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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.,
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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.
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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.
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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.
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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.
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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. 
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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.
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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.
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Principles for Responsible Banking Gain Support of First Large U.S. Bank

Last week, Citi announced its support of the Principles for Responsible Banking (the Principles), joining a list of banks from around the world that have committed to becoming signatories. The Principles were developed by a group of 28 banks, jointly representing more than $17 trillion in assets, on behalf of the wider United Nations Environment Programme Initiative (UNEP FI).
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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.”
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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.
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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.
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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.
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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.  
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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.” 
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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.
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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.
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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.
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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.”
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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.
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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.
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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
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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
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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. 
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