Social and Governance Matters

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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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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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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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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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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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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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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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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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Mr. Clayton Goes to Washington

SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed. Beyond these general areas, Clayton offered few specifics or signals as to how he might steer the Commission during his term as Chair. He did, however, discuss concerns about growing companies finding the U.S. public markets unattractive due to the burdens of being a public company.
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State Street Stewardship Report Highlights the Investor’s Approach to Targeted Engagement

In its annual stewardship report covering 2015, State Street Global Advisors (SSGA) indicated that it had voted at 15,471 meetings in 81 countries.  The investor voted against management proposals 12% of the time and in favor of shareholder proposals 14% of the time.

In light of the difficulty for passive index managers that are invested in thousands of companies globally to actively oversee their holdings, SSGA develops an annual stewardship program based on its strategic priorities by focusing on specific sectors and environmental, social and governance (ESG) themes.  For 2015, SSGA’s sector focus led them to engage with 48 pharmaceuticals and 95 consumer discretionary companies. 
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SEC Sustainability Disclosure Search Tool Released This Week

Ceres, an environmental nonprofit organization, released this week an SEC Sustainability Disclosure Search Tool. This tool, available here, is the next step in Ceres’s campaign for increased, and more transparent and comparable, climate change and other sustainability disclosure. (See prior blog posts on this topic available here, here, and here.

The search tool allows registered users to access summary reports which reproduce the climate change, carbon asset risk, hydraulic fracking and water disclosure filed with the SEC by 5,300 public companies, spanning various industries (such as Banks & Financial Services, Mining and Oil & Gas) and indices (S&P 500, Russell 3000 and FT Global 500).
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ESG (Environmental, Social and Governance) in Focus by Stock Exchanges and in Investment Decisions

A global trade association of 64 stock exchanges, the World Federation of Exchanges (WFG), has recommended that its member exchanges voluntarily incorporate a set of 34 ESG factors into listed company disclosure standards.

The WFG, which includes the NYSE and NASDAQ, highlights 34 key performance indicators that the group believes demonstrate the best sustainability practices, such as energy consumption, water management, CEO pay ratio, gender diversity, human rights, child and forced labor, temporary worker rate, corruption and anti-bribery, tax transparency, supplier code of conduct and codes of ethics. The purpose and methodology is explained here and the full list of indicators is set forth here.
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Recent Developments in Climate Change Regulation

In recent years, there has been an increasing amount of attention paid to climate change, both in the media and on the part of “green groups” such as Sierra Club, and regulators in the U.S. and other countries have proposed or finalized rules intended to limit greenhouse gases such as carbon dioxide, methane and ozone-depleting substances. These regulations affect various industries, including coal and oil and gas, as well as industries reliant upon them, such as the power generation and auto industries.

In addition, certain countries, including the U.S., China, India and Brazil, have made public pronouncements of ambitious plans to reduce carbon emissions during the next few decades.
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BlackRock and Ceres Release Investor Guide on Environmental, Social and Governance Corporate Engagement

Late last week, BlackRock and Ceres released a detailed investor guide (the “Guide”) outlining various strategies and questions for engaging effectively with companies on environmental, social and governance (“ESG”) risks.

The Guide includes short articles from nearly 30 different institutional investors (including BlackRock, CalPERS, CalSTRS, T. Rowe Price and Breckinridge Capital Advisors) describing their priorities and strategies they use to engage with companies across different asset classes, both internationally and domestically, on ESG matters.

The Guide also includes sector-by-sector questions for investors and Wall Street analysts to ask, including during stock calls, with companies in the following nine industries: (i) Oil, Gas and Mining, (ii) Banking and Finance, (iii) Insurance, (iv) Information Technology, (v) Electric Utilities, (vi) Apparel and Retail, (vii) Transportation, (viii) Food and Beverage and (ix) Healthcare and Pharmaceuticals.
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Environmental Groups Warn Directors and Executives of Possible Personal Liability for Opposing Climate Change

Greenpeace International, WWF International and the Center for International Environmental Law sent letters to executives and directors of 32 major oil, gas and energy companies, warning them that they may ultimately face personal liability related to climate change issues.  

According to the NGOs, the targeted companies are “working to defeat action on climate change and clean energy by funding climate denial and disseminating false or misleading information on climate risks.” Beyond this general yet inflammatory allegation, there are no specific examples or references cited other than a list of news stories and other publications about corporate influence and “lobbying” activities.
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Global Stock Exchanges Considering Adopting Sustainability Disclosure Listing Requirements

A group of investors representing over $13 trillion in assets and led by Ceres’s Investor Network on Climate Risk recently submitted recommendations to various global stock exchanges for a uniform mandatory stock exchange standard on corporate environmental, social and governance (ESG) reporting. These recommendations follow Ceres’s April 2013 consultation paper on this topic. The investors recommend exchanges consider adopting, and capturing in a global listing rule, the following three company requirements:

  • First:  Listed companies are to disclose in their annual financial filings a “materiality” assessment where management will discuss its approach to determining what ESG issues are material to their companies.

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Ceres Continues Its Campaign to Improve Climate Change Disclosure in SEC Filings

Ceres, a leading sustainability nonprofit representing institutional investors with over $11 trillion in assets under management, is calling again on the SEC and registrants to do more to improve climate change disclosure in SEC filings. Dissatisfied with the SEC’s perceived lack of follow-through on its own February 2010 Climate Change Disclosure Guidance, Ceres released a report earlier this month, Cool Response: The SEC & Corporate Climate Change Reporting  – SEC Climate Guidance & S&P 500 Reporting – 2010 to 2013, directing the SEC to prioritize climate change disclosure by issuing more comment letters to companies with “inadequate” disclosure. Ceres cites the SEC’s three climate change comments from 2012 to 2013 out of the thousands it issued each year as evidence of the SEC’s poor enforcement of its 2010 disclosure guidance, which Ceres spent several years petitioning the SEC to adopt.
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Investor Group with $3 Trillion under Management Launches Latest Carbon Risk Initiative against Oil & Gas, Coal and Utility Companies Focused on the Value of Fossil Fuel Reserves

A coalition of over 70 international investors has sent letters to 45 of the world’s top oil & gas, coal and electric power companies requesting that the companies assess and disclose potential reduced demand for their products or services due to current and probable future greenhouse gas reduction policies and/or the physical impacts of climate change.  This campaign, the Carbon Asset Risk Initiative (or CARI) led by Ceres and the Carbon Tracker Initiative, is yet another institutional investor and not-for-profit campaign seeking to highlight risks inherent in carbon-intensive industries with the ultimate goal of moving toward renewable energy.  CARI’s main target appears to be oil & gas companies, particularly those with holdings in the carbon-intensive Canadian oil sands.
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Sustainability Accounting Standards Board Develops Industry Standards of Sustainability Disclosure for SEC Filings

Following up on our earlier report, yet another group is determined to require public companies to disclose sustainability issues in SEC filings. The Sustainability Accounting Standards Board (SASB) held a conference recently to discuss its standard-setting process. While its name invokes an immediate similarity to FASB, SASB has no official designation, although its advisory council includes an impressive list of industry, sustainability and financial professionals affiliated with Deutsche Bank, ISS, J.P. Morgan, Goldman Sachs, Morgan Stanley, BlackRock, AllianceBernstein, CalPERS, Ernst & Young, PwC and McKinsey, among others.

After being informed by the SEC of its reluctance to consider a separate line item requirement for environmental, social and governance (ESG) disclosure because of differences among industry sectors, SASB has begun drafting, and plans to adopt by the second quarter of 2015, ESG disclosure standards for 88 different industries in 10 sectors: (i) health care; (ii) financials; (iii) technology & communications; (iv) non-renewable resources; (v) transportation; (vi) services; (vii) resource transformation; (viii) consumption; (ix) renewable resources & alternative energy; and (x) infrastructure.
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