“In this comment letter to the Securities and Exchange Commission, we underscore that the SEC has established statutory authority authorizing its ability to require disclosures regarding climate risks that face companies, and that there is overwhelming evidence that such information is important to investors. We start with the position that if the choice were between having the climate rule as originally proposed or no rule at all, the need for more reliable, comparable reporting on climate risks is so important that we would support adoption of the rule.
But because the Commission desires constructive comments precisely so it can improve the proposed rule, we propose these specific changes that, in our view, will increase the benefits of the climate disclosure regime and lower its cost:
• The Commission should recognize the power and value of high-quality Scope 1 and 2 reporting, and not require Scope 3 reporting or the reporting of innovative, voluntary efforts like internal carbon pricing, scenario analyses or transition planning, unless a company has chosen to set public targets for Scope 3 or Scope 3 emissions are required and reportable under existing disclosure requirements. Instead, voluntary disclosure of Scope 3 emissions or other innovative techniques should be encouraged by way of safe harbor protection;
• To improve the utility and efficiency of the Commission’s Scope 1 and 2 reporting requirements, the rule should require reporting in conformity with the GHG Protocol, with as little variation as is necessary to allow for investors to compare issuer emissions on an entity-wide basis;
• To further enhance the effectiveness of Scope 1 and 2 reporting, the proposed rule should have strong provisions requiring issuers that outsource material components of their operations, such as manufacturing or call centers, or through franchises, whose impact would be reportable under Scope 1 and 2 if conducted directly, to report the climate impact of those operations within their Scope 1 and 2 disclosures;
• To further increase the coherence of narrative requirements with emerging private sector and international standards, and with principles-based SEC reporting like MD&A, the requirements for narrative disclosure should be streamlined, the use of words like “any” and “all” or of de minimis quantitative thresholds like one percent should be eliminated or replaced with a more reasonable threshold of five or ten percent, and all narrative and quantitative disclosure beyond Scope 1 and 2 emissions should be subject to a materiality judgment by the issuer about the information’s impact on the company’s operations and prospects consistent with that used in the Commission’s MD&A reporting standard;
• To move in that direction, by way of non-exclusive example, proposed Items 1501-1503 should be consolidated into one more concise item that is less prescriptive, less redundant and more focused on materiality, and that should be part of the MD&A of the company;
• Attestation of Scope 1 and 2 emissions should be phased in rather than be required immediately by all large accelerated filers and accelerated filers. Under this phase-in approach, for the first three years of implementation attestation should first be required for the largest public companies with market capitalization over $25 billion, and then be required by remaining large cap companies with market value above $10 billion. Only after this initial five-year phase-in period should attestation be required by smaller public companies;
• Likewise, to the extent the Commission insists on requiring the disclosure of Scope 3 emissions, or of other innovative techniques such as internal carbon pricing, transition plans, or other climate-related matters, at the very least those requirements should be phased in on the same basis as we urge for attestation; and
• Enforcement of the rule should be limited to the government itself and there should be no private right of action. Emphasis in the early years of implementation should be on education and facilitation, not enforcement. And, in the context of government enforcement, stronger safe harbor protections along the lines we advocate should apply."
“In January of last year I noted how the narrative on sustainability reporting had changed from the belief that market forces will determine the standards because there is no need for regulatory reporting requirements, to the obvious recognition that, as with accounting, we need regulators to create the standards and enforce their use. In this piece I would like to focus on just one aspect of sustainability reporting—standards for climate-related disclosures.
There are three significant new proposals now in the public domain for comment:
The European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG) “ESRS E1: Climate change” with comments due by August 8, 2022.
The obvious question to ask is “Are we going to get a global standard for climate-related reporting if three different organizations have just issued new proposals?” Maybe we’re just swapping out the past confusion created by multiple NGOs proposing standards for confusion stemming from regulatory bodies (the SEC and EU) and an organization backed by regulatory bodies (the ISSB)?” This question is fundamentally important. Climate change is a global issue and investors hold portfolios of companies all over the world."
“At a Financial Times Moral Money conference on May 20, 2022, Mr. Stuart Kirk, Global Head of Responsible Investment at HSBC Asset Management, and a former journalist at the FT for 10 years (which he calls “the happiest of my professional career”) gave a talk titled “Why investors need not worry about climate risk.” In doing so he fulfilled American artist, film director, and producer Andy Warhol’s observation that “"In the future everybody will be world famous for fifteen minutes." Well, in this case, 16:25 to be precise.
I’ve watched Mr. Kirk’s speech several times. He is a gifted public speaker and I genuinely enjoyed listening to him. Mr. Kirk’s poised, articulate, and well-delivered talk was done with nary a bump or a “hmmm” or a “you know.” At the very beginning he reveals a sardonic wit and his direction of travel by saying, “I do have a beard which is my one sop to responsible investing.” It’s a fulsome gray and well-trimmed beard which nicely complements his white shirt and dark blue jacket and clean-shaven bald head. Being a gray bearded fellow myself (although admittedly much older) I was pleased to hear that beards are associated with sustainable investing. He also proudly boasts that he has never used the word “journey” in speech or writing. I’ll take his word that he’s now done so for the first time and say I’m impressed that one can have such certainty about their past linguistic practices. And I respect his wish to take “a very financial and investment view.”
“The mission of the SEC is to protect investors. Key to this is providing them with the information they need to make their capital allocation decisions. On March 21, 2022 the Securities and Exchange Commission announced its proposed rule for “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” Comments are due on June 17. As with any rule, it contains an economic analysis of the costs and benefits.
Prior to the SEC’s announcement, the sustainability NGO Ceres and the carbon software accounting firm Persefoni (to whom I’m an advisor) commissioned The SustainAbility Institute by ERM to do a survey of companies and investors on the costs they are currently incurring for climate-related disclosure, analysis, and other activities and their perceived benefits in doing so. Although the questionnaire was rather long and complex, the response rate was very good—39 corporate issuers (i.e., companies) and 35 investors. As announced yesterday, results have been published in “Costs and Benefits of Climate-Related Disclosure Activities by Corporate Issuers and Institutional Investors” by Mark Lee, Emily K. Brock, and Doug MacNair. The report was also discussed in a webinar I moderated on May 11, 2022, with Emily K. Brock and Robert LaCount of ERM, Isabel Munilla of Ceres, and Mike Wallace of Persefoni.”
“Next year marks the 50th anniversary of my graduation from MIT with a bachelor’s degree in pure mathematics. As an entering freshman I had dreams of doing important work such as proving The Four Color Theorem (first posed in 1852 and finally solved in 1976) and Fermat’s Last Theorem (first posed in the late 1630s and finally proved 350 years later). Alas, when I turned 19 and realized I had not proven any significant theorem, I decided it was time for another line of work. I got a Ph.D. in sociology at Harvard and have had a career as a business school academic. Through this long and winding road I began working in the field of sustainability about 10 years ago.
At that time the somewhat awkward acronym of ESG (for environmental, social, and governance) was just beginning to be bandied about. A Google Trends chart shows the term getting fairly little worldwide attention from 2004 to 2016 when the slope began to increase and really started to spike up in 2019. In its early days only those interested in sustainability knew what the acronym meant. When the term was explained to the uninitiated, the knee jerk response was that paying attention to ESG (or certainly the E and S parts) was a way for companies and investors to lose money. It then went mainstream and in a short period of time ESG investing, based on companies that “cared” about ESG, was seen as a magical elixir, a way for people to make the world a better place and earn superior returns at the same time. ESG is now under vicious attack, and it is fascinating to observe how broad the spectrum is of those who hate the idea—although those who do so infuse it with a meaning convenient to their world view.”
“Despite their reputation in the 1980s as corporate raiders, most private-equity firms attempt to improve the performance of their portfolio companies through better corporate governance. Historically their business model has been to create value by sharpening the focus and oversight of largely ignored business units inside conglomerates or poorly managed private companies, such as dysfunctional family-run businesses. But although the G in “environmental, social, and governance” has been important in the PE industry from the outset, the E and the S have been virtually nonexistent. The industry has been content to seek returns with little concern for the long-term sustainability of portfolio companies or their wider impact on society.
A huge opportunity for private equity—and for society—now exists. PE has moved far beyond its Wall Street niche to become a major player in the global economy. In 2021 the industry had $6.3 trillion in assets under management (compared with about $90 trillion for public equities) and close to $2 trillion in “dry powder” (funds raised but not yet invested). Those assets are projected to exceed $11 trillion by 2026. Roughly 10,000 PE firms worldwide oversee more than 20 million employees at about 40,000 portfolio companies. Some of the largest PE firms—Apollo, Blackstone, Carlyle, EQT Partners, KKR, and TPG—are now publicly listed themselves and therefore subject to the same pressures that all public companies face.
Because the industry is now so large, society won’t be able to tackle climate change and other major challenges without the active participation of private-equity firms and their portfolio companies. And unless those challenges are addressed, the PE industry, along with all other economic activity, will fail to thrive.”
“Vladimir Putin’s unprovoked and brutal assault on the Ukrainian people is reverberating around the world in many ways. It will continue to do so for years, if not decades, to come. One place it has already touched is “ESG investing,” by whatever name. I certainly don’t want to trivialize the human suffering this war is creating for both the Ukrainian and, to a much lesser extent (at least for how), Russian people. However, I do want to take this unexpected opportunity from tragic circumstances to try to bring some clarity to the muddled world of ESG investing.
Not surprisingly, investors are dumping the stocks of Russian companies and Western banks are now refusing to deal with them. Many liken this to how the financial community divested from and then excluded South African companies in the apartheid years. While divesting Russian stocks has symbolic importance it is easy to do for large and diversified investors. The Russian equity market is a tiny—and rapidly shrinking—percentage of global equity value and is unlikely to rise any time soon. More important, and harder, is for companies to stop doing business in Russia if it is a major market for them. Some notable consumer goods companies are dragging their feet. Natalie Jaresko, a former Ukrainian finance minister, has rightly called out ESG-rhetoric companies to have their actions match their words.”
“In this post, we provide comments on the proposed rules. We appreciate the opportunity to provide comments on the proposed rules relating to the Modernization of Beneficial Ownership Reporting. One of us, Charlie Penner, has been working in shareholder activism for over a decade, starting in traditional activism and more recently focusing on expanding activist efforts to environmental, social, and governance (ESG) issues that are material to long-term investors. Examples include campaigns to encourage Apple to give families more effective tools to address the negative impacts of excessive screen time on kids and to place highly qualified directors on ExxonMobil’s board to help better prepare for the future in a gradually decarbonizing world. The other, Professor Bob Eccles, has been working for decades to demonstrate that companies need to manage their material ESG issues in order to generate long-term shareholder value. He was a tenured professor at the Harvard Business School and now has an appointment at the Saïd Business School at the University of Oxford. He is also the Founding Chairman of the Sustainability Accounting Standards Board (SASB) and one of the founders of the International Integrated Reporting Council (IIRC).”
“In the last several weeks, most of the attention in the corporate governance world has been focused on the drama playing out between Elon Musk and Twitter’s board of directors—especially the Twitter board’s decision to install a “poison pill” to prevent Musk from attempting a hostile takeover.
Poison pills evoke a bygone era of corporate raiders when activist investors got saddled with the reputation that they have today in some quarters, even though their business model has changed dramatically. Rather than being Viking-like corporate raiders (my wife and I are currently watching “The Last Kingdom” about King Alfred in the late 9th century so this metaphor comes readily to mind), most activist investors now function as an important mechanism for ensuring corporate accountability on both financial and sustainability performance.
This admittedly somewhat unhealthy feeling of nostalgia was reinforced by another corporate governance drama unfolding in recent weeks. This one is getting less attention than Musk’s antics, but is much more interesting. A tiny hedge fund is attempting to squeeze a huge amount of old-fashioned “greenmail” out of Nielsen, the storied audience and media-ratings company. It is pitting itself against well-established active investors who, continuing with the language of a bygone era, are, ironically, in the role of the “white knight.” Here we have another example of how the stereotype of activist investors doesn’t always match the current reality of what they do, as I have written about before.”
“Shareholder activism—the practice of buying small stakes in public companies and pushing for change—is one of the best tools we have for holding companies accountable. The efforts of shareholder activists can benefit not just long-term investors (including the beneficiaries of pension funds, i.e., people like you and me), but also anyone who thinks that investors should be doing more to discover value relevant information about a firm and, if you are a socially conscious investor, to recognize the risk of climate change.
Around 20 percent of an S&P 500 firm is owned by the three passive indexers (BlackRock, Vanguard, and State Street) whose business model is the provision of low-cost index funds. Their business model is not designed to generate fundamental information that would suggest whether the company is under- or over- valued. As an example, consider the case of one prominent S&P 500 firm. That firm has under-performed the S&P 500 index by around 250 percent in the decade spanning 2010-2021. Will an asset management firm stay solvent if it underperformed the market by 250 percent? Yet, the big three passive indexers continue investing in that firm because the company is in the index. Who, if anyone, has the power to get that firm’s management to confront its problems? Undervalued firms usually attract the attention of activist shareholders. Overvalued firms usually attract short sellers.
If we make life difficult for both types of activists, we stifle whatever little incentive we provide to hold management’s feet to the fire. For an ESG example, take activist firm Engine No. 1’s successful campaign last year to add three independent directors to ExxonMobil’s board, with the aim of getting the oil giant to finally start treating climate change as a fundamental threat to long-term shareholder value. While there is still much work to be done at ExxonMobil, the Engine No. 1 campaign at least got the industry’s attention, indicating that activists in the future may be able to bring about even more dramatic change.”
“On March 24, 2022 the IFRS Foundation (the Foundation) and the Global Reporting Initiative (GRI) published a press release announcing “a collaboration agreement under which their respective standard-setting boards, the International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB), will seek to coordinate their work programmes and standard-setting activities.” I can’t tell you how excited I was to read this! I must also admit I was rather surprised and that this came out of the blue to me. I’m someone who tries to keep his ears to the ground in the land of sustainability reporting standard setting.
I was not surprised about the immediate reaction to a simple two-page press release announcing a Memorandum of Understanding (MoU) which “represents the latest development in efforts to consolidate or align multiple international initiatives covering sustainability reporting into a more cohesive approach for the benefit of companies, investors and society at large.” The GSSB, focused on multi-stakeholder sustainability reporting, will collaborate with the ISSB whose mission is to develop a global baseline of investor-focused sustainability disclosures for the capital markets. To make this collaboration a substantive one, each organization “will join the each other’s consultative bodies related to sustainability reporting activities.” To be clear, this is a collaboration agreement, not a merger.
As GRI CEO Eelco van der Enden put it in the press release, the MoU sends “a strong signal to capital markets and society that a comprehensive reporting system, which combines financial and impact materiality for sustainability reporting, is possible on a global scale. Emmanuel Faber, Chair of the ISSB, succinctly summed up the benefits of alignment by saying, “using the standards set by the ISSB and GSSB together will offer a complete and compatible suite of sustainability disclosures.”
