Sustainability Reporting After the Paris Climate Accord

It’s fair to say that President Trump’s June 1 announcement that the U.S. will withdraw from the Paris climate accord has been widely reported. It’s also fair to say that the announcement triggered a host of passionate reactions, positive and negative, around the world. Within corporate America, a number of high-profile corporations (for example, Apple, Disney, Facebook, General Electric, Google, Salesforce, Tesla and Twitter) pledged to continue their efforts to cut greenhouse gas emissions and adhere to the spirit of the accord. This leads one to wonder whether withdrawal from the Paris climate accord might, per the law of unintended consequences, actually increase investor emphasis on corporate social responsibility (CSR) and the number of companies that voluntarily report their sustainability initiatives. It’s an intriguing possibility. Momentum for sustainability reporting has been building for years. In fact, the vast majority of S&P 500 companies now publish some type of sustainability or CSR report, and disclosures have begun to appear in SEC filings, particularly proxy statements. Mid-size and smaller companies, lacking the resources of their larger brethren, have been slower to do so, though some have begun and others are giving it serious consideration. Increased pressure from institutional investors, employees and other stakeholders, now coupled with widespread concern over withdrawal from the accord, could tip the reporting balance, especially for companies in sustainability-sensitive industries or companies that otherwise want to send a certain message. One challenge for all companies is to make sense out of the CSR reporting landscape. First of all, the terminology itself—sustainability, CSR, environmental, social and governance (ESG), and triple bottom line, to name a few—is confusingly ambiguous...

A Compliance Calendar Tip: Update for T+2

A few weeks ago, the SEC finalized rules to shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). Amended Exchange Act Rule 15c6-1(a) will prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (subject to certain exceptions) that provides for payment of funds and delivery of securities later than two business days after the trade date (known as “T”), unless otherwise expressly agreed to by the parties at the time of the transaction. (See this Doug’s Note.) The shift from T+3 to T+2 will be effective on September 5, 2017 to give everyone sufficient time to plan for, implement and test changes to the various systems, policies and procedures necessary for an orderly transition. Most of this preparation burden will, of course, fall on the direct participants in the securities trading industry. However, any company that pays regular cash dividends may need to adjust its annual compliance calendar to accommodate the new rule. Most companies that pay regular cash dividends include these relevant dates in their annual compliance calendars: The date on which the dividend is expected to be declared by the board of directors, The dividend payment date, and The ex-dividend date (the date set by the stock exchanges on which the security’s purchase price no longer reflects the dividend because the trade will settle after the record date). NYSE and NASDAQ rules currently state that shares will trade ex-dividend two business days prior to the dividend record date, which makes sense under the current T+3 timeline. However, the exchanges have now...

Conflict Minerals–What Just Happened and What Didn’t

The conflict minerals saga continues. Background In April 2014, the Court of Appeals for the D.C. Circuit in National Association of Manufacturers v. SEC held that the conflict minerals rule’s requirement that companies state that their products have not been found to be “DRC conflict free” violated the First Amendment. Subsequently, the SEC staff released guidance relieving issuers of the obligation to put those labels in their reports. The case was subsequently remanded to the district court for further consideration, and on August 18, 2015, the Court of Appeals reaffirmed its prior decision. In response to these developments, Acting SEC Chairman Michael S. Piwowar issued a statement in January 2017 declaring that he had “directed the staff to reconsider whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate.” (See this Doug’s Note.) Last week, the D.C. Circuit Court entered final judgment in the case, which upheld its prior rulings, and remanded it to the SEC for appropriate action. This past Friday, the SEC issued a statement noting that the D.C. Circuit’s remand to the SEC has “presented significant issues for the Commission to address” and that several comments were received in response to Acting Chairman Piwowar’s January request. Therefore, “in light of the uncertainty regarding how the Commission will resolve those issues,” the Division of Corporation Finance will not recommend enforcement action if companies “only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD,” which conspicuously excludes the need to comply with paragraph (c). What does this mean? Companies that use conflict minerals...

The Downside of Sustainability Reporting

Not long ago, I wrote about the growth of sustainability reporting among public companies. (See this Doug’s Note.) It is now widely believed that effective sustainability reporting, also called “corporate social responsibility” reporting, facilitates a perception among investors, employees, customers, suppliers and other stakeholders that a company is committed to operational, compliance and governance values that enhance its reputation and increase shareholder value. This increase in quantity and quality of reporting has been encouraged by various non-profit organizations formed to flesh out and standardize disclosures. It is important to remember, however, that the evolution of CSR reporting from fringe puff pieces to mainstream disclosure means that companies must also be alert to possible liability for misstatements or other inaccuracies. In fact, the last few years have seen a rise in the number of law suits claiming violations of securities or consumer protection laws due to CSR statements. Basically, companies must analyze all CSR communications, whether in an SEC report, on their websites, in a special report, or otherwise, in accordance with their established disclosure controls and procedures. Resist the temptation to treat CSR disclosures as nothing more than soft marketing or public relations materials unrelated to the company’s “real” disclosures. Be sure that they are thoroughly reviewed prior to dissemination and are subject to the same layers of scrutiny, which may include the disclosure committee, chief risk officer, chief compliance officer, board risk oversight committee and other persons performing similar duties. Here are some tips to keep in mind: Avoid overly broad, unsubstantiated statements of fact about what the company has done or will do regarding CSR matters. Wherever...

Don’t Forget the Say-on-Frequency Form 8-K

The proxy rules require that public companies submit a nonbinding proposal to their shareholders every six years regarding how often they should hold say-on-pay votes, known as “say-on-frequency.” Most companies held their first say-on-frequency vote in 2011 and will be including another vote in their 2017 proxy statements. (“Smaller reporting companies” were not required to hold their first say-on-frequency vote until 2013, meaning that they won’t have to do it again until 2019, and there are special rules for “emerging growth companies.”) Shareholders may choose to vote on executive compensation every year, every two years or every three years, or they may choose to abstain. Though the vote is nonbinding, the charter of most compensation committees requires them to consider the outcome of the shareholder vote when deciding how best to proceed. Indeed, companies must amend their initial post-meeting Item 5.07 Form 8-K (which reports voting results) no later than 150 calendar days after the end of the shareholder meeting at which the vote was taken in order to “disclose the company’s decision in light of such vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials….” Back in 2011 when these rules were still new, more than a few companies failed to make the necessary Form 8-K disclosures. While this may not sound like a big deal, in fact it is. A missed Form 8-K filing can render a company ineligible to use Form S-3 during the 12 months following the date that the Form 8-K should have been filed. For companies planning to raise capital in...

Sustainability Reporting Continues to Mature

Several years ago, voluntary sustainability reporting in proxy statements, annual reports to shareholders, websites and special sustainability reports to various stakeholders began to take hold, even as the SEC continued to resist calls for mandatory sustainability reporting and even in the general absence of guidance regarding what to disclose and how. (See this Doug’s Note.) Around the same time, several non-profit organizations formed for the purpose of bringing order to these disclosures. Among them was the Sustainability Accounting Standards Board (SASB), which enjoys a board of directors made up of a particularly distinguished list of executives, investors, professionals and academics, and chaired by Michael Bloomberg. Since then, sustainability reporting has continued to increase in quantity and quality, and SASB has maintained its position as a well-known, respected standard-setter. In keeping with the maturation of these disclosures, SASB recently published an interesting and detailed “staff bulletin” describing its Approach to Materiality for the Purpose of Standards Development. The bulletin explains the SASB’s efforts to align its disclosure standards with existing federal securities law concepts of materiality (as set forth, for example, in TSC Industries v. Northway, Basic v. Levinson and the SEC’s MD&A rules and guidance). It caught my eye because the alignment of mandatory SEC reporting and voluntary sustainability reporting is essential not only to effective disclosure controls and procedures, but also to consistent and meaningful stakeholder communications. Because sustainability issues vary according to a particular industry’s business model, methods of competition, use of resources and impact on society, SASB provides disclosure standards for 79 industries divided into ten industry sectors: Healthcare Financials Technology & Communications Non-renewable Resources Transportation...