The SEC’s Climate-Related Disclosure Rules to Be Announced on March 21st (Newsletter 3/11/22)

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Regulatory News

The SEC Will Propose Climate-Related Disclosure Rules on March 21st

The Securities and Exchange Commission will release its long-awaited climate-related disclosure rules on March 21, according to a meeting agenda posted by the regulator. Initially, the rules were slotted for release in October 2021, but were pushed back as the SEC debated internally about which scopes of greenhouse gas (GHG) emissions to include. Public companies are currently required to disclose information related to financially material risks. The proposal will require climate-related risks to be included in public disclosures, including risks such as the potential for physical damage from severe weather or rising tides. If 3 of the SEC’s 4 commissioners vote in favor the proposal, the rules will move forward to a public comment period before being instituted. 3 of the 4 commissioners have previously advocated for the rules, according to the Wall Street Journal.

SEC Releases Proposal on Cybersecurity Disclosures

In the first of a few rules to come, the SEC has announced new proposed disclosure rules on cybersecurity. Under these rules, public companies would need to disclose material cybersecurity incidents within 4 days of the company’s realization that the incident occurred. In addition, in their forms 10-K and 10-Q, issuers would be required to give updates on previously disclosed cybersecurity incidents and disclose where any series of immaterial incidents became material in the aggregate. Finally, in their 10-K, companies would be required to disclose their procedures for identifying and managing cybersecurity risks, including board oversight of and expertise with cybersecurity risk and management’s role in the implementation of cybersecurity programs.

Investor Updates

Investors Push SEC to Mandate Scope 3 Emissions Disclosures

A group of 75 investors, representing $4.7 trillion in assets with signatories including Boston Common, Parnassus Investments, and Trillium Asset Management, asked the SEC to mandate Scope 3 emissions reporting in its upcoming climate disclosure regulation. The letter, coordinated by As You Sow, argued that Scope 3 emissions are often the largest source of emissions for companies and that they must be included in disclosures to ensure that companies are assessing all potential climate-related risks. The investors suggested that the SEC implement a safe harbor period for one year to allow issuers and auditors to create sound methods of collection and disclosure. In contrast, BlackRock responded by arguing for a staggered approach to emissions reporting, with Scope 3 reporting to be required sometime after Scope 1 and 2.

Proxy Season Briefing

Morningstar’s Predictions for the 2022 Proxy Season

Morningstar expects that shareholders will vote against management on executive pay more frequently this proxy season than in years past. Pointing to Apple, which historically has had support from 90% of shareholders on executive compensation, Morningstar notes that only 64% of shareholders voted to approve the company’s most recent executive compensation plan proposed on March 4. Shareholders have been more active this year than in past years, even doubling the number of shareholder resolutions filed versus the prior year, according to one measure by the ICCR. Morningstar adds that companies should expect more active participation from index fund providers like BlackRock, State Street, and Vanguard on issues related to climate change, ESG oversight, and executive compensation.

Shareholders Vote for Civil Rights Audit at Apple

Shareholders of Apple, who typically side with the company on shareholder proposals, have voted against management in favor of conducting an independent civil rights audit. Critics of Apple say that the company almost entirely lacks diversity in leadership roles, implying that some groups are favored over others when making decisions related to hiring and promotions. The shareholders also approved a proposal requesting Apple create a public report detailing the company’s use of concealment clauses in employment contracts with respect to employee harassment and discrimination. Apple opposed both proposals, saying it already has clear policies protecting gender and racial pay equity and employee rights to speak about employment conditions.

Dollar Tree Adds Committees & Members to Board After Settling with Activist Investor

Dollar Tree has settled with activist investor Mantle Ridge, its third largest shareholder, on a fight over control of the board. The company will more than double its board size, from 5 to 12 members, including 2 from Mantle Ridge. The company will also add 2 new board committees to oversee finance and sustainability and corporate social responsibility. Mantle Ridge has argued that the stock’s performance has lagged and that leadership changes could reinvigorate investors. This is the activist’s third successful attempt to add board members to target companies since being founded in 2016.

Amazon Faces Investor Pressure Over Lack of Tax Transparency

Shareholders of Amazon have proposed a resolution demanding the company increase its transparency related to taxes in accordance with the Global Reporting Initiative’s (GRI) tax standard. The company has previously been scrutinized by shareholders for its tax transparency and famously pays little in taxes. Amazon requested that the SEC throw out the proposal, but the investors pushed back, arguing that risks related to taxes are financially material and that Amazon has an obligation to disclose such information. This is the first proposal of its kind to be submitted at a U.S.-listed company, according to Proxy Insight. Amazon is already required to provide the information in question to tax authorities, but it does not currently disclose it publicly.

Companies Feeling the Heat

U.S. Steel Fined $1.8M for Emissions Violations

U.S. Steel has been fined $1.8 million after local authorities found that the Clairton, Pennsylvania plant, the nation’s largest coke plant, produced hydrogen sulfide levels above the state air quality standards 153 days since 2020. Hydrogen sulfide levels can remain elevated for over a month after it is emitted, and can cause a rotten egg smell, eye irritation, neurological problems, and worsened symptoms of asthma. Despite being fined several times for the same plant, the company announced last year that it was canceling its planned $1.5 billion emission control upgrade.

Company Spotlight

Largest Oil & Gas Companies Strive for Net Zero Methane Emissions

The Oil and Gas Climate Initiative, a group of the world’s 12 largest oil companies including Exxon Mobil, Shell, and Saudi Aramco, have made a pledge to reduce methane emissions to net zero by 2030. This is a significant development because methane is a potent greenhouse gas that traps up to 25 times as much heat in the atmosphere as carbon dioxide. Oil companies have historically been unable to contain their methane emissions because it inadvertently leaks out of wells, even after they are decommissioned.

Great Resignation Sees Increased Female Representation on Boards & in Executive Management

FactSet found that CEO turnover has risen a staggering 76% in the last 5 years, creating opportunities for women to fill these roles. The number of open CEO positions filled by women in the Russell 3000 doubled from 2017 to 2021, from 5% to 10%. FactSet also found that the number of companies with 2 or more women serving on the board of directors has increased significantly since the beginning of the pandemic. While these statistics are encouraging, FactSet also notes that women are still far less likely than men to achieve top management positions, with over 93% of Russell 3000 CEOs being male. FactSet adds that while male labor force participation has recovered to pre-pandemic levels, female participation in the labor force has decreased overall.

Factset women
Source: FactSet 

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