ESG Developments This Week
In Washington, D.C.
SEC disclosure proposal means new challenges for auditors
On March 21, the Securities and Exchange Commission (SEC) introduced its proposal on mandatory climate disclosures for publicly traded companies. Ever since, various media and analysts have been combing through the document, trying to figure out what exactly the new proposal will mean and for whom. On March 29, The Wall Street Journal argued the following:
“Professional-services firms are assessing an array of knotty and often subjective information from companies under a new proposal from U.S. securities regulators on climate disclosure.
The Securities and Exchange Commission last week put forward a plan that would require companies to provide information about their greenhouse-gas emissions and climate-change-related risks to their businesses. The proposal, which is now open for public comments, would add to the growing amount of work for auditors around assessing companies’ climate risks.
Under the proposal, climate metrics and disclosures included in the footnotes of companies’ financial statements would be subject to a full audit.
Separately, companies’ estimates of greenhouse-gas emissions from their operations and from the energy they consume—known as Scope 1 and 2 emissions—would require independent assurance, a review typically performed by engineering, consulting or audit firms. The assurance requirement applies to companies with at least $250 million in publicly traded shares.
Auditors would have to consider the additional climate disclosure when opining on the accuracy of the financial statements as a whole.”
As was noted in this newsletter last fall:
“KPMG in October said it planned to spend more than $1.5 billion over the next three years on climate-change-related initiatives, including training on environmental, social and governance issues for all 227,000 employees and efforts to advise businesses on how to meet net-zero emission targets. Ernst & Young in September said it would spend $10 billion over the next three years on audit quality, sustainability and technology. Deloitte, a sponsor of CFO Journal, didn’t respond to a request for comment on its planned climate-change-related investments.
PricewaterhouseCoopers in June unveiled a five-year, $12 billion plan to train employees on climate-related matters and hire 100,000 new people. “We invested and we’ve gotten the cost side under way because that’s what our clients were asking for from our people,” said Wes Bricker, vice chair at PwC and a former chief accountant at the SEC.
The SEC proposal would require companies to disclose if climate change is expected to affect more than 1% of a line item—such as revenue or debt—and explain the impact….”
“Some audit firms will likely generate higher revenue from clients, outweighing any cost increases stemming from hiring and training, BDO’s Mr. Tower said. “The additional cost that we incur would result in additional service billings,” he said.
Professional-services firms also expect higher demand for their consulting offerings. Those would include advising clients on how to calculate their emissions estimates and working with them on the new disclosure rules, for example identifying what’s needed for reporting, tax planning and operations, said Neil Dhar, co-leader of PwC’s U.S. consulting practice.
“On the consulting side, depending on how much expertise [our clients] need, it will require incremental help that we have to obviously plan for,” Mr. Dhar said.”
In the States
California corporate diversity law ruled unconstitutional
On September 30, 2020, California Governor Gavin Newsome signed Assembly Bill 979, which added a section to the California Corporate Code. The new section mandated that every corporation in the state have at least one racial or sexual minority on its board of directors by the end of 2021. The law was challenged in court and, as of last Friday, has been ruled unconstitutional:
“A Los Angeles court has found a California law mandating that publicly traded companies include people from underrepresented communities on their boards unconstitutional, ruling in favor of a conservative group seeking an injunction against the measure.
Los Angeles County Superior Court granted summary judgment to Judicial Watch on Friday. The conservative legal group had argued the law violates the equal protection clause of California’s constitution. The ruling did not provide Judge Terry Green’s reasoning behind the decision.
The law, passed in 2020, required that publicly traded companies with a main office in California appoint at least one member of the Asian, Black, Latino, LGBT, Native American, or Pacific Islander communities to their boards by the end of 2021 through either filling a vacant seat or creating a new one….
It passed following the murder of George Floyd, an unarmed Black man, by Derek Chauvin, a white police officer during an arrest, which galvanized a national protest movement against racism and the disproportionate use of police force against Black Americans.”
Analysts foresee subsequent challenges to California Senate Bill 826, which was signed into law in 2018 and which requires that:
“[N]o later than the close of the 2019 calendar year… a domestic general corporation or foreign corporation that is a publicly held corporation, as defined, whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California to have a minimum of one female, as defined, on its board of directors, as specified. No later than the close of the 2021 calendar year, the bill would increase that required minimum number to 2 female directors if the corporation has 5 directors or to 3 female directors if the corporation has 6 or more directors.”
Idaho looks to join states curbing ESG
Idaho is, perhaps, about to join Florida, Texas, and West Virginia in looking to prohibit ESG in state investments, according to KTVT in Twin Falls, Idaho. The station reports:
“Several pieces of legislation aimed at preventing Idaho government entities from investing in companies that choose environmental-friendly paths or follow particular social policies are moving through the Legislature.
The Senate State Affairs Committee on Wednesday sent to the full Senate a bill aimed at prohibiting investments in companies that make commitments to environmental, social, and corporate governance, known as ESG.
The House, meanwhile, is advancing a resolution that would task a committee with identifying such companies.
ESG is increasingly seen as an important way for corporations to tout responsible business credentials. But some Idaho lawmakers say they’re suspicious of companies that appeal to what’s known as sustainable investing.
Republican Sen. Steve Vick says the state should avoid investing in companies whose actions are “counter to the values of Idaho.””
Several other states are reported to have legislation under consideration as well.
In the spotlight
Poll: Should retirement and pension funds consider factors other than ROI?
On March 31, Scott Rasmussen’s “Number of the Day” column—published by Ballotpedia—addressed the question of “other factors” in pension investing—factors like political issues, ESG, etc. This question was, presumably, inspired by the Labor Department’s efforts to establish a new rule in which ESG can be included in ERISA-governed retirement funds, overturning a Trump-era rule to the contrary. Rasmussen’s results were as follows:
“Forty-eight percent (48%) of voters believe that firms managing pension funds should focus only on earning the best possible return. A Scott Rasmussen national survey found that, among current investors, 59% hold that view. Thirty-seven percent (37%) believe they should also consider other factors, such as diversity, equity, and inclusion requirements.
When we asked a follow-up question about which other factors should be considered very important, the top choice was earning the best possible return on investment. Overall, 74% of voters say either that return on investment is the only thing that should be considered or that returns are a very important consideration. That figure jumps to 84% of investors.”See the column, including the survey methodology here.