Statement by Chair Gensler on ESG Disclosures Proposal

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Today [May 25, 2022], the Commission is considering a proposal to improve disclosures by certain investment advisers and funds that purport to take Environmental, Social, and Governance (ESG) factors into consideration when making investing decisions. I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus.

It is important that investors have consistent and comparable disclosures about asset managers’ ESG strategies so they can understand what data underlies funds’ claims and choose the right investments for them.

When I think about this topic, I’m reminded of walking down the aisle of a grocery store and seeing a product like fat-free milk. What does “fat-free” mean? Well, in that case, you can see objective figures, like grams of fat, which are detailed on the nutrition label.

Funds often disclose objective metrics as well. When doing so, investors get a window into the criteria used by the asset managers for the fund and the data that underlies the claim.

When it comes to ESG investing, though, there’s currently a huge range of what asset managers might disclose or mean by their claims.

As investor interest in ESG investments has grown, so too have ESG investment products and services. For example, we’ve seen an increasing number of funds market themselves as “green,” “sustainable,” “low-carbon,” and so on. While the estimated size of this sector varies, one estimate says that the “U.S. sustainable investment universe” has grown to $17.1 trillion. [1] Suffice it to say there are hundreds of funds and potentially trillions of dollars under management in this space.


Statement by Commissioner Peirce on ESG Disclosures Proposal

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Mr. Chair. A key impetus for today’s rulemaking [1] is a legitimate concern about the practice of greenwashing by investment advisers and investment companies. This concern is real because advisers can mint money by calling their products and services “green” without doing anything special to justify that label. Only days ago, we settled an enforcement proceeding in which we alleged that an adviser said one thing about ESG and did another. [2] Yet while enforcement proceedings of this sort illustrate the problem, they also show that we already have a solution: when we see advisers that do not accurately characterize their ESG practices, we can enforce the laws and rules that already apply. [3] A new rule to address greenwashing, therefore, should not be a high priority.

In any event, this proposed rule misses the mark.

I could have supported a proposal to require advisers and funds to answer three questions about their ESG products and services:

  1. If you offer products or services you label as some formulation of “E,” “S,” or “G,” what does the label mean with respect to each such product or service?
  2. What do you do to make your product or service line up with E, S, or G, as you have defined it for that product or service?
  3. For each such product or service, what—if any—is the cost to investors, including in terms of forgone financial returns of pursuing E, S, or G objectives alongside of or instead of financial objectives?

This proposal touches on some of these questions, [4] but embodies a fundamentally different approach. It avoids explicitly defining E, S, and G, yet implicitly uses disclosure requirements to induce substantive changes in funds’ and advisers’ ESG practices. Investors will pick up the tab for our latest ESG exploits without seeing much benefit.


Statement by Commissioner Lee on ESG Disclosures Proposal

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

I am pleased to support today’s proposal to bring greater transparency and accountability to sustainable investing. There has been explosive growth in investor interest and demand around such investments, both domestically and internationally. [1] With that increasing demand comes increasing need for consistent, comparable, and reliable information—information to help protect investors from “greenwashing,” or exaggerated or false claims about ESG practices. Greenwashing can mislead investors as to the true risks, rewards, and pricing of investment assets. [2]

This goes to the heart of our mission at the SEC, which is to protect investors by promoting transparency and accountability around investment decision-making. Those offering investments must fully and fairly disclose what they are selling, and act consistently with those disclosures. In others words: say what you mean and mean what you say. That is what today’s proposal is designed to promote for sustainable investments.

I want to highlight briefly three key areas of the proposal, including those areas where public feedback will be critical. [3] These include how to categorize the various types of funds engaged in ESG investing; whether we have calibrated disclosures sensibly for each category; and finally, the significant question of when and how to require disclosure of greenhouse gas (GHG) emissions.

First, the proposal would categorize funds engaging in ESG investing into two buckets: Integration Funds and ESG-Focused Funds, with a third category that is a subset of ESG-Focused funds to be known as Impact Funds. An Integration Fund would be defined as one that considers one or more ESG factors alongside other non-ESG factors, but generally gives ESG factors no greater prominence than non-ESG factors in its investment selection process. [4] An ESG-Focused Fund, by contrast, would focus on one or more ESG factors as a significant consideration in its investment selection process or as part of its engagement with portfolio companies. Finally, Impact Funds (a subset of ESG-Focused Funds) would be comprised of those with a goal of achieving a specific ESG impact. [5]


Nosedive: Boeing and the Corruption of the Deferred Prosecution Agreement

John C. Coffee Jr. is the Adolf A. Berle Professor of Law at Columbia University Law School. This post is based on his recent paper.

For public corporations, the deferred prosecution agreement (or “DPA”) has become the default rule. Whatever the crisis or scandal—foreign corrupt practices, securities fraud, opioids—the response of the public corporation is to cut a deal with the U.S. Attorney under which it conducts an internal investigation, agrees to a joint “Statement of Facts” describing the misconduct, pays a substantial fine, and possibly agrees to some modest governance and monitoring reforms. The payoff to the defendant is that it is not indicted, and if it can avoid another similar episode for a short probation period, the charges will be effectively erased at the end of that period.

Such a resolution is attractive for each side: the prosecution can “declare a victory” in a case where it lacked the manpower or budget to dig deeply or proceed on its own; the defendant corporation avoids the reputational damage associated with a trial and also escapes the collateral civil liability (from follow-on class actions) that would likely ensue if it plead guilty to a crime. Who loses? The short answer is the public, which is denied transparency and the truth. Although a “Statement of Facts” will typically accompany a DPA, its disclosures are heavily edited and sanitized by defense counsel. In fact, both sides have a strong incentive to massage the facts to make themselves look good.

Few examples better illustrate this tendency than the DPA entered into by the Department of Justice (“DOJ”) and The Boeing Corporation (“Boeing”) on January 7, 2021. The DOJ alleged that Boeing had misled the Federal Aviation Administration (“FAA”) about its new model 737 MAX, which had markedly different flight characteristics than its predecessors. Had the FAA known more, it would have almost certainly mandated more extensive flight simulator training. This failure to alert the FAA to these changes may have been a proximate cause of two 737 MAX crashes in 2018 and 2019 that killed 346 passengers.


The Cost of Proxy Contests

Michael R. Levin is founder and editor of The Activist Investor. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

By now we’ve heard a lot about the universal proxy card (UPC), and how it makes life easier for activist investors and harder for companies. We set forth the highlights earlier. Many observers note UPC will lower the cost of proxy contests, and thus encourage more of them. Here, we dig into exactly how that could work.

We don’t know if an activist investor can hit the $5,300 cost the SEC estimates an activist investor can spend on a proxy contest using UPC, or if it even wants to. Still, if a resourceful activist chooses to pursue a “nominal” solicitation, it can run a proxy contest at a potentially much lower cost than before.

Notes on regulatory practice

Pursuant to longstanding regulatory practice, the SEC assesses the impact of a rule on many affected parties: issuers or registrants, dissident shareholders (here called companies and activists), other shareholders, and directors. The SEC also assesses impact as “potential economic effects of the final amendments, including the likely benefits and costs, as well as the likely effects on efficiency, competition, and capital formation.” For our purposes here, we look at the direct cost for activists and companies to comply with the rule.

Estimating the incremental cost of any regulation is at best difficult under any circumstances. Estimating the impact of this unprecedented one is even trickier. We haven’t seen any independent analysis of UPC compliance costs, so we rely on the SEC’s data and models. Our work below refers to page numbers and footnotes in the final rule.


Hell or High Water Provisions in Merger Agreements: A Practical Approach

Stephen Fraidin and Joel Mitnick are partners and Ross Steinberg is a law clerk at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader memorandum.

Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here); The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here);Deals in the Time of Pandemic, by Guhan Subramanian and Caley Petrucci (discussed on the Forum here).

When a business is being sold, the sellers, regardless of whether it is the Board of Directors of a public company, or a private owner, take into consideration three overarching factors: price, speed, and certainty. In recent years, particularly in light of the Biden Administration’s focus on antitrust enforcement and policy, antitrust clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”) has become a major risk factor affecting the speed to, and the certainty of, completion of the sale of a business. This post addresses a specific type of merger agreement provision that is designed to eliminate uncertainty arising from the antitrust risk of a given transaction.

To address antitrust risk uncertainty, sellers are increasingly asking buyers to agree to what is euphemistically called a “hell or high water” (“HOHW”) agreement. An HOHW agreement is designed to provide the Seller with certainty that the Buyer is required to complete the transaction come hell or high water, regardless of the position of the DOJ or FTC, and that Buyer is required to comply with its HOHW commitment by the termination date of the agreement (the “End Date”), often a year after the agreement was entered into. The End Date is increasingly important because the average duration of significant U.S. HSR antitrust investigations has increased from approximately seven months in 2011 to approximately one year today. At the same time, the average duration of a significant investigation by the E.U. is now nearly 20 months.

Antitrust Investigation Process

HSR provides for a 30-day initial review period (the “waiting period”) by either the Department of Justice (“DOJ”) or Federal Trade Commission (“FTC”) (the DOJ and FTC are collectively called the “Antitrust Authorities”). At the conclusion of the initial 30-day waiting period, the Antitrust Agencies unilaterally may extend the waiting period for an indefinite time by issuing what is in effect a very broad based subpoena for documents and information that is colloquially called a “second request.” In order to avoid the probable issuance of a second request in deals that raise obvious antitrust issues, antitrust practitioners sometimes volunteer to extend the government’s initial review period by a “pull and refile” approach that permits attempting to persuade the DOJ or FTC of the legality of the transaction without the need for a more extensive investigation. This approach involves the parties withdrawing their HSR filing, providing information to the Antitrust Authorities, and encouraging them to clear the transaction without a further investigation, and then refiling under HSR and restarting the 30-day initial waiting period. However, failure to convince the Antitrust Authorities that a deal presents no problem even after a pull and refile likely will result in issuance of the second request.


ESG Incentives and Executives

Ira T. Kay is Managing Partner, Mike Kesner is Partner, and Joadi Oglesby is a Consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).


Early indications are that the inclusion of environmental, social, and governance (ESG) metrics in corporate incentive plans—primarily annual incentives currently—is becoming common, with 69% of S&P 500 companies (207 of 301) reporting the inclusion of such metrics in their 2022 proxies. [1] If this level of inclusion holds for all of 2022, it would represent a significant increase from 2021 when 52% of the S&P 500 reported ESG metrics. It is apparent that large corporations and their executives have undertaken a good faith effort in using incentives to address ESG issues at the company level, with possible beneficial societal implications.

This unprecedented movement in incentive metric usage—much faster even than the relative total shareholder return (TSR) transition—is caused by many factors: from boards’/executives’ desire to help improve the social footprint of their companies and society to responding to shareholder pressures. This shift is viewed by most audiences as a positive response from the corporate sector, but it has its critics and challenges: measuring real impact; interpreting limited data; navigating the lack of uniform measurement standards; choosing metrics; setting goals; and balancing shareholder, societal, and employee priorities, among others. Most, but not all, companies that have added ESG metrics to an incentive plan have included them in a holistic/qualitative scorecard that may include a combination of quantifiable and qualitative goals. There are many valid reasons for this including measurement difficulty, litigation risk, and motivational challenges. There are several companies that have purely quantitative goals, and there is governmental, institutional, proxy advisor, and media pressure to adopt this approach.


Banking’s Climate Conundrum

Jeremy Kress is Assistant Professor of Business Law at the Stephen M. Ross School of Business at the University of Michigan and Co-Faculty Director of the University of Michigan’s Center on Finance, Law & Policy. This post is based on his recent paper, forthcoming in the American Business Law Journal.

“Climate change is an emerging risk to financial institutions, the financial system, and the economy,” Federal Reserve Chair Jerome Powell proclaimed in 2020. In doing so, Powell joined a growing chorus of policymakers, scientists, and scholars raising alarms about climate change’s potential to destabilize the global financial system. Around the world, financial regulators have begun implementing policies to address climate risks among banks, insurers, and other financial institutions. Despite Powell’s acknowledgement of climate risks, however, the United States lags significantly behind other countries in addressing such risks. My paper, Banking’s Climate Conundrum, argues that the United States’ sluggishness in responding to climate-related financial risk is problematic because the U.S. banking system is uniquely susceptible to climate change. It contends that the United States must act quickly to overcome this unusual weakness by taking bold steps to safeguard the financial system from the climate crisis.

The U.S. financial system’s vulnerability to climate change stems, in part, from a little-known provision in bank capital requirements. Capital requirements are bank regulators’ primary tool for protecting the safety and soundness of the financial system. Generally speaking, the more capital a bank maintains, the bigger the cushion the bank has to absorb losses, and the less likely the bank will become insolvent. The international Basel III capital accord established new global capital standards for banks in 2010. Under Basel III’s standardized approach, the amount of capital a bank must maintain for a corporate loan or a sovereign bond is based on the company’s or country’s external credit rating. Thus, a bank that makes a loan to Microsoft (with a AAA credit rating) is required to maintain less capital than a bank that makes a loan to American Airlines (with a B- credit rating), since the loan to Microsoft is less risky.


ESG Disclosure Rules and the SEC’s Mission

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Will Corporations Deliver Value to All Stakeholders? by Lucian A. Bebchuk and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here); and Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

Earlier this week, SEC Chair Gary Gensler gave the keynote address for an investor briefing on the SEC Climate Disclosure Rule presented by nonprofit Ceres. In his remarks, entitled “Building Upon a Long Tradition,” Gensler vigorously pressed his case that the SEC’s new climate disclosure proposal (see this PubCo post, this PubCo post and this PubCo post) was comfortably part of the conventional tapestry of SEC rulemaking. Growing out of the core bargain of the 1930s that let investors “decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” Gensler observed, the SEC’s disclosure regime has continually expanded—adding disclosure requirements about financial performance, MD&A, management, executive comp and risk factors. Over the generations, the SEC has “stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.” As has been the case historically, the SEC, he insisted, “has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.” The proposed rules, he said, “would build on that long tradition.” But has everyone bought into that view?


Gensler surely felt compelled to focus on positioning the rulemaking as well within SEC traditions given the bashing the proposal has received from some corners of the political universe, perhaps even auditioning some arguments in preparation for one or more court challenges. Even before the proposal was released, the WSJ reported, some Republicans had contended that “it isn’t the SEC’s job to mandate nonfinancial disclosures.” In addition, the article continued, some industry organizations “told the SEC it didn’t have legal authority to compel disclosures and impose its value judgments.” One Republican state attorney general “wrote that ‘West Virginia will not permit the unconstitutional politicization of the Securities and Exchange Commission. If you choose to pursue this course we will defeat it in court.’”


Will Corporations Deliver Value to All Stakeholders?

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School; and Roberto Tallarita is a Lecturer on Law and Associate Director of the Program on Corporate Governance at Harvard Law School. This post is based on their forthcoming article.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Stakeholder Capitalism in the Time of Covid by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

In August 2019, in the Business Roundtable’s Statement on the Purpose of a Corporation (the “BRT Statement”), numerous major company CEOs announced their commitment to deliver value to all stakeholders and not just shareholders. Some observers viewed this event as a milestone and the Statement as reflecting a meaningful commitment to improve the treatment of stakeholders (the “Commitment Hypothesis”). Others, by contrast, including us in previous work, viewed the Statement as a PR move with little practical impact on stakeholders (the “PR Hypothesis”). Which hypothesis best explains the BRT Statement?

In a forthcoming article, Will Corporations Deliver Value to All Stakeholders?, we investigate the aftermath of the BRT Statement to assess whether joining it represented a meaningful commitment or was mostly a public-relations move.

Our analysis is based on a review of a large array of corporate documents of the 128 U.S. public companies that joined the original BRT Statement in August 2019 (the “BRT Companies”). We manually collected and analyzed over six hundred corporate documents, which we are making publicly available in an online archive, the BRT Corporate Purpose Archive. The documents include governance guidelines, bylaws, proxy statements, and SEC no-action letter requests, and cover the period through the end of August 2021, two full years after the publication of the BRT Statement (the “Two-Year Period”).

Our analysis of these documents provides considerable evidence inconsistent with the Commitment Hypothesis and in support of the PR Hypothesis. These findings, we argue, have significant implications for the heated debate on stakeholder capitalism.

Below is a more detailed account of our analysis:


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