U.S.: SEC Issues Proposed Climate Change Disclosure Rule
On March 21, 2022, the U.S. Securities and Exchange Commission (the “SEC”) released its long-awaited proposed rule on the “Enhancement and Standardization of Climate-Related Disclosures for Investors” (the “Proposed Rule”), which is intended to require “consistent, comparable, and decision-useful information” on climate-related disclosures. The Proposed Rule, if adopted (the Proposed Rule is expected to face legal challenge, and is likely to receive numerous comments for and against), would advance one of the most dramatic changes to SEC disclosure requirements that we have seen.
The Proposed Rule would add new, often prescriptive climate-related disclosure requirements to Regulation S-K, which primarily governs qualitative disclosures, and Regulation S-X, which governs financial statements. In general, these disclosures would address various climate-related risks to the registrant’s business, operations, and financial condition, including disclosure of a registrant’s greenhouse gas (“GHG”) emissions. The Proposed Rule draws heavily from the Task Force on Climate-Related Financial Disclosures, which has developed a climate-related reporting framework that is familiar to many registrants and investors, and the Greenhouse Gas Protocol, which the SEC identifies as the leading accounting and reporting standard for GHG emissions.
Debevoise has prepared a short briefing note on the Proposed Rule, which can be linked to here.
U.S.: 2022 Proxy Season—ESG-Related Resolutions
The 2022 proxy season has already seen more ESG shareholder proposals filed than the record-breaking 2021 season. Proxy Preview 2022, released by As you Sow, the Sustainable Investments Institute (Si2), and Proxy Impact have reported that there have been 529 shareholder ESG resolutions filed, an increase of 20% compared to this time last year, with that increase largely driven by a 40% uptick in the number of racial justice shareholder proposals. Not only are more proposals being filed, but it’s likely that more will be put to a vote since the SEC announced in November that it will no longer exclude shareholder proposals calling for emissions reductions targets “so long as the proposals afford discretion to management as to how to achieve such goals.”
Some high-profile ESG resolutions have already been passed this proxy season, including:
- Apple: Three groups—SOC Investment Group, SEIU Capital Stewardship Program and Trillium Asset Management—filed a proposal with Apple earlier this month calling for Apple to investigate the company’s impact on civil rights. 53% of Apple’s shareholders backed the proposal—the first time such a proposal has received majority support at any large company.
- Disney: Activist investor Arjuna Capital filed a request for Disney to report on race- and gender-based pay gaps which garnered support of 59% of shareholders. Disney unsuccessfully sought to exclude the proposal, arguing that the proposal violates the SEC’s ordinary business rule. Prior to the proposal, female Disney employees had filed a lawsuit alleging that Disney paid them less than their male colleagues.
- Jack in the Box: Earlier this month, 95% of the shareholders of fast-food chain Jack in the Box supported a proposal requesting that the company improve its plastic packaging, believed to be the largest support ever for a sustainability-related resolution that is opposed by the company itself.
Other high-profile ESG resolutions which are yet to be put to a vote this season are:
- Credit Suisse: European asset manager Amundi and Switzerland’s Ethos Foundation filed the first-ever climate proposal at a Swiss company, asking Credit Suisse to amend its articles of association to include short- and long-term fossil fuel financing targets that align with the goal of limiting global warming to 1.5° C.
- Amazon: Investor Missionary Oblates of Mart Immaculate-United States filed a proposal, backed by “[a] $3.5trn consortium of investors,” with Amazon, “ask[ing] Amazon to issue a tax transparency report based on the Global Reporting Initiative’s Tax Standard.”
- Chevron: Proxy voter Majority Action has launched a campaign to remove Chevron’s CEO and Chair, Michael Wirth, and Lead Director, Ronald Sugar, off the board. The move is driven by what the US nonprofit alleges is a failure by the oil major to adequately respond to majority votes on emission reductions and climate lobbying.
However, it is not just shareholders which are pressuring corporates to increase their sustainability transparency. CDP, the climate disclosure not-for-profit, has announced that more than 680 financial institutions will contact the boards of nearly 10,400 companies to request disclosures on their environmental impact data. The number of financial institutions making these requests has increased by 100 compared to last year and include Allianz, Amundi, AXA, BNP Paribas, CalPERS, Capital Group, State Street and Vanguard. The requests are in the form of letters, asking companies to disclose data on issues such as climate change, deforestation and water security. New this year are questions on biodiversity impacts and specific questions on company climate transition plans.
Last year, more than 13,000 companies, representing 64% of global market capitalization, disclosed their data through CDP. Separately, nearly 3,200 of the 7,176 companies that received a request letter disclosed their environmental impact data in response. Last year’s data showed that only one third of responding companies were developing climate transition plans. With new ESG regulations in place, it is anticipated these numbers will increase in the coming years.
CDP press release
Global: Task Force on Nature-related Financial Disclosures Releases Prototype Framework
The Taskforce on Nature-related Financial Disclosures (TNFD) is an investor-backed initiative which seeks to develop and deliver a risk management and disclosure framework for organizations to report and act on evolving nature-related risks. The TNFD is the nature-related equivalent of the well known Task Force on Climate-Related Financial Disclosures (TCFD) and has recently published the first draft of its proposed framework which is due to be launched in 2023. Given the wide-adoption of the TCFD’s framework, the eventual TNFD framework is likely to be relevant for corporate and financial institutions worldwide.
The draft framework includes three core components: key concepts and definitions; draft disclosure recommendations; and guidance on nature-related risk and opportunity assessment. The key definitions which the framework puts forward in its first section include “nature,” which it defines as consisting of four parts: land, ocean, freshwater and atmosphere. These aspects of nature provide an entry point for understanding organizational “dependencies,” which it defines as ecosystem services that an organization relies on for their processes to function such as clean and regular water supply. “Nature-related risks” are defined as potential threats to an organization linked to dependencies on nature, which can come in the form of physical, transitional or systemic risks while “nature-related opportunities” are activities creating positive outcomes for organizations and nature by avoiding or reducing the organization’s impact on nature or actively contributing to nature restoration.
Regarding disclosures, the TNFD draft is modelled on the TCFD’s four pillars of Governance, Strategy, Risk Management, and Metrics and Targets which they hope will encourage integrated disclosures in the future. The draft also includes four general requirements that disclosures should be based on: (i) assessment of nature-related dependencies and impacts; (ii) consideration of location; (iii) consideration of capabilities for nature-related and opportunity assessment and management; and (iv) a statement of the scope of disclosures and what will be covered in future disclosures. As yet, there are no specific performance metrics—these will need to be developed by mapping existing climate-related metrics such as Scope 1, 2 and 3 emissions and emissions intensity to nature-based performance.
Finally, with respect to the nature-related risk and opportunity assessment, the TNFD have introduced a “LEAP” process. LEAP encompasses: (a) Locate your interface with nature; (b) Evaluate your dependencies and impacts; (c) Assess your risks and opportunities; and (d) Prepare to respond to nature-related risks and opportunities and report to investors. LEAP is designed to enable a broad range of organizations to undertake a structured, step-wise and science-based assessment of nature-related risks and opportunities through an understanding of their nature-related dependencies and nature impacts.
The TNFD is currently inviting stakeholders to test the framework and provide feedback through the online platform and intends to release further draft versions in June and October 2022 and February 2023 before launching the final framework in September 2023.
Global: Impact Investment Exchange Announces the Launch of Orange Bond Initiative for Gender Equality
The Impact Investment Exchange recently launched their “Orange Bond Initiative,” which seeks to develop the world’s first gender-focused investing asset class by and for the Global South. The goal of the Initiative is to mobilize the global bond market to empower 100 million women and girls in efforts to advance the UN Sustainable Development Goals and to build a climate-resilient future. The first issuance of the bonds, which take their name from the orange color of SDG 5, the gender equality goal, is expected later this year, with the proceeds to be directed to projects in Africa and Asia.
The Orange Bond Initiative founding signatories draw from across the sustainable finance ecosystem and include the Australian Government’s Department of Foreign Affairs and Trade (DFAT), the United Nations Capital Development Fund (UNCDF) and global asset manager Nuveen among others. The group is aiming to develop standards for gender bonds, catalyzing capital through debt securities using a gender-oriented investment lens and collaborating with stakeholders by equipping them with data analytics, market intelligence and training to build a gender-empowered financial system.
The Orange Bond Initiative
The Orange Bond Pledge