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Nearly All S&P 500 Companies Provide Sustainability Reporting

With funding from the Investor Responsibility Research Institute (IRR), the Sustainable Investment Institute (Si2) reviewed the current state of companies’ sustainability reporting and found that although most S&P companies gave sustainability information, they followed a wide range of practices.  The websites of 92% of S&P 500 companies included disclosure on sustainability, but only 395 companies (78%) issued reports.  Within those reports, 357 companies provide environmental metrics and 320, social data.  Other findings include:

Most reports can be downloaded, although companies often provide dynamic website information.  Discrete reports in downloadable time-bound form were favored by 68% of companies, updated annually by 93% of those companies, while 9% of companies overall offered web-only information that could change at any time. 
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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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EPA and BLM Easing Methane Rules for the Oil and Natural Gas Industry

The Trump Administration took two actions this month in its efforts to reverse the Obama administration’s climate change agenda: the United States Environmental Protection Agency’s (EPA) proposed amendments to scale back the 2016 New Source Performance Standards for the oil and natural gas sectors, and the Bureau of Land Management’s final rule revising the 2016 Waste Prevention, Production Subject to Royalties, and Resource Conservation Rule. Both rules targeted by these actions aimed at reducing emissions of methane, a potent greenhouse gas which traps 87 times the heat of carbon dioxide. These actions follow other EPA efforts aimed at reversing the prior administration’s regulatory initiatives targeting climate change, including less stringent greenhouse gas rules applicable to vehicles and coal- and oil-fired power plants.
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UN Sustainable Development Goals – The Leading ESG Framework for Large Companies?

Davis Polk’s series on environmental, social and governance (“ESG”) developments continues with this article on the United Nations Sustainable Development Goals (“SDGs”), which aim to create a “world free of poverty, hunger, disease and want, where all life can thrive.” Approximately 40% of the world’s largest companies acknowledge the SDGs in their corporate reporting or in the CEO and/or Chair’s message. This article introduces the SDGs and describes their nuances, focusing on how companies can leverage the SDGs to improve their mandatory and voluntary ESG disclosure, guide interactions with investors and other key stakeholders, and reap the economic benefits the SDGs are expected to provide.
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Senator Warren Introduces Bill to Mandate Disclosure of Climate Risk in SEC Filings

The Climate Risk Disclosure Act, introduced by Senator Warren, would require the SEC to issue rules for every public company to disclose:

  • Its direct and indirect greenhouse gas emissions
  • The total amount of fossil-fuel related assets that it owns or manages
  • How its valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the Paris accord goal; and
  • Its risk management strategies related to the physical risks and transition risks posed by climate change

The SEC can tailor the rules to different industries, and impose additional requirements on companies in the fossil fuel industry.
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What Would a U.S. Supreme Court Confirmation of Judge Kavanaugh Mean for Environmental Regulation?

Over the next several weeks, the U.S. Senate will consider President Trump’s nominee, Judge Brett Kavanaugh, to fill the currently vacant seat on the U.S. Supreme Court.  Because Judge Kavanaugh is being considered to replace Justice Kennedy, who was often the swing vote in environmental decisions, a Kavanaugh confirmation could significantly affect the trajectory of environmental law.  This memo will discuss how Judge Kavanaugh’s views, and in particular his stance on deference to administrative agencies such as the U.S. Environmental Protection Agency, will likely tip the balance in environmental cases in a more conservative direction if he is confirmed.
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ESG Treatise Part 2 – United Nations Global Compact – Whether to Join or Not?

Davis Polk’s series on environmental, social and governance (“ESG”) standards continues with a discussion of the UN Global Compact, an internationally recognized principles-based ESG corporate disclosure and values framework. The UN Global Compact, launched in 2000, is one of the most relevant ESG frameworks as the largest corporate sustainability initiative in the world with over 9,500 company members in over 160 developed and developing countries.  Many corporations, particularly in the financial services industry, are often urged to join the UN Global Compact. This article provides an overview of the UN Global Compact and discusses potential implications for businesses that agree to sign onto it.
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EPA’s New Greenhouse Gas Emissions Rule for U.S. Power Sector – Legal Considerations and Business Impacts

On August 21, 2018, the United States Environmental Protection Agency (“EPA”) proposed the Affordable Clean Energy Rule (the “ACE Rule”) which would replace its 2015 Clean Power Plan (the “CPP”) in its entirety, both of which were designed to regulate the greenhouse gas (“GHG”) emissions of fossil fuel–fired power plants pursuant to EPA’s authority under Section 111(d) of the Clean Air Act. The ACE Rule dramatically scales back the ambitious sweep of the Obama administration’s CPP. Whereas the CPP proposed to limit GHG emissions by shifting the nation’s electricity generation away from fossil fuel–fired sources towards natural gas and renewables, the ACE Rule is limited to measures aimed at improving the efficiency and prolonging the lifespan of coal–fired power plants.
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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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ESG in Private Equity Part 1: UN PRI & Related ESG Reports and Ratings

Davis Polk is following the development and evolution of environmental, social and governance (“ESG”) frameworks by various organizations that are being employed by private equity general partners and limited partners. This article, covering the Principles for Responsible Investment’s ESG Guidance for Private Equity trilogy issued in full on June 13, 2018, is the first item in our series. Our next article will describe the related United Nations Global Compact ESG principles and its use and relevance in private equity. Our third article will discuss the United Nations Sustainable Development Goals, seventeen cutting-edge principles which the investment community is beginning to incorporate.
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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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New Coalition Condemns Lack of Retail Investor Influence and Criticizes Current Investor Focus

The Main Street Investors Coalition wants retail investors to have more influence in combating the rise of passive investors.  Retail investors own about 30% of stock issued by U.S. companies, where holdings are dominated by major institutional investors.

The group includes the National Association of Manufacturers, the American Council for Capital Formation, the Equity Dealers of America, the Savings and Retirement Foundation and the Small Business and Entrepreneurship Council and is led by George David Banks, who recently served in the White House as a special assistant to the current administration on both the National Economic Council and National Security Council.
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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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Are the Reports that the DOL Guidance Will Lead to the Demise of ESG-Focused Plans Greatly Exaggerated?

Last week the U.S. Department of Labor (DOL) issued a bulletin (the Bulletin) on its prior interpretations related to considerations of ESG factors by ERISA plan fiduciaries.  Since then there has been some speculation that perhaps the positions outlined in the Bulletin would act as a speed bump to the increasing focus by investors on ESG matters at public companies.

As background, ERISA requires plan fiduciaries to act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing benefits to such persons and to discharge their fiduciary duties with the care, skill, prudence and diligence a prudent person would use under similar circumstances. 
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What You Should Know About Engaging with BlackRock on Human Capital Management

BlackRock has recently elaborated on what companies can expect when engaging with them on human capital management (HCM) matters, which BlackRock defines as including “employee development, diversity and a commitment to equal employment opportunity, health and safety, labor relations, and supply chain labor-standards, amongst other things.”

For industries and markets where talent is limited or constrained, BlackRock believes corporate strategies must address topics such as “how [companies] are establishing themselves as the employer of choice for the workers on whom they depend.” In these types of business environments, strong HCM can be viewed as a competitive advantage and a contributing factor to a company’s business continuity and success.
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Corporate Sustainability Disclosure is Not the Primary Driver of MSCI ESG Ratings

The topic of corporate ESG disclosure is among the ESG trends to watch in 2018, according to a recent report from MSCI.

Companies are increasingly providing voluntary information about their sustainability practices, and since MSCI ESG Research is among one of largest groups that review and rate corporate ESG disclosures and practices, grading companies from AAA to CCC, MSCI is “one of the world’s largest consumers” of corporate sustainability disclosure.

As the report explains, companies are providing more information given that investors are overwhelmingly supportive of efforts by various standard setters to encourage disclosure, with an alphabet soup of requests and choices that companies can follow, including CDP, GRI, SASB, IIRC and FSB. 
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ESG in Private Equity: What Every GP Needs to Know About Public Pension Fund Requirements

Public pension funds have long been outspoken advocates of environmental, social & governance (ESG) principles in investing. As quasi-public institutions uniquely sensitive to public opinion and the political process, public pension funds have begun to incorporate ESG considerations into all asset classes in their portfolio, including their private equity investments. With public pension fund limited partner (LP) investments constituting 44% of total worldwide private funding by the top 100 LPs in private equity, the largest category of private equity LP type by far among this group, it is important that private equity firms understand the ESG expectations of public pension funds and assess on an ongoing basis whether their ESG policies and practices, and those of their portfolio companies, are responsive.
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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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Environmental & Social Standards in Project Finance: Overview, Current State of Play

Global development banks and other financial institutions have been imposing environmental and social (E&S) requirements on borrowers in project finance matters since the 1990s. Cultural considerations, reputation, stakeholder pressure and, in the case of development banks, a desire to protect and support the communities and natural resources in their relevant geographic areas, all drive these requirements, but the ultimate goal is sustainable development.

This memorandum provides an overview and summary of seven existing E&S frameworks. It is important for both borrowers and these financial institutions to be familiar and have a facility with the varying E&S standards found in these and other similar frameworks.
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ESG Reports and Ratings: What They Are, Why They Matter

Institutional investors, asset managers, financial institutions and other stakeholders are increasingly relying on third party environmental, social and governance (ESG) reports and ratings to assess and measure company ESG performance over time and as compared to peers. This assessment and measurement often forms the basis of informal and shareholder proposal-related investor engagement with companies on ESG matters.  This client memorandum provides an overview and analysis of seven ESG report and rating providers, as well as information on ESG-related funds and portfolios offered by nine asset managers that are based in part on these ESG reports and ratings.
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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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U.S. Supreme Court Confirmation of Justice Neil Gorsuch and Potential Future Impacts on Environmental Laws and Regulations

On April 10, 2017, Justice Neil Gorsuch assumed the seat on the U.S. Supreme Court previously held by Justice Antonin Scalia. Justice Gorsuch, who was appointed by President George W. Bush to the United States Court of Appeals for the Tenth Circuit in 2006, has generally espoused conservative views on most legal issues throughout his 24-year career as a lawyer and judge. His nomination was supported by conservative groups such as the Federalist Society and the Heritage Foundation, which presumably believe his approach to interpreting the law aligns closely with that of the late Justice Scalia. Justice Gorsuch was confirmed in spite of a filibuster by Senate Democrats to prevent his appointment; by employing the “nuclear option,” a majority vote in the Senate was used to change Senate debate rules to eliminate the filibuster for U.S.
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President Trump’s Climate Change Executive Order: Legal Impacts and Business Implications

On March 28, 2017, President Trump signed a sweeping executive order aimed at rolling back signature portions of the Obama administration’s climate change agenda. Framed as a series of measures to bolster American energy independence, economic growth and job creation, the executive order takes steps to undo nearly two dozen Obama-era regulations, executive actions, policies and guidance documents. Some of the most prominent regulations affected include those governing greenhouse gas emissions from the power sector, notably the Clean Power Plan, as well as methane and other air emissions from oil and natural gas operations, including hydraulic fracturing.

The process of rescinding or revising regulations is lengthy, complex, and often the subject of vigorous legal challenges.
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