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IFC Launches Framework for Impact Investing with Commitments by 60 Global Investors

On April 12, 2019, the International Finance Corporation (IFC), a World Bank Group, officially launched their Operating Principles for Impact Management (the Principles).  As of the official launch date, 60 global investors have committed to the Principles.  The first adopters range from large asset managers, private funds to non-profit investment firms.  The focus of the Principles is on impact investing, a term that IFC defines as “investments made into companies or organizations with the intent to contribute to measurable positive social or environmental impact, alongside a financial return.”  IFC adapted this definition from GIIN and notes that impact investing focuses on more than just avoiding harm or managing environmental, social and governance (ESG) risks; it aims to utilize investing’s ability to positively impact society by “choosing and managing investments to generate positive impact while also avoiding harm.”  This focus seemingly goes beyond the UN initiated Principles of Responsible Investing or UN PRI, which were tailored to the idea of responsible investing – investing with the goal of incorporating ESG factors into decisions in order to manage risk and generate long-term returns.
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Recent Executive Order on Energy Infrastructure and Economic Growth – ESG Disclosure and Proxy Voting Implications

President Trump’s Executive Order yesterday on energy infrastructure and economic growth contained an unexpected Section 5 entitled “Environment, Social and Governance Issues; Proxy Firms and Financing Energy Projects Through the United States Capital Markets.”  While the section does not directly address environmental, social and governance (ESG) disclosure, it restates the definition of materiality from the U.S. Supreme Court case, TSC Industries, Inc. v. Northway, Inc., and reiterates a company’s fiduciary duties to its shareholders to strive to maximize shareholder return, consistent with the long-term growth of the company.  This order comes on the heels of last week’s U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing on ESG Principles in Investing and the Role of Asset Managers, Proxy Advisors and Other Intermediaries, as well as ongoing activity at the U.S.
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Will the SEC Adopt Additional Human Capital Management Disclosure Requirements?

IAC Meeting.  Last week, the Investor Advisory Committee (IAC or Committee) to the Securities and Exchange Commission (SEC) voted to ask the SEC to further investigate and evaluate whether public companies should be required to disclose information related to human capital management (HCM), in other words, how companies manage workplace relationships including training, talent development and retention.

Over the last few decades, as the US economy has increasingly become based on technology and services, certain investors have expressed more interest in HCM disclosure. 
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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.
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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.
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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.
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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”.
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California Imposes Climate Risk Disclosure Requirements on the U.S.’s Two Largest Pension Funds

Citing concerns of climate change’s impact on the financial sector, California passed SB 964 last week requiring the country’s two biggest pension funds to publicly disclose and analyze their climate-related investment risks. Under the new law, The California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) must review and report “climate related financial risks” that are “material” to the stability of their public market portfolios. Such “climate-related financial risks” include “intense storms, rising sea levels, higher global temperatures, economic damages from carbon emissions, and other financial and transition risks due to public policies to address climate change, shifting consumer attitudes, changing economics of traditional carbon-intense industries.” SB 964’s obligations, which will take effect on January 1, 2020 and continue every three years until 2035, also require the funds to report on their alignment to the Paris climate agreement, California climate policy goals, and any long-term climate-related financial risks.
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Investors Petition the SEC to Develop ESG Reporting Requirements

A group of investors representing more than $5 trillion in assets under management petitioned the U.S. Securities and Exchange Commission on October 1, 2018 to develop a comprehensive framework that would require public companies to disclose environmental, social and governance (ESG) aspects relating to their operations.  Petitioners include CalPERS, the New York State Comptroller and the U.N. Principles for Responsible Investment.  The 19-page petition, available here, cites increasing demands by certain investors for information to better understand the long-term performance and risk management strategies of public companies. The petition notes that the voluntary “sustainability reports” that some companies have produced in response to these demands are insufficient and instead, an SEC-mandated comprehensive framework for clearer, more consistent and more fulsome, reliable and decision-useful ESG disclosure (above and beyond existing SEC disclosure requirements) would meet this demand. 
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FSB’s Task Force for Climate Disclosure to Release Updated List of Supporters

The Task Force on Climate-related Financial Disclosures (“TCFD”), an entity formed by the Financial Sustainability Board (“FSB”) focused on how climate change impacts the finances of global corporations, will publish its latest list of supporters on September 26, 2018.  The current list of over 300 supporters, includes major financial institutions, corporations, central banks and national governments, and is available here.  Corporations have been cautious in the past to sign on as supporters, but in an August 8, 2018 webinar, the TCFD stated that there is no current monetary or other commitment attendant to becoming a supporter, and no formal timeline to start disclosing against the TCFD’s disclosure principles.  
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Quarterly EPS Guidance Targeted, and Quadrophobia Allegedly Investigated

A recent WSJ Op-Ed from Jamie Dimon and Warren Buffet, together with the Business Roundtable, encouraged all public companies to move away from providing quarterly EPS guidance.  The Council of Institutional Investors (CII), cited as “the leading voice for strong shareholder rights,” is quoted to represent investors in support of the premise.

Reports indicate that only about a third of the S&P 500 continues to provide quarterly guidance, or one in five public companies generally.  That data is largely consistent with a 2016 survey by NIRI, which shows that 67% of the companies that responded choose to provide annual guidance and another 20% provide guidance that spans more than one year. 
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Two Recent Climate Change Disclosure Initiatives Affecting Banks and Greenhouse Gas Emitting Companies

Sixteen banks from four continents commit to furthering the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure push for improved climate risk disclosure.  In addition, Climate Action 100+ invigorates its push on 161 large companies with either high greenhouse gas emissions or the potential to impact clean energy to improve their climate change disclosures and governance.  More details as follows:

16 Banks From Four Continents Commit to TCFD Pilot Project

Sixteen banks (Australia and New Zealand Banking Group (ANZ), Barclays, Banco Bilbao Vizcaya Argentaria (BBVA), BNP Paribas, Bradesco, Citi, DNB, Itaú Unibanco, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Société Générale, Standard Chartered, TD Bank Group and UBS) have joined a United Nations Environment Programme – Finance Initiative pilot project to help banks disclose their climate related financial risks in line with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”).
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FSB Task Force Releases Tool to Propel Climate Change Scenario Disclosure

The Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (“TCFD”), an industry-led group formed at the request of the G20, and the Climate Disclosure Standards Board (“CDSB”) announced today at TCFD’s first U.S. Scenario Analysis Conference the launch of the TCFD Knowledge Hub (“Hub”). The Hub is an online platform with peer-to-peer resources to assist organizations in implementing TCFD’s recommendations to public companies on the use of scenario analysis to disclose climate-related risks and opportunities. Our prior posts describing TCFD’s recommendations can be found here and here. The Hub can be accessed at tcfdhub.org. Over 250 organizations have expressed their support for TCFD as of April 2018.
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SASB Releases ESG Disclosure Standards: Public Companies and Private Equity Industry Take Note

The Sustainability Accounting Standards Board (SASB) released this Monday its draft standards for Environmental, Social and Governance (ESG) disclosure, launching a 90-day public comment period which ends on December 31, 2017. These standards set forth ESG topics covering 11 different sectors and 79 industries for public companies to disclose annually.

The draft standards, over four years in the making, were created by SASB working groups open to the public, including registrants, investors and service providers to public companies. The 90-day public comment period provides registrants and other stakeholders another opportunity to shape these disclosure frameworks before they are finalized. This opportunity is important as certain observers expect these standards will have some meaningful uptake.
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Largest Companies Continue to Provide Political Spending Disclosure According to Latest CPA-Zicklin Index

Politics and governance intersect in the 2017 version of the CPA-Zicklin Index, which examines the disclosure practices of the S&P 500 companies on political spending, scores those companies and divides them into five tiers.  The score distribution shows a strong positive correlation with the average market capitalization of the companies.

Irrespective of the political environment, companies are continuing to provide more information about their corporate political spending, with an increasing number prohibiting certain types of payments. Fifty companies have been designated “trendsetters” for scoring 90% or above, an increase from 28 companies in 2015 and 41 in 2016.

Political spending disclosure
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Financial Stability Board Task Force Releases Final Climate-Related Financial Risk Disclosure Recommendations

The Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (“TCFD”), an industry-led group formed at the request of the G20, released yesterday its Final Recommendations Report for “voluntary” climate-related financial disclosure. The TCFD’s mandate is to ensure sufficient climate risk disclosure is available to avoid catastrophic financial market disruption due to climate change impacts.

Why Important?  While a variety of climate change disclosure frameworks already exist, such as those of SASB, GRI and CDP, as noted in our previous post summarizing the TCFD’s December 2016 draft recommendations, these recommendations are particularly relevant because of the FSB’s status as an international body founded by the G7 which coordinates national financial authorities and international standard-setting bodies, including the U.S.
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Mr. Clayton Goes to Washington

SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed. Beyond these general areas, Clayton offered few specifics or signals as to how he might steer the Commission during his term as Chair. He did, however, discuss concerns about growing companies finding the U.S. public markets unattractive due to the burdens of being a public company.
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Financial Stability Board’s Task Force Releases Climate Risk Disclosure Recommendations

The FSB’s Task Force on Climate-Related Financial Disclosure (Task Force) released on Wednesday its Recommendations Report for voluntary climate change disclosure. The Task Force is an industry-led group formed in 2015 by the FSB at the request of the G20. Its goal is to ensure sufficient climate risk disclosure is available to enable informed financial decisions to help avert climate change-based financial market disruption.

The Task Force recommendations, based in part on certain existing disclosure frameworks, call for four categories of disclosure: (i) governance of climate risk; (ii) climate risk management; (iii) climate risk metrics and targets; and (iv) impacts of climate risk on business strategy and planning (strategy).
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Legislation Introduced to Increase Activist Hedge Fund Disclosure

U.S. Senators Tammy Baldwin (D-WI) and Jeff Merkley (D-OR) have introduced The Brokow Act designed to increase oversight of activist hedge funds. Senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) are co-sponsors.

The Act is named for a small Wisconsin town that, according to the press release issued by Senator Baldwin’s office, went bankrupt after an “out-of-state hedge fund closed a paper mill that had provided good jobs to the town for over 100 years.” The release stated that the fund bought up the Wausau Paper Company, “forced out its executives and demanded short-term returns like buybacks at the expense of the company’s long-term future.”

The release includes a quote from the senator that the reforms “will help ensure that no other small towns in America will fall victim to activist hedge funds on Wall Street.” The hedge fund that targeted the paper mill is not named, but reports indicate that it refers to Starboard Value LP’s attack on Wausau Paper in 2011.
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Case Demonstrates Risks of Selectively Providing Details of an Executive’s Biographical Information

A recent decision by the U.S. District Court for the Northern District of Illinois Eastern Division indicates that companies should be careful about providing some, but not all, of an executive’s background.

The Court decided on a class action complaint against Textura Corporation, its CEO and Chair and its CFO, alleging violation of Section 10(b) of the Exchange Act and Rule 10b-5, and control person liability for the CEO and CFO. These alleged misstatements were revealed in reports issued by a short seller Citron Research, and included omitted material information about the CEO’s background, failure to report related party transactions and misleading analysts with respect to the basis points it earned from certain fees.
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SEC Sustainability Disclosure Search Tool Released This Week

Ceres, an environmental nonprofit organization, released this week an SEC Sustainability Disclosure Search Tool. This tool, available here, is the next step in Ceres’s campaign for increased, and more transparent and comparable, climate change and other sustainability disclosure. (See prior blog posts on this topic available here, here, and here.

The search tool allows registered users to access summary reports which reproduce the climate change, carbon asset risk, hydraulic fracking and water disclosure filed with the SEC by 5,300 public companies, spanning various industries (such as Banks & Financial Services, Mining and Oil & Gas) and indices (S&P 500, Russell 3000 and FT Global 500).
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Corporate Political Spending Disclosure Reviewed in 2015 CPA-Zicklin Index

With the backdrop of the focus on next year’s presidential election and frequent reports regarding political spending, the Center for Political Accountability has published the 2015 CPA-Zicklin Index. In its fifth annual report, for the first time, the Index examines all S&P 500 companies, rather than only the top 300. Many companies that were not previously evaluated will find themselves with low scores. Shareholder proposals seeking information on political contributions and lobbying expenses are perennial favorites of social activists.

Among the top 300 companies that have been reviewed in past reports, an increasing number are providing more disclosure. Becton Dickinson, Noble Energy and CSX Corporation received the highest overall scores.
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Changes in Final Pay Ratio Disclosure Rules

The SEC held an open meeting today to adopt the final rules requiring pay ratio disclosure, which were just released. A company’s first reporting period for the pay ratio disclosure is its first full fiscal year beginning on or after January 1, 2017. This appears to mean the 2018 proxy statement for companies with fiscal years ending December 31st.

In her opening comments, Chair White noted that the Commission received over 287,000 comment letters, including more than 1,500 unique letters, that both criticized and endorsed the pay ratio rule. In her view, the Commission’s responsibility is to implement the mandates of Congress in a cost-effective way: “It is the law and we’re required to carry it out.”

We will issue a detailed memo.
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SEC Issues Concept Release on Additional Audit Committee Disclosure

The SEC recently issued a concept release seeking public comment on whether to expand disclosure requirements about audit committees. The primary focus of the concept release is on the audit committee’s responsibilities for oversight of the independent auditor. However, the SEC has invited public comment on other aspects of the audit committee’s role beyond those involving the auditor, such as its oversight of financial reporting, internal controls and risk.

Read the Davis Polk memo on this release »
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