US regulatory environment has ‘shifted dramatically’ on ESG, say legal experts

Jan 08, 2020
SEC action on ESG topics proves contentious talking point at ESG Integration Forum and SASB Symposium

As the SEC considers how issuers should report on certain material ESG issues and the House of Representatives waits to discuss a proposed ESG reporting bill, a leading corporate governance lawyer says the regulatory environment has ‘shifted dramatically’ on ESG.

Speaking to Corporate Secretary and sister publication IR Magazine at the ESG Integration Forum last month, Gillian Emmett Moldowan, partner at Shearman & Sterling, cited the SEC’s recent proposed changes to Regulation SK as a notable example of the turning tide on ESG regulations.

The SEC’s proposed change is intended to simplify issuers’ reporting on material risk factors, therefore making the information easier for investors to review. The proposed change has garnered attention because it would require companies to report on human capital management issues as a material risk.

‘The SEC is authorized to make certain rule changes on disclosures of risk factors, and there’s a new focus on human capital management, which we may see come to fruition… I would encourage companies to really think about what is material to them, their company and their industry,’ Moldowan said.

The period to submit comments to the SEC closed on October 22, 2019, with more than 80 bespoke letters and roughly 2,800 copies of a form letter submitted. Despite the lapsed deadline, SEC commissioner Robert Jackson encouraged companies to continue to submit comment letters.

Speaking at the Sustainability Accounting Standards Board (SASB) Symposium in December, Jackson said: ‘I’m so proud we came out and were clear about human capital management. Across the country and around the world the degree to which companies invest in their people is an incredibly important issue.’

He added, however, that he would have liked the commission to go further and include environmental risk-factor disclosures in the proposed rule change. ‘We should be thinking about sustainability and environmental issues,’ he said. ‘The good news is it’s just a proposal. If you have strong views about this, we’d love to hear from you.’

In a letter to the SEC, CalPERS’ CEO Marcie Frost expressed concerns about the proposed rule change. While CalPERS supports the sentiment of the rule change, she wrote, it ‘makes the concept of materiality substantially more confusing.’

Proposed changes to shareholder proposal thresholds

Jackson was equally outspoken about the SEC’s proposed change to Rule 14a-8, which would change the value of shares an investor must hold in a company before being able to put forward a proposal.

As Corporate Secretary reported last month, under the current system a proponent must hold at least $2,000 or 1 percent of a company’s shares for at least one year to be eligible to submit a proposal. The SEC’s proposed rule change would get rid of the 1 percent threshold and create three alternative ownership/tenure thresholds:

  • Continuous ownership of at least $2,000 of the company’s securities for at least three years
  • Continuous ownership of at least $15,000 of the company’s securities for at least two years
  • Continuous ownership of at least $25,000 of the company’s securities for at least one year.

‘It’s an empirical fact that this will have an impact on ESG,’ Jackson told audience members at the SASB Symposium. ‘Many environmental proposals will not have support. Many social proposals will not have support, and if they get removed from the ballot they can’t be put up again for three years.’ Again, he encouraged concerned parties to submit comment letters to the SEC.

At the ESG Integration Forum two days later, his views were echoed by Deb Markowitz, vice president of initiatives and campaigns at Ceres. She explained that the proposed rule change would prevent proposals from being resubmitted if they didn’t receive a certain level of support.

The SEC’s proposal would allow companies to exclude a proposal that has been previously voted on three or more times in the last five years if it received less than 50 percent of the votes cast and saw a decline in shareholder support of 10 percent or more compared with the preceding vote.

‘One of the things we’ve observed with these votes is that the first time you get a small percentage, but that doesn’t mean there won’t ultimately be strong support,’ Markowitz said.

Proposed legislative action

Beyond these two notable changes to ESG regulations, Tom Riesenberg, director of legal policy and outreach at SASB, called out a couple of other changes from a legislative perspective that indicate the tide is turning on ESG conversations in Washington, DC.

Speaking at the ESG Integration Forum, Riesenberg called attention to Bill HR 340 – the ESG Disclosure Simplification Act 2019. The bill has been introduced in the House Financial Services Committee, but Riesenberg explained that it isn’t likely to progress beyond that because there isn’t a companion bill in the Senate. He added, however, that during the presidential debates four years ago, climate wasn’t discussed at all – which provides an indication of how much the conversation has grown in prominence since then.

Click here to view the full video interview with Moldowan.

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