HR Policy Association

SEC Signals Quick Action as Investor Watchdog Strengthens ESG Expectations

Published on: May 7, 2021

Topics: ESG and Diversity & Inclusion, Executive Pay Legislation and Regulation

The SEC is sending clear signals, including from Chair Gensler and his staff, that it intends to move quickly on ESG issues for both companies and investors.  At the same time, the UN-supported Principles for Responsible Investment (PRI) is tightening its minimum requirements on voting and policy requirements for signatory firms, which is likely to increase investor demands on companies for D&I and climate disclosures.

PRI released its 2021-2024 Strategic Plan in April Since PRI has achieved admirable market penetration with its certification, investors seeking to avoid the reputational risk of delisting will enhance engagement efforts and sharpen proxy voting policies in line with the new standards.

The SEC's increased focus on ESG risks:  John Coates, acting director of the Division of Corporation Finance, recently delivered remarks describing the SEC's considerations for an effective ESG disclosure system.  He explained that certain aspects could be mandatory and outlined the potential virtues of a single global ESG reporting framework. The SEC is currently soliciting feedback on ESG disclosures through June, with Mr. Coates stating that it will not wait long to act once the comment period closes.

In addition, the SEC has announced two investigative initiatives:

  • Comparing companies’ voluntary ESG disclosures to their disclosures in SEC filings for any material omissions which could inform new guidance on complying with existing SEC disclosure requirements.

  • Ensuring that mutual funds and ETFs marketed as ESG funds have accurate disclosures as well as appropriate processes and policies regarding their investment and voting decisions.

PRI’s new reporting requirements for first quarter 2021 include:

  • A publicly-disclosed Responsible Investing Policy covering at least 90% of assets under management.

  • Incorporation of ESG criteria in all asset classes in which at least US $10 billion is invested, or that make up 10%+ of assets under management.

  • A requirement of engagement and voting in listed equities.

  • Giving priority to certain issues, including human rights (such as D&I) and climate change mitigation, but without defined metrics, trigger levels/events, or prescription of how signatories must vote.

  • Internal verification, C-level sign-off and internal and external audits are now required for compliance reports submitted to PRI.

Signatories that do not meet the minimum requirements will be granted a one-year “engagement window” to comply prior to delisting.

Outlook:  Chairman Gensler did not disclose a specific timetable for SEC actions on the issues, but given his reputation for efficient rule-making we anticipate actions in the near future.  Currently, 628 U.S. investment managers, including many of the largest institutional investors such as BlackRock, JP Morgan, and Vanguard, are PRI signatories.  As 2021 proxy vote results come in, it will be possible to evaluate if the largest institutional investors are changing their voting policies.  Companies should expect increased engagement requests on climate risk and D&I concerns.  Investors will likely request specific performance metrics and progress updates on such issues.  In the very near term, investors are likely to increase support for ESG shareholder proposals and may sharpen director election voting policies for underperformance in 2022 or soon after. 


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