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.
On June 30, 2020, Chairman Jay Clayton moderated a virtual roundtable titled “Q2 Reporting: A Discussion of COVID-19 Related Disclosure Considerations” to solicit views from a small panel of highly experienced and well-informed private investors and asset managers (“Roundtable”). The Roundtable included the following panelists: Gary Cohn, Former Director of the U.S. National Economic Council; Glenn Hutchins, Chairman of North Island and Co-Founder of Silver Lake; Tracy Maitland, President and CIO of Advent Capital Management; and Barbara Novick, Vice Chair and Co-Founder of BlackRock. The Director of the Division of Corporation Finance, William H. Hinman, also participated in the Roundtable.
Standardization, Transparency and Forward-Looking Information
There was a general consensus among panelists that companies’ providing greater transparency and forward-looking information is crucial when there is a lot of economic uncertainty, such as presented by the COVID-19 pandemic.
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.
Last week, New York City Comptroller Stringer announced the progress of the Boardroom Accountability Project 3.0 (Project 3.0) that is designed to foster diversity in the leadership of the companies in which the New York City Retirement Systems (NYCRS) invests. As an actively-engaged investor with sizeable assets under management (NYCRS reports that it had approximately $211.2 billion as of February 2020), NYC Comptroller Stringer notes that prior project campaigns have helped to facilitate the prevalence of important corporate governance matters, such as proxy access and greater board diversity transparency.
As described more fully in our prior post, Project 3.0’s objective is to increase the accessibility of director and CEO positions for women and persons of color by encouraging companies to adopt a “Rooney Rule” policy, resembling the one employed by the National Football League.
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.
Directors of SEC-registered public companies are increasingly taking a more active role in the shareholder engagement process given the evolving corporate governance landscape, including the increasing number of requests for their participation by some of the largest institutional investors. The Conference Board and Rutgers University’s Center for Corporate Law and Governance have recently published a report showing the emerging practices surrounding when and how corporate directors engage with shareholders based on a survey administered in 2018. Because board-shareholder engagements are often undisclosed and private, the results from this survey provide greater insight about how these communications are evolving and may help public company boards prepare for their shareholder engagements going forward.
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
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.
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.
The New York City Retirement Systems (NYCRS) continues its effort to foster diversity in the leadership of the companies in which it invests. NYCRS is a collection of pension funds that together have over $200 billion in assets under management, and Comptroller Stringer serves as the investment advisor and custodian/trustee.
Boardroom Accountability Project 3.0
Last week, Comptroller Stringer announced the launch of the latest phase of the NYCRS’ shareholder engagement initiative, Boardroom Accountability Project 3.0. With each phase, the NYCRS designates one or more themes on which to engage with its portfolio companies. Project 3.0’s theme is increasing the accessibility of director and CEO positions for women and persons of color by encouraging companies to adopt a “Rooney Rule” policy, resembling the one employed by the National Football League.
Women now occupy more than 20% of Russell 3000 board seats, according to a recently released Equilar report. Equilar states that this is the first time Russell 3000 boards have achieved this milestone. In addition, Equilar found that women constituted over 40% of new directors during the first half of 2019, compared to 17.8% of new directors in 2014.
As discussed in a September 11 WSJ article, companies may be responding to a number of factors including existing or anticipated state legislative pressure. California made headlines in 2018 by being the first state to require exchange-listed companies with principal offices within its borders to have at least one female board member or potentially face a monetary fine.
Last Thursday, the Investor Advisory Committee (IAC) of the Securities and Exchange Commission (SEC) voted to adopt a proposal revised and presented by the Investor-as-Owner Subcommittee (Subcommittee) to recommend modifications to the structure of the proxy process, commonly referred to as “proxy plumbing.” The Subcommittee originally introduced the proposal at an IAC meeting in July 2019, which we previously discussed, but the committee decided to postpone voting on the proposal for further review.
Overview of the Written Recommendations
The revised written proposal proposal largely reflects the original proposal presented at the July meeting. The revised written recommendations are the same four recommendations for “short-term” improvements to the following areas of proxy plumbing: (1) End-to-End Confirmation; (2) Reconciling Ownership and Voting Information; (3) Shareholder Identity and Share Lending; and (4) Adopting the Universal Proxy Rule.
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.
BlackRock has released its Investment Stewardship Report for the Americas region (United States, Canada and Latin America) for the second quarter of 2019. The majority of the investor’s stewardship activities during this quarter entail voting and direct engagements to inform its voting decisions given that a majority of its portfolio companies’ shareholder meetings are scheduled in this time period. In sum, in comparison to the second quarter of 2018, BlackRock has engaged with approximately 9% fewer companies in the Americas, and for North America (United States and Canada) the percentage of proposals BlackRock has voted against managements’ recommendations, while still low, has increased from 4% to 7%.
This past Thursday, the Investor Advisory Committee (IAC) of the Securities and Exchange Commission (SEC) reviewed and discussed the written proposal from the Investor-as-Owner Subcommittee (Subcommittee) for a recommendation to the Commission on modifying and improving the structure of the proxy process, commonly referred to as “proxy plumbing.” The discussion was a continuation of the discussion the IAC previously held at its September 2018 public meeting. That meeting preceded the SEC Roundtable on the Proxy Process in November 2018, which we previously discussed.
At the July 25, 2019 meeting, the Subcommittee made the following four recommendations on proxy plumbing:
- The SEC should require end-to-end vote confirmations to end-users of the proxy system, potentially commencing with a pilot involving the largest companies;
- The SEC should require all involved in the system to cooperate in reconciling vote-related information, on a regular schedule, including outside specific votes, to provide a basis for continuously uncovering and remediating flaws in the basic “plumbing” of the system;
- The SEC should conduct studies on (a) investor views on anonymity and (b) share lending, and
- The SEC should adopt its proposed “universal proxy” rule, with the modest changes that would be needed to address objections that have been raised to that proposal.
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.
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.”
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.
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.
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.
State Street’s letter to board members advises companies that this year they intends to focus on corporate culture as one of many key intangible value drivers. Through engagement, they have found that “few directors can adequately articulate their company’s culture or demonstrate how they assess, monitor and influence change when necessary.”
When engaging with directors and management on corporate culture, State Street will expect to understand the following:
- Can the director(s) articulate the current corporate culture?
- What does the board value about the current culture? What does it see as strengths? How can the corporate culture improve?
- How is senior management influencing or effecting change in the corporate culture?
The SEC’s solicitation of comments on the proxy process has led to more than 150 public letters. While almost no companies sent in letters under their own names, investors have submitted the bulk of the commentary, including nearly all of the familiar groups of shareholder proponents. Insight from a few major institutional investors follows, with diverging views about shareholder proposals and oversight of proxy advisory firms.
Don’t change, or do change, ownership or resubmission thresholds for shareholder proposals, and related rules.
“As such, we would view any action to limit some shareholders’ rights to file proposals as an action to limit all shareholders’ ability to fully consider all risks and opportunities of their investment.
Retail shareholders own about 30% of public companies, a fairly consistent level over the past five years, but only about 28% of those shares are voted, according to the latest issue of ProxyPulse from Broadridge and PwC. In comparison, 91% of institutional shares vote.
During the 2018 proxy season, support for the 21,855 directors up for election was 96% from institutional investors and 95% from retail investors, on average. About 1,408 directors (6.4%) failed to receive at least 70% favorable votes, and another 416 directors (1.9%) did not obtain support from at least a majority of shareholders. These poor results increased from prior year 2017, as 11% more directors failed to receive majority support and 14% more directors failed to surpass 70% support.
On the heels of California becoming the first state to impose requirements mandating gender diversity on boards, which we discussed here, State Street has announced policy changes also focused on gender diversity.
Beginning in 2020, State Street will vote against the entire nominating committee if a company does not have at least one woman on its board, and has not engaged successfully with State Street for three consecutive years.
The global policy from State Street made headlines because notwithstanding companies concerns, it remains highly unusual for the largest asset managers to vote against directors, leading to director elections resulting in average support of over 95%.
The Office of the New York City Comptroller Scott M. Stringer (NYC Comptroller), as part of the Boardroom Accountability Project 2.0 initiative, has published examples of “best practices” in board matrices. The matrices include companies that have disclosed, in chart form, individual director qualifications and either (a) individual self-identification of director gender and race/ethnicity or (b) aggregate board self-identification of director gender and race/ethnicity.
These matrices were the outcome of letters sent in September 2017 to more than 150 companies that are part of the “focus list.” NYC Comptroller sought to have companies provide, in a snapshot, not only the skills and attributes of each director, but also information about the board’s gender and racial/ethnic diversity, so that investors would not have to “make assumptions about how their directors self-identify based on photographs or the spelling of their names.”