Environmental_social and corporate governance

Subscribe to Environmental_social and corporate governance via RSS

In an era where TikTok stars outearn scores of CEOs of top earning publicly traded companies, executive compensation is no less important to the investing public or to companies striving to attract and retain top talent. Indeed, just this year the CEO of Starbucks received a 39% pay increase. Such soaring executive compensation has not escaped the notice of the SEC.

The acronym “ESG” is shorthand for environmental, social, and governance concerns.  In recent years, companies have used “ESG” to refer to initiatives involving climate change, responding to racial injustice, and supporting workers’ rights.  The “S” in ESG can be a bit nebulous, however, as “social” may refer to any number of issues affecting a corporation, its stakeholders, and the community at large. For example, children’s privacy has always been a hot button social issue, but it has only gained traction during the COVID-19 pandemic as children have transitioned to remote learning and socializing online more than ever before. And a derivative lawsuit suggests that companies may want to ensure they are responding to child privacy concerns as part of their regular ESG practices and policies.

The SEC’s Climate and ESG Task Force has been criticized by Republican commissioners who believe enforcement in the area would be premature. But Kelly L. Gibson, acting deputy director of the enforcement and head of the agency-wide ESG Task Force, stated that the task force is necessary to recognize evolving investor priorities and that it will continue to operate. And new SEC Chairman Gary Gensler has echoed her sentiments, telling Congress that investors “measured in the trillions of dollars” seek to better understand climate risk issues.

While the SEC staff tends to be of the broad view that ESG warrants serious consideration, there are a breadth of different opinions regarding what ultimate disclosure requirements should look like.  This discord came to a head during a virtual SEC panel last Friday.

The panelists included both SEC staff and industry leaders.  One-by-one, the panelists provided their views on the SEC’s ESG subcommittee’s December recommendation of new standards for issuers to disclose “material ESG risks.”  In particular, the ESG subcommittee recommended that material ESG risks be disclosed pursuant to “standard setters’ frameworks,” and “in a manner consistent with the presentation of other financial disclosures.”

On Monday, the SEC asked for public comments on a new, standardized ESG disclosure framework that would require issuers to disclose certain climate and other ESG-related risks. The comment request—which encapsulates public and private company disclosures—includes 15 questions with the goal of providing a “consistent, comparable, and reliable” framework to allow investors to use ESG considerations in their decision-making.

On February 18, 2021, the Institute of International Finance (“IFF”) hosted the U.S. Climate Finance Summit, at which both John Coates, Acting Director of the SEC’s Division of Corporation Finance, and Federal Reserve Governor Lael Brainard made statements in favor of companies providing fulsome ESG disclosures.  These pronouncements underscore the Summit’s larger goal of supporting a “pro-growth, pro-markets transition to a sustainable, low-carbon economy.” 

In 2020, trillions of dollars flooded ESG funds, and many analysts are expecting this trend to continue in 2021. BlackRock, the largest asset manager in the world, plans to have $1.2 trillion in ESG assets in the next 10 years, and an estimated one-third of all U.S. assets under management are already sustainably invested.  Given the importance of ESG to the securities markets, we herein present an elementary primer, explaining ESG issues and how they are affecting companies and their public disclosures—your ABC’s of ESG, so to speak.

In December, the NASDAQ proposed new listing rules that—if implemented—would require companies to (i) disclose information about the diversity of their directors on an annual basis and (ii) have at least two diverse directors, or else provide an explanation why they do not.

By “diverse directors,” the rules contemplate “one [director] who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”  In turn, underrepresented minorities, as defined by the proposed rules, encompass as individuals who self-identify as: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities.