its Investment Stewardship 2020 Annual Report. The report provides an overview of the asset manager’s engagements, views and voting statistics related to the 12-month period ended June 30, 2020. The report, which is double the length of last year’s, describes how the asset manager prioritized engagements with its portfolio companies, reaching the firm’s highest levels.
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Vanguard Spotlights Climate Change and Diversity as Priorities in its Latest Stewardship Report

Vanguard announced the publishing of its Investment Stewardship 2020 Annual Report.  The report shares the highlights of the asset manager’s engagements with its portfolio companies, observations and voting statistics relating to the 12-month period ended June 30, 2020. The firm’s key focus areas are primarily climate change and diversity.

Vanguard believes environmental, social and governmental (ESG) matters came into sharper focus during the 2020 proxy season because of certain events and circumstances, including the COVID-19 pandemic, economic uncertainty, escalating climate risks and historic social justice movements.
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Key Sustainability Standard Setters Converge to Promote Consistency in Corporate Sustainability Reporting

Five framework- and standard-setting institutions announced a joint statement on September 11, 2020 reflecting their collaborative vision to develop a comprehensive global corporate reporting system for disclosing sustainability topics such as climate change, biodiversity, wages and skills. The participants include the Global Reporting Initiative (GRI), CDP (formerly the Carbon Disclosure Project), Climate Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB).
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Davis Polk Client Memo: SEC Updates Business, Legal Proceedings and Risk Factors Disclosure

On August 26, the SEC adopted amendments to update the business description, legal proceedings and risk factor disclosures that U.S. companies make in registration statements, annual reports and quarterly reports. In making these changes, the SEC is taking a more tailored and “principles-based” approach to disclosure, with the intention of simplifying compliance for companies and improving information provided to investors.
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ESG Disclosure Frameworks – Recent Updates

Updates in the past two months to voluntary ESG disclosure frameworks raise questions for companies about these overlapping and arguably competing standards.

GRI Launches Sector-Specific Disclosure Framework

On July 8, 2020, the Global Reporting Initiative (GRI) published an initial draft of a standard for ESG disclosures for the oil & gas industry. The draft, open for public comment until October 6, 2020, marks the first sector-specific ESG disclosure framework created by GRI, which, unlike the Sustainability Accounting Standards Board (SASB), has before now provided only a uniform framework for all industries.
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Legal Liability for ESG Disclosures – Investor Pressure, State of Play and Practical Recommendations

Davis Polk ESG co-heads, Joseph A. Hall and Betty M. Huber, and Katherine J. Brennan and Connor Kuratek of Marsh & McLennan Companies are authors of the 13th edition of The International Comparative Legal Guide: Corporate Governance 2020: Legal Liability for ESG Disclosures – Investor Pressure, State of Play and Practical Recommendations, the second chapter in the guide.
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