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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.

The Report makes two key arguments. First, climate change poses major risks to the stability of the U.S.
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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. In addition, the report indicates that the firm held more directors accountable this proxy season than it has in any other.

Key Takeaways.

Adaptation/Resilience. BlackRock predicts more engagements and voting proposals will center on corporate risks, such as climate change, social and racial equity, and demographic and technological changes.
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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. Vanguard wants to know how boards plan to preserve long-term relevance.

Engagement Data.
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Long-Term Stock Exchange Launches

The Long-Term Stock Exchange (LTSE) announced its launch last week for trading stocks on its platform and listing companies on the exchange. As the name suggests, the exchange aims to list companies that desire to create value over time.

The LTSE’s listing requirements take a “principles-based approach” to long-termism (in contrast to a one-size-fits-all approach) requiring listed companies to pledge to operate consistently with five principles:

  • Stakeholders. Long-term focused companies should consider a broader group of stakeholders and the critical role they play in one another’s success.
  • Strategy. Long-term focused companies should measure success in years and decades and prioritize long-term decision-making.

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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).

Relevance to Companies.  The overarching purpose of the new system is to reduce the reporting burden on companies while improving the completeness, consistency and comparability of sustainability data available for decision-making. The participants’ plan is that companies who choose to disclose sustainability topics need to collect data only once.
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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.

The GRI sector program, currently in its pilot phase, “focus[es] reporting on the sustainability issues that matter most” to an industry. 
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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. The chapter discusses litigation related to ESG voluntary disclosures and what companies can do to limit that risk. It also describes the current pressure leading to more ESG disclosures and the SEC response to these trends.

Read the full publication here.
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Department of Labor Proposes Investment Duties Rule Affecting ESG Investments

The U.S. Department of Labor issued a proposed rule on June 23, 2020 to clarify how and when ERISA fiduciaries can select and monitor plan investments based on environmental, social or corporate governance (“ESG”) and similar objectives.

  • Who is subject?

The proposed rule would apply to fiduciaries of private-sector retirement plans, such as company-sponsored defined benefit pension plans and 401(k) plans. Fiduciaries of public pension plans are not subject.

  • Why was the rule proposed?

The Labor Department believes that the proposed rule will help plan fiduciaries navigate ESG investing and separate the consideration of risk-return factors from investments that may sacrifice investment return, increase costs or assume additional investment risk to promote “non-pecuniary” objectives.
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SEC Urged to Mandate Disclosures on COVID-19 Risks and Responses

On June 15, 2020, Americans for Financial Reform (AFR), a nonprofit coalition founded in the wake of the 2008 financial crisis, called on the Securities and Exchange Commission (SEC) to require public companies to disclose how they are protecting employees from coronavirus (COVID-19), citing that consistent, comprehensive information is critical to investors and public health.

Although the SEC Division of Corporate Finance issued Staff Guidance in March 2020 providing companies with its views on COVID-19 disclosures, followed by a joint statement on COVID-19 disclosures in April 2020 by SEC Chairman Clayton and Corp Fin Director Hinman which statement recommended that companies “provide as much information as is practicable” about how they are responding to the pandemic, AFR claims that these efforts were only one step in the right direction.
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SEC Asset Management Advisory Subcommittee Provides Report on ESG Practices in Asset Management Space

Earlier today, the Securities and Exchange Commission (“SEC”) held an open virtual meeting with the Asset Management Advisory Committee to discuss the impact of the coronavirus (“COVID-19”) and, in particular, to hear updates and recommendations from its subcommittee on ESG (the “ESG Subcommittee”).  The ESG Subcommittee provided an overview of its current areas of research, which has taken the form of five separate workstreams.  Moreover, the ESG Subcommittee offered preliminary recommendations for regulatory measures which could provide consistency to ESG investment policies and disclosures in light of the growing push by asset management stakeholders to implement ESG practices, which has become a particularly important consideration in light of COVID-19.
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World Economic Forum Pledges to Stand By Stakeholders in the COVID-19 Era

The novel coronavirus (COVID-19) pandemic has posed unprecedented health risks and has led to global economic disruptions. The World Economic Forum (WEF), an international organization that fosters public-private cooperation on global, regional and industry agendas, released this month the “Stakeholder Principles in the COVID Era” (Stakeholder Principles) as part of its COVID Action Platform and called businesses to action stating that, during this time of crisis, “[t]he business community’s contribution: [is] to be leaders of responsiveness and stewards of resilience.” In January 2020, the WEF made headlines by issuing its Davos Manifesto 2020, challenging companies to incorporate stakeholders into their corporate purpose, as well as issuing, through its International Business Council (IBC) a draft corporate sustainability disclosure framework, “Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.”
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BlackRock Releases Its 2020 Public Company Engagement Priorities

While managing COVID-19 related risks and impacts may be the current priority for many public companies, BlackRock provided a reminder yesterday that environmental, social and governance (ESG) issues will form a core part of its engagement strategy this proxy season.  Publishing its investment stewardship team’s public company engagement priorities for 2020 (Priorities), BlackRock stressed, among other things, that it intends to hold board directors accountable for demonstrating “material progress” on ESG-related disclosures and practices.

BlackRock’s 2020 Investment Stewardship Engagement Priorities

The Priorities place an enhanced focus on sustainability-related issues and disclosures. Moreover, the Priorities articulate key performance indicators against which the asset manager will track companies’ progress and identify those directors whom it will hold responsible for demonstrating progress on these issues. 
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EU Publishes Final Taxonomy Report to Support its Sustainable Finance Regulations

Last week, the European Commission’s Technical Expert Group on Sustainable Finance (TEG) published its final report along with a technical annex setting forth its recommendations regarding the design and implementation of a unified classification system, known as EU Taxonomy, which will define what economic activities are considered environmentally sustainable under the EU’s sustainable finance regulations.  The final report is the result of a nearly two year long process conducted at the direction of the European Commission to assist in the implementation of the Taxonomy regulation.  The European Commission will consider the final report as it develops legislation to implement elements of the Taxonomy regulation.
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SEC Chairman Releases Statement on Proposed Changes to Financial Reporting and Discusses Climate-Related Disclosure

Today, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted to propose amendments to certain financial disclosure requirements under Regulation S-K, specifically those requirements related to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).  In addition to these proposed amendments, the SEC issued guidance for registrants to consider when using metrics and key performance indicators in their MD&A disclosures.  The press release announcing these developments explains that the proposals are part of an overarching effort by the SEC to improve and “modernize” the disclosure regime for the benefit of both investors and issuers.

SEC Chairman Jay Clayton issued a statement in support of the proposed amendments and related guidance, a statement that largely focuses on a topic that the Chairman himself notes is “not the particular focus of today’s Commission action” – environmental and climate-related disclosures.
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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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Davis Polk Client Alert: Chamber of Commerce Releases Best Practices for Voluntary ESG Disclosure

The U.S. Chamber of Commerce released this month a set of ESG voluntary reporting best practices. By releasing its best practice guide, the Chamber makes clear that it believes further regulatory requirements mandating ESG disclosures are not warranted. A departure from a one-size-fits-all approach, the best practices guide asserts that each company should have the discretion to determine which ESG factors and related metrics are relevant to it without necessarily being tied to the various third-party frameworks and standards currently in existence. Finally, the best practices guide emphasizes that ESG reports need not be incorporated into filings with the SEC, nor should ESG information be required as part of an SEC filing if it is not “material”.
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SEC Investor Advisory Committee Panel on ESG – Data, Disclosure and Materiality

Last Thursday, the SEC’s Investor Advisory Committee (IAC) held an open meeting, which included a session to discuss investor use of environmental, social and governance (ESG) data in their investment and capital allocation decisions. During this session, the IAC heard insights from and asked questions of a panel consisting primarily of ESG-focused investors, as well as one academic. The panelists represented investment management firms Neuberger Berman, AllianceBerstein, State Street Global Advisors and Calvert Research and Management, as well as Columbia University’s program in sustainability management.

SEC Chairman’s Written Comments

SEC Chairman Clayton was not in attendance, though he submitted written remarks to the IAC, expressing his views on the matters to be considered at the meeting.
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Next SEC Investor Advisory Group Meeting–How Are Investors Using ESG Data?

Earlier this week, the Securities and Exchange Commission (SEC) announced that its Investor Advisory Committee (IAC) will be holding a meeting on Thursday, November 7, 2019, at 9:30 a.m. E.T. The agenda includes a morning discussion on whether and how investors use environmental, social and governance (ESG) data in their investment and capital allocation decisions. The agenda and press release provide no further details on the session topic other than the panelist list provided below.

Brief Backdrop

SEC Chairman Clayton has raised a similar question at prior IAC meetings on human capital management (HCM) as the one posed for the November 7, 2019 meeting.
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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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ISS Ratings and Data Now Available on Open:FactSet Marketplace

ISS ESG, the responsible investment arm of ISS, is now offering its ESG data on FactSet’s Open:FactSet Marketplace. ISS ESG is the umbrella entity that consists of ISS-ethix, which focuses on responsible investment issues and related screens, ISS-climate, which provides climate data, analytics and services to financial market participants and ISS-oekom, which provides ESG research and ratings, including ISS’s Governance QualityScore and E&S Disclosure QualityScore.  Open:FactSet Marketplace is a platform offering aggregated data and analytics from various data providers to provide a single point of access for asset managers and other investment professionals.  FactSet, which owns Open:FactSet, reportedly has approximately 100,000 users, but it is unclear how many of these subscribe to its Open:FactSet Marketplace offering.
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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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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.”
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