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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ISS Releases Responses to Policy Survey

ISS announced the results of its high-level policy survey. The results will inform the new and updated policies for the 2019 proxy season, which is usually released in November.

Auditors and Audit Committee. ISS asked whether additional indicators of audit quality and independence would be useful in addition to considering non-audit services and fees when assessing auditor independence. Investors most often cited regulatory fines or other penalties on the auditor for weaknesses or errors in audit practices, or significant audit controversies, as important matters of interest.  The third most favored factor was the identity of the audit partner and any links to the company or its management.
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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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Commissioner Jackson Defends Proxy Advisory Firms

On the heels of the SEC staff rescinding the letters to proxy advisory firms, Commissioner Jackson decried the influence of “corporate lobbyists” on the issue in his statement.

It is corporate lobbyists who have made regulating proxy advisors a top priority, as they complain that those advisors have too much power, he said.  Commissioner Jackson does not believe there is proof to that effect, citing academic studies, he said.  In his view, “rigorous review” of the evidence shows that lobbyists are mistaking causation by observing the correlation between recommendations and vote outcomes.

He is concerned that the “corporate lobbyists’ priorities” will “sidetrack” the Commission’s work of “fixing the American system of corporate voting.”  He blames “entrenched interests” in the voting systems for the Commission’s failure to take any action, eight years after the proxy plumbing concept release.
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SEC Chairman Clarifies the Role of SEC Staff Views and Statements, Reinforced in Other Remarks and Statements on the Same Day

Yesterday, Chairman Clayton released a statement that while the SEC staff might express their views in myriad ways, ultimately those staff statements are “nonbinding and create no enforceable legal rights or obligations of the Commission or other parties.”

As he noted, the staff’s perspective may be provided in the form of written statements, compliance guides, letters, speeches, responses to frequently asked questions and responses to specific requests for assistance.  The staff may also provide companies and others with their interpretation about how Commission rules or regulations may apply in specific situations.

Chairman Clayton believes that it is important for the Commission to be mindful about the role of staff views and guidance, and he has instructed the directors in the Division of Enforcement and the Office of Compliance Inspections and Examinations to emphasize the distinction to their staff. 
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In Advance of Roundtable, SEC Withdraws Letters on Investment Advisers’ Reliance on Proxy Advisory Firms for Voting Recommendations

The SEC issued a statement today announcing that its Division of Investment Management has rescinded the letters issued in 2004 to ISS and Egan-Jones, effective immediately.

The letters have been criticized to have unintentionally resulted in the endorsement of investors using proxy advisory firms in making proxy voting recommendations, in order to address potential conflicts of interests by investment advisers exercising their fiduciary obligations when voting proxies.  In them, the SEC staff stated that the recommendations of a third party, independent of an investment adviser, may “cleanse” the adviser’s vote from conflict, as we explained in a post more than five years ago.
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Glass Lewis Reports to Incorporate SASB Standards

Yesterday Glass Lewis announced that its proxy voting reports will include guidance from the standards developed by the Sustainability Accounting Standards Board (SASB).  SASB has ties with the FSB’s Task Force on Climate-Related Financial Disclosure, among other ESG disclosure initiatives, and has been working for years on industry-specific disclosure standards for use in SEC filings.

The reports will “display [SASB] content” and allow investors to “easily identify whether items are aligned with” SASB standards.  The information will be incorporated in advance of the 2019 season after the SASB standards are codified.  The codification is not yet complete.
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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. Read the Full Memo >
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The New York City Comptroller’s Office Continues Focus on Board Matrices and Enhanced Disclosures on Board Recruitment and Board Evaluations

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.”  As we previously reported, 80% of companies responded.
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SEC Consider Capital Raising Enhancements, Including Concept Release on Exemptive Offerings

In a recent speech, SEC Chairman Jay Clayton said “To sum up my remarks in a sentence, we have taken a lot of steps intended to promote capital formation, and we have an ambitious capital formation agenda ahead of us.”  Here’s what may be next:

Thresholds for SOX 404 reporting.  The SEC has heard that the costs associated with providing auditor attestation reports on internal control over financial reporting can be a burden for smaller companies.  Currently, companies with a public float of less than $75 million or no public float have relief from these auditor attestation requirements.  Clayton has directed the Commission staff to formulate recommendations for possible amendments that would reduce the number of companies that need to provide the auditor attestation report.
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