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Investor Letter Campaign Calls for More Equity Pay Transparency

An announcement issued today states that an institutional investor group representing over $1.6 trillion in assets under management has launched a letter campaign calling for companies to provide more disclosure on workplace equity policies and practices relating to gender, race, ethnicity, sexual orientation, and other federally protected classes. The signatories believe that this type of information is material to investors and seek “more accurate assessments of the scope and depth of a company’s programs, its performance relative to peers, and improvement trends over time.”

The letter, referred to as the Investor Statement, references studies on the benefits of a diverse workplace, including findings by Equileap, an organization that specializes in providing data and insights on gender equality.
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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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Potential Legislation on HCM Reporting and Stock Buybacks

Earlier in the week, a subcommittee of the House Financial Services Committee held a hearing on four draft bills that, if enacted, would impact corporate reporting, and more. Proponents of these bills contend that the disclosure will “provide more information to help investors make decisions based on long-term economic growth.”

What Were the Topics?

1. Mandatory HCM Reporting. Representative Cynthia Axne (D. Iowa) introduced a draft bill to amend the Securities Exchange Act of 1934 (Exchange Act) to require issuers to disclose information about human capital management (HCM) in annual reports on topics such as demographics, compensation, composition, skills, culture, health, safety, and productivity.
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State Street’s New ESG Scoring Tool – Companies and ESG Raters Take Note

Introduction. Earlier this week, we learned that State Street Global Advisors, or SSGA, has created and is currently applying its new Environmental, Social, and Governance (ESG) platform, known as “R-Factor,” to better inform its investment, engagement, voting, and other decisions regarding any given company. SSGA says that it built R-Factor, its own scoring system, because it believes that the current ESG reporting and scoring landscape lacks standardization and transparency. Moreover, SSGA found that differing methodologies used by the current ESG raters can lead to a variance in company scores. These differences can be critical as asset owners and investment managers seek consistent, comparable and material ESG-related information for their investment analyses.
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Leading ESG Standard-Setters Release How-To Guide for Implementing TCFD’s Climate Risk Disclosure Recommendations

On May 1, 2019, the Sustainability Accounting Standards Board (SASB) and the Climate Disclosure Standards Board (CDSB) jointly released a how-to implementation guide for implementing the disclosure recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD).  TCFD released its final recommendations in June 2017, and as of this post’s writing, 643 organizations have publicly expressed support.  Despite this level of support, companies have lacked, according to the CEO of The SASB Foundation, Madelyn Antoncic, a clear understanding on how to put the recommendations into practice.  It is for this reason that CDSB and SASB teamed up to develop a series of practical TCFD-focused resources, of which the implementation guide is the first.
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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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State Street Updates Voting Guidelines and Engagement Protocol

State Street Global Advisors, or SSGA, updated and released earlier this week its Global Proxy Voting and Engagement Principles and Proxy Voting and Engagement Guidelines – North America (US & Canada). SSGA has created a new set of global policies dedicated to what companies can expect when engaging with SSGA on environmental and social matters and how SSGA intends to approach voting on sustainability-related proposals.

In addition, SSGA recently published its latest general issuer engagement protocol (as distinguished from guidelines dedicated to a specific engagement topic) informing its investee companies what to expect when engaging with the asset manager. These guidelines include important information such as where to direct an email requesting an engagement and what information to include.
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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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Growing Pressure from Investors Is Resulting in Increased Climate Change Related Commitments by Some Public Companies

We’ve written previously about Climate Action 100+, an investor led group representing over $32 trillion in assets under management, and its campaign against 161 or so of the largest publicly traded companies seeking to have these companies improve their greenhouse gas emitting practices.

Climate Action 100+ has experienced recent successes in its engagement efforts with a few companies, the details of which are available on its website.  In particular, a few companies have agreed to increased public reporting of their climate change strategies and, most notably, to adopt executive compensation metrics tied to greenhouse gas reduction targets. Recently, the group issued a report describing what it believes the steel industry should do to reduce greenhouse gas emissions and related public disclosure of those efforts.
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Credit Ratings Agencies Increasing their Focus on ESG Risks

Fitch Ratings announced on Monday that it has launched a new integrated scoring system that shows how environmental, social and governance (ESG) factors, such as climate change, human rights and labor issues, impact individual credit rating decisions.

Its ESG Relevance Scores are sector-based and entity-specific. Fitch has started with over 1,400 non-financial corporate ratings, which it is initially making publicly available at www.fitchratings.com/site/esg.  In contrast to other third-party ESG ratings available in the market today, Fitch states that these scores do not reflect judgments as to whether an entity has positive or negative ESG practices, but rather discloses how an environmental, social and/or governance issue specific to the entity influences its current credit rating. 
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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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