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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ISS Launches Annual Benchmarking Policy Survey

Yesterday, Institutional Shareholder Services Inc. (ISS) announced its annual Benchmarking Policy survey. ISS will use survey responses to inform its policies governing 2020 shareholder meetings. Institutional investors, public companies, board directors, corporate advisors and other market participants are welcome to participate. Participants can make survey submissions until 5:00 PM ET on August 9, 2019.  ISS typically publishes the survey results a few weeks thereafter.

While the survey includes questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fall into the following categories: (1) board composition/accountability, including gender diversity and overboarding, (2) board/capital structure, including dual or multi-class shares and combined CEO/chairs, (3) compensation and (4) climate change risk oversight and disclosure.
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SEC Roundtable on Short-Term / Long-Term Management of Public Companies

Yesterday, the SEC Division of Corporation Finance hosted a roundtable on the impact of short-termism on U.S. capital markets and whether modifications should be made to the reporting system to address these impacts. In December, the SEC published a request for comment on these topics, specifically with respect to earnings releases and quarterly reports. At yesterday’s roundtable, the SEC reiterated that the comment period is still currently open. The roundtable was comprised of  two panels, both featuring a variety of market participants including investors, issuers, attorneys, accountants, academics and governance experts. Panelists voiced their own perspectives and opinions, in representing their respective fields and interests.
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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.

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.” The target for improving this disclosure has been the SEC, which received an October 2018 petition from a coalition of investment managers, public pension funds and non-profit organizations requesting that the agency develop a robust ESG disclosure framework.
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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). Citi has been a member of UNEP FI, a partnership between UNEP and the global financial sector, since 1997 and has undertaken several initiatives related to sustainability in the recent past.

So far, the majority of endorsers of the Principles are non-U.S.
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ISS Opens Window Today for Peer Group Submissions

Today begins the window where certain public companies in the U.S. and Canada have the option of submitting changes to their respective peer groups to Institutional Shareholder Services Inc. (“ISS”). The submission window closes next Friday at 8:00 PM EDT, July 19, 2019.

ISS’ invitation is directed to companies with annual meetings scheduled between September 16, 2019 and January 31, 2020 that have changed or anticipate changing their respective peer group from their last proxy disclosures. ISS advises that “[s]ubmissions should reflect peer companies used (or to be used) by the submitting company for pay-setting for the fiscal year ending prior to the company’s next upcoming annual meeting.”

Each proxy season, ISS constructs a peer group for each company prior to the company’s new proxy statement.
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SEC Selects July 18th for Roundtable on Short-Term / Long-Term Corporate Management, Regulations and Public Reporting

The SEC announced yesterday that the Division of Corporation Finance (“Division”) will host an afternoon roundtable on July 18, 2019 on the effects of short-termism on the capital markets and whether any regulatory modifications should be made to address the impacts.

Agenda: Division staff will moderate two back-to-back panels.  The first panel will address the causes and impact of short-termism with Director William Hinman and Deputy Director Shelley Parratt moderating.

The second panel will discuss the regulatory reporting system and potential regulatory modifications “to foster a longer-term focus in [the SEC’s] periodic reporting system.” David Fredrickson, Division Chief Counsel and Luna Bloom, Chief of the Office of Rulemaking, will moderate.
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Delaware Supreme Court on Director Risk Oversight and Independence

Key Holding and Facts. In Marchand vs. Barnhill, Chief Justice Leo E. Strine, Jr. writing on behalf of the Delaware Supreme Court earlier this month reversed the Court of Chancery’s 2018 dismissal of a stockholder derivative suit alleging Caremark claims.  Caremark claims are essentially claims asserting bad faith by board members such that the directors breached their duty of loyalty. The facts underlying the case are well documented and spanned over several years, but generally involved a listeria outbreak at the ice cream production facilities of Blue Bell Creameries, a privately held monoline ice cream manufacturer, which resulted in devastating losses, including the death of three consumers, plant shutdowns, financial impairment and various regulatory investigation and private party litigation, including by the Food and Drug Administration (FDA), Centers for Disease Control and Prevention (CDC) and the Department of Justice (DOJ).
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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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