Monthly Archives: June 2022

New Climate-Related Financial Disclosures for Private Companies and LLPs

Gareth Rees and Matthew Dunlap are partners and Stephanie Pong is an associate at Morrison & Foerster. This post is based on a Morrison & Foerster memorandum by Mr. Rees, Mr. Dunlap, Ms. Pong, and James Quirke.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here), both 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 A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

Companies and limited liability partnerships (LLPs) “with the greatest economic and environmental impact” are now subject to the legal requirement to assess their climate risks and disclose climate-related financial information as a result of new regulations which came into force on 6 April 2022. This follows the Financial Conduct Authority (FCA) extending climate-related financial disclosure obligations to, among others, standard-listed companies and certain asset managers and owners in December 2021, as discussed in our previous client alert.

Under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (the “Regulations”), certain companies and LLPs—including large private companies—are now obliged to make disclosures of climate-related financial information for accounting periods beginning on or after 6 April 2022.

Companies within scope of the FCA’s Listing Rules will now be subject to two frameworks, and UK government guidance has confirmed disclosures required under the Listing Rules should also be compliant with the new Regulations.

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Time Running Out Under the HFCAA

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

In December 2020, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, was signed into law. The HFCAA amended SOX to prohibit trading on U.S. exchanges of public reporting companies audited by audit firms located in foreign jurisdictions that the PCAOB has been unable to inspect for three sequential years. (See this PubCo post.) The U.S.-China Economic and Security Review Commission reports that, as of March 31, 2022, Chinese companies listed on the three largest U.S. exchanges had a total market capitalization of $1.4 trillion. As a result, the trading prohibitions of the HFCAA, which could kick in in just a couple of years—or perhaps even sooner, if Congress speeds up the timeline—could have a substantial impact. According to SEC Chair Gary Gensler, “[w]e have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the [PCAOB]….The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible.” But China and Hong Kong have not permitted PCAOB inspections, largely because of purported security concerns. Last week, in remarks to International Council of Securities Associations, YJ Fischer, Director of the SEC’s Office of International Affairs, addressed “recent regulatory developments related to the lack of US inspections of audits and investigations in China and Hong Kong, and the implications for continued trading of China-based issuers on US exchanges.” The main message: although there has been progress, “significant issues remain,” and reaching an agreement would be only “a first step.” In other words, there is still “a long way to go.”

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What’s “Controversial” About ESG? A Theory of Compelled Commercial Speech under the First Amendment

Sean J. Griffith is the T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on his recent paper.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and 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).

The SEC’s proposed climate disclosure rules create an opportunity to reflect on the limits that the First Amendment places upon securities regulation. As regular readers of this blog know, the SEC has proposed rules to make companies disclose their “climate risks” along with their greenhouse gas (“GHG”) emissions and certain climate-related financial metrics. Unlike existing rules, which require disclosure of climate-related matters when they have a material effect on business operations, the proposed rules largely dispense with the concept of materiality and, where they do not disregard it altogether, significantly alter its meaning. These rules thus raise the question of whether there is any limit on the SEC’s ability to impose them and, in particular, whether there is any First Amendment constraint on the SEC’s authority to mandate disclosures.

My paper, What’s “Controversial” About ESG? A Theory of Compelled Commercial Speech under the First Amendment, analyzes these questions. It argues that there is indeed a First Amendment limit to SEC action and that the proposed climate rules exceed those limits.

The SEC is, at its core, a regulator of speech. It makes rules about what companies and investors must say to one another. Yet the First Amendment prevents the government from, among other things, “abridging the freedom of speech.” The SEC is part of the government, and it abridges the freedom of speech. So, one wonders, is the SEC unconstitutional?

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ESG Global Study 2022

Jessica Ground is Global Head of ESG at the Capital Group. This post is based on her Capital Group memorandum.

Executive summary

ESG adoption is on the rise, fuelled by client demand and a desire to make an impact. As ESG momentum continues to gain steam, investors are refining and evolving their strategies. This can be seen in the implementation arena, where investors are moving away from basic screening methods towards more targeted and sophisticated strategies, including thematic and impact investing. Meanwhile, ESG integration remains the top implementation strategy — showing how investors are taking a holistic approach as they look to comprehensively embed ESG into the investment process.

This rigorous approach is also evident in the strong bias towards active strategies. Nearly two-thirds prefer active funds to integrate ESG. Investors therefore want managers to use active security selection to uncover ESG opportunities and active ownership to engage and influence investee companies.

The increasing sophistication of ESG investors can also be seen in attitudes to the UN Sustainable Development Goals (SDGs). Almost a third say the ability to report on specific SDGs is one of the most important elements of fund sustainability reporting — nearly double last year’s percentage. And half say the ability to offer the full spectrum of SDG themes is important when selecting funds.

Crucially, as investors expand their ESG knowledge base, they increasingly recognise that companies with good sustainable credentials are more likely to outperform. Fewer investors this year point to sacrificing returns as an adoption hurdle. And more are now investing in ESG with the specific and sole remit of generating alpha. Furthermore, investors largely agree that investment returns and sustainable impact go hand in hand.

But as investors become more knowledgeable and familiar with ESG, they are becoming more cognisant of the challenges. Data challenges continue to be a critical issue that manifests throughout the investment process. Difficulties with the quality and accessibility of data and inconsistent ratings are hampering the ability of investors to adopt, incorporate and implement ESG.

These issues also present themselves to fixed income investors who identify a lack of standardisation across ESG bond ratings as the top barrier.

Such difficulties are compounded by the fact that investors face an information overload as they swim against a tidal wave of ESG data.

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Weekly Roundup: June 10-16, 2022


More from:

This roundup contains a collection of the posts published on the Forum during the week of June 10-16, 2022.

Practical Stake


Remarks by Chair Gensler Before the Investor Advisory Committee


The SEC’s Climate Proposal: Top Ten Points for Comment


Stakeholder Capitalism and ESG as Tools for Sustainable Long-Term Value Creation


California Gender Board Diversity Law Is Held Unconstitutional



What Boards Should Know About Digital Assets


Holding Foreign Insiders Accountable


Boards Are Tying Goals to ESG Metrics


California Bill Would Prohibit Settlement Agreements Keeping Certain Information Secret



Socially Responsible Divestment


The SEC and Messaging Apps




E&S Shareholder Proposals


Activism Vulnerability Report: Q1 2022


Statement by Chair Gensler on Request for Comment on Certain Information Providers Acting as Investment Advisers

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 this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Today [June 15, 2022], we have issued a request seeking comment on the activities of “information providers”—namely, index providers, model portfolio providers, and pricing service providers—and how our framework for registering and regulating investment advisers should apply to those providers (if at all). I want to encourage market participants to comment.

Index providers, model portfolio providers, and pricing services have come to play prominent roles in today’s asset management industry. [1] Take index providers as an example. In 2020, there were approximately 3 million indexes, ranging in type, from broad-based and widely-used, to narrow, customized or bespoke indices for specific users. [2] With the dramatic ascent of index funds, some have noted that index providers are responsible for directing trillions of dollars’ worth of investments. [3] And, the indexes that they create and maintain often form the benchmarks that serve as the measuring stick for fund or manager performance or compensation, or as guideposts in academic research. [4]

Many information providers appear to exercise significant discretion in the performance of their services. [5] As an example, index providers may exercise significant discretion by determining what securities go into the bucket of an index, what weight each should be given, and how often those buckets should be reconstituted or rebalanced. Ultimately, what index providers choose to include (or not include) in their index often determines what securities go into a fund, or how investors perceive manager or fund performance. Model portfolio providers similarly may exercise significant discretion in creating investment models for their users, making adjustments to those models, reconstituting or rebalancing the portfolios, and by providing varying degrees of customization. And, pricing services, in providing valuations to their users, appear to exercise discretion in determining what valuation methodology to use, what weight to give various inputs, how and whether to adjust valuations based on market color.

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Activism Vulnerability Report: Q1 2022

Jason Frankl and Brian Kushner are Senior Managing Directors at FTI Consulting. This post is based on their FTI Consulting memorandum. Related research from the Program on Corporate Governance includes 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); and 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).

Introduction and Market Update

This post will present findings from our Activism Vulnerability Screener for the first quarter of 2022 and discuss other notable trends in the world of shareholder activism and engagement.

Markets experienced heightened volatility during the quarter, with Russia’s invasion of Ukraine exacerbating already challenging inflation, pandemic, supply chain and oil price considerations, amongst others. Many nations, including the U.S., have imposed heavy economic sanctions on Russia, with almost 1,000 companies worldwide having curtailed their Russian operations as the war continues to escalate. [1]

In May, the U.S. Federal Reserve took its first major step to combat the fastest reported inflation growth in 40 years by committing to a 50 basis-point rate increase, and rate hikes are likely to continue as inflation persists. [2] This news caused financial markets to continue to trend downward with considerable volatility, and navigating this challenging inflationary, supply chain and human capital environment will remain a central focus for corporate executives, boards of directors and investors for at least the next 12 to 18 months.

In the same month, the Dow Jones Industrial Average (“DJIA”) and the Nasdaq Composite each experienced their single worst day of declines since 2020. Likewise, the S&P 500 hit its lowest level in a year, approaching bear market levels. Year-to-date through May 20, the DJIA was down 14.0%, the S&P 500 was lower by 18.1% and the Nasdaq Composite fell by 27.4%. Over the same period, the CBOE Volatility Index (“VIX”), an index that measures market volatility, was up over 49.9%. [3] As shown below, the Nasdaq Composite’s precipitous tumble has been further weighed down by its technology components, as investors are evaluating risks associated with lofty growth projections and potential recession impacts and are instead seeking stability from companies with sizable cash flows, i.e., value stocks.

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E&S Shareholder Proposals

Will Collins-Dean is Vice President, Senior Portfolio Manager, and Chairman of the Investment Stewardship Committee, and Kristin Drake is Vice President, Head of Investment Stewardship, and Member of the Investment Stewardship Committee at Dimensional Fund Advisors. This post is based on their Dimensional Fund Advisors memorandum.

A manager’s voting record on environmental and social (E&S) shareholder proposals is sometimes equated with a manager’s overall commitment to environmental, social, and governance (ESG) issues. But such an assessment does not consider a manager’s broader stewardship activities and the effectiveness of shareholder proposals at improving portfolio company governance. Dimensional’s [1] stewardship approach includes engagement, [2] proxy voting, and other advocacy efforts and is focused on maximizing shareholder value on behalf of our clients. Through these efforts, we consider how portfolio companies’ E&S policies and practices may impact company performance and valuations.

Landscape and Limitations of Shareholder Proposals for US Companies

Shareholder proposals are proposals submitted by a shareholder or group of shareholders requesting the company take a specific action, such as publishing a report or disclosing a policy on a given issue. Public companies in the US must submit a proposal that they receive from an eligible shareholder to a shareholder vote at a meeting of the company’s shareholders, subject to certain exceptions. While these proposals can be used for a variety of recommendations and requests, shareholder proposals are often put forward by shareholders with a specific issue-oriented agenda. E&S shareholder proposals, while increasing, continue to represent a very small percentage of overall votes, typically less than 1% of all voting matters at US public companies. [3] Institutional Shareholder Services (ISS) noted that the majority (507 or 60%) of the total shareholder proposals filed at US companies were E&S-related. However, after omissions and withdrawals, only 182 of these proposals went to a vote. [4]

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Policy Insights on Executive Compensation

John Galloway is Global Head of Investment Stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship. 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).

Executive summary

  • On behalf of the Vanguard funds, we advocate for well-structured executive compensation plans that drive relative pay and performance alignment, are fair to long-term shareholders, and are flexible through uncertain times.
  • We look for compensation programs that drive sustainable value for a company’s investors in a way that links pay with performance relative to peers. To do so, compensation plans must be rigorously designed with thoroughly disclosed rationale.
  • Vanguard does not expect nonfinancial metrics (such as ESG metrics) to be a standard component of all compensation plans. When compensation committees choose to include nonfinancial metrics, we look for the same qualities we do with more traditional metrics, such as rigor, disclosure, and alignment with key strategic goals and/or material risks.

Our compensation philosophy endures

Executive compensation is one of the fundamental principles of Vanguard’s Investment Stewardship program. We believe that well-structured, transparent, performance-linked executive compensation policies and practices are fundamental drivers of sustainable, long-term value. We encourage portfolio companies to adopt pay plans that incentivize outperformance versus industry peers over the long term, aligning executive compensation outcomes with shareholder outcomes.

This post highlights our main compensation principles and key parts of our executive compensation analysis process, and we discuss the rise of nonfinancial metrics—often referred to as environmental, social, and governance (ESG) metrics—in executive compensation plans to share our perspectives on best practices.

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Do Equity Markets Care About Income Inequality? Evidence from Pay Ratio Disclosure

Stephan Siegel is Professor of Finance and Business Economics at the University of Washington. This post is based on a recent paper, forthcoming in the Journal of Finance, by Professor Siegel; Yihui Pan, Associate Professor of Finance at the University of Utah; Elena S. Pikulina, Assistant Professor of Finance at the University of British Columbia Sauder School of Business; and Tracy Wang, John Spooner Professor of Finance at the University of Minnesota Carlson School of Management.

Stagnant middle-class wages but rapidly-increasing incomes by high earners have led to a growing debate about income inequality in the U.S. However, it is largely unknown how U.S. financial markets and shareholders assess the dispersion in pay between a firm’s top executives and rank-and-file employees. Understanding equity markets’ assessment of income inequality is important because equity markets allocate capital and send valuation signals to firms, informing and possibly shaping corporate policies that contribute to or mitigate income inequality. In this paper, we address this question by exploiting a new rule that required U.S. publicly traded companies to report the ratio between CEO pay and median worker pay for the first time in 2018.

Experimental and survey evidence suggests that many individuals are averse to pronounced income inequality. Aversion to inequality could be self-centered or reflect concerns about future economic growth or stability in broader society. For some individuals, high income inequality could violate their views about a fair allocation of resources. Whether such attitudes are important among financial market participants is an open question, especially as wealthy Americans, who are more likely to be equity investors, have been found to be more accepting of inequality than the rest of the population (Cohn et al. (2019)).

The average pay ratio across the approximately 2,300 U.S. firms that reported their pay ratios for the first time in 2018 is 145, while the median is 65. We find that firms reporting a higher pay ratio experience a significantly lower market reactions than firms reporting a lower pay ratio. Specifically, a one-standard-deviation increase in pay ratio decreases a firm’s seven-day cumulative abnormal return by about 42 basis points (bps). The negative market reaction persists at least several months after the initial pay ratio disclosure. It is also robust to controlling for contemporaneously disclosed CEO or worker pay, suggesting that financial markets react to within-firm pay disparity independently of pay levels. The U.S. market reaction to high pay ratios therefore seems to be at odds with earlier findings from the UK that higher pay inequality is primarily a reflection of better managerial talent (Mueller, Ouimet, and Simintzi (2017)).

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