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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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.
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.
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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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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. In particular, a few companies have agreed to increased public reporting of their climate change strategies and, most notably, to adopt executive compensation metrics tied to greenhouse gas reduction targets. Recently, the group issued a report describing what it believes the steel industry should do to reduce greenhouse gas emissions and related public disclosure of those efforts.
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How State Street Intends to Focus on Corporate Culture in Engagement
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?
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CII Analysis of Board Evaluation Disclosure
CII has published an update to its analysis of disclosure on board evaluations in proxy statements, highlighting as “Seven Indicators of Strength” a wish list of information.
The report contains multiple qualifications and statements designed to reassure companies, including that they are not expected to reveal any specific details about the results of the evaluations, but instead the disclosure should focus on the process for continued improvement. In addition, the seven benchmarks selected in the report are not intended to be prescriptive, as they are observations of what CII believes investors find to be useful information based on CII’s review of the proxy statements of more than “100 prominent companies”.
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