U.S.: Nasdaq Board Diversity Regulations Upheld in Fifth Circuit Decision
On October 18, 2023, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit ruled that Nasdaq may retain rules intended to increase representation of women and minorities on the boards of listed companies. The case is Alliance for Fair Board Recruitment v. SEC, No. 21-60626 (5th Cir. 2023).
The diversity regulations require companies to disclose the race, gender and sexual orientation of their board members and to have at least one woman and either one minority or LGBTQ member on their boards. If a company is unable to comply, it is required to explain why. Approved by the Securities and Exchange Commission (the “SEC”) in 2021, the rules went into effect this year.
Several conservative groups, including the Alliance for Fair Board Recruitment and the National Center for Public Policy Research, legally challenged these diversity regulations. The groups argued that the regulations violated federal securities law and the First Amendment rights of companies and directors.
In upholding the rules, the Court held that a challenge under the First Amendment’s protection of free speech was unfounded because Nasdaq is not a state actor. Additionally, the Court held that the SEC’s approval under its own statutory authority did not by itself subject the rules to constitutional scrutiny. The panel also concluded that the rule is not a demographic quota but rather a requirement to disclose standard information regarding board diversity. Finally, because the SEC had statutory authority to approve the rule, the Court held that it did not violate the Securities Exchange Act or the Administrative Procedure Act.
Nasdaq Board Diversity Regulations
Fifth Circuit Decision for Alliance for Fair Board Recruitment v. SEC
EU: European Commission Delays Sector-Specific European Sustainability Reporting Standards Implementation
On October 18, 2023, the European Commission announced that it would postpone the implementation of sector-specific European Sustainability Reporting Standards (“ESRS”), as mandated by the Corporate Sustainability Reporting Directive. In its release of the 2024 Commission Work Programme, the Commission highlighted the burden of reporting for small and medium-sized companies, opting to delay the adoption of the ESRS for two years.
The first set of ESRS includes general reporting requirements that apply across sectors and have an adoption deadline of June 2024. According to the Commission’s proposal, the deferral of the sector-specific rules will assist companies in focusing on implementing the first set of ESRS and allow the European Financial Reporting Advisory Group to analyze the effectiveness of sectoral ESRS.
The Commission’s Proposal
EU: Report of European Banking Authority Recommends Enhanced Environmental and Social Review
On October 12, 2023, the European Banking Authority (the “EBA”) published its Report on the Role of Environmental and Social Risks in the Prudential Framework. The Report explains how social and environmental factors are increasingly influencing other, more traditional risk concerns in the financial sector, such as credit, market and operational risks. Because of this correlation, the EBA has proposed enhancements to the current Pillar 1 prudential framework in order to address directly environmental and social concerns as relevant risks to the industry.
The EBA recommends short-term and longer-term action items. In the short term, the EBA recommends including environmental and social risks in stress testing programs, Credit Rating Agency assessments, due diligence and supervisory reporting, among others. In the medium-to-long term, the EBA proposes revising the Pillar 1 framework to include environmental and social risks in areas such as scenario analysis, transition-plans, the IRD supervisory formula and risk metrics.
The EBA intends to continue integrating environmental and social risks across all pillars of the prudential framework and does not plan to limit such enhancements to Pillar 1.