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Key Developments
SEC stays its climate-related disclosure rules pending judicial review.
On March 6, the U.S. Securities and Exchange Commission (SEC) adopted its landmark climate-related disclosure rules for U.S. reporting companies and foreign private issuers. Although the SEC has removed or narrowed some of the more onerous proposed requirements (including Scope 3 reporting), the final rules still prescribe expansive climate-related disclosures that will meaningfully increase the cost, risks and complexity associated with public reporting. Key implications for public companies include the relatively short compliance timeline, interpretive challenges, liability considerations and overlapping requirements in other jurisdictions (see our webinar and memo). Different groups have filed legal challenges to these rules, which further amplifies uncertainty. On March 21, the challenges filed in six different circuit courts were consolidated for review by the U.S. Court of Appeals for the Eighth Circuit. On April 4, the SEC issued an order staying the rules pending the completion of judicial review of these consolidated challenges.
EU nears agreement on CSDDD.
Following a failed vote in February, on March 15, the European Council reached an agreement on revisions to the proposed Corporate Sustainability Due Diligence Directive (CSDDD). The revised text would significantly reduce the scope of the directive but would still require covered companies to, among other meaningful obligations, (1) establish and implement measures with respect to the identification, prevention, bringing to an end, minimization and remediation of adverse human rights and environmental impacts and (2) adopt and put into effect a transition plan for climate-change mitigation aligned with a 1.5⁰C pathway. On March 19, the Legal Affairs Committee of the European Parliament approved the European Council’s revised text, which is expected to be subject to a plenary vote of the European Parliament on April 25. If passed by the European Parliament, EU Member States will be required to implement the CSDDD into their national legislation.
Union activity continues to shape this proxy season.
Unions have actively engaged with companies in the months leading up to the core 2024 annual meeting season. In notable instances, these organizations have used engagement strategies outside of the typical Rule 14a-8 shareholder proposal process. In March, although the Strategic Organizing Center terminated its proxy contest at Starbucks (the first ESG-focused universal proxy fight), organizations such as the United Mine Workers and the American Federation of Labor and Congress of Industrial Organizations have continued their engagement by submitting multiple “floor proposals” at Warrior Met Coal, bypassing the one-proposal-per-shareholder limitation under Rule 14a-8.
In this Issue
1. Legislative and Regulatory Updates
2. Shareholder and Stakeholder Engagement Updates
3. Insurance Updates
1. Legislative and Regulatory Updates
United States
SEC finalizes climate-related disclosure rules. On March 6, 2024, the SEC in a 3-to-2 vote adopted its landmark climate-related disclosure rules (the “Final Rules”), which will significantly expand the climate-related information that U.S. reporting companies and foreign private issuers (other than Canadian issuers reporting on Form 40-F) will be required to disclose in their periodic reports and registration statements. After receiving a record 24,000 comment letters on its 2022 proposed rulemaking, the SEC narrowed its proposed requirements by: (1) qualifying many disclosure requirements (including disclosures of Scope 1 and 2 greenhouse gas (GHG) emissions) by materiality, (2) eliminating the proposed Scope 3 emissions reporting requirements and (3) narrowing the proposed financial statement disclosures. Nevertheless, the Final Rules still prescribe expansive climate-related disclosures that will meaningfully increase the cost, compliance challenges and liability exposure associated with public reporting. The earliest compliance date is in 2026 with respect to fiscal years beginning in 2025 (for large accelerated filers, with tiered compliance dates for others). For details on the key requirements and implications of the Final Rules, see our webinar and memo.
SEC stays the Final Rules pending judicial review. Following the SEC’s adoption of the Final Rules, nine petitions challenging the Final Rules were filed by different groups—including energy companies, energy trade associations, several groups of state attorneys general, the U.S. Chamber of Commerce, as well as climate advocacy groups—in six different circuit courts. On March 21, the Judicial Panel on Multidistrict Litigation issued an order at the SEC’s request consolidating the challenges in the Eighth Circuit, which was randomly selected via a lottery as the circuit court to review all of these challenges. On April 4, the SEC issued an order staying the Final Rules pending the completion of judicial review of the consolidated Eighth Circuit petitions. For details on these legal challenges and the SEC’s stay order, see our memo.
There is significant uncertainty regarding the timing and process pursuant to which the Eighth Circuit will act on the consolidated petitions before it. This creates additional challenges for companies subject to the Final Rules. The SEC’s stay order does not amend or otherwise modify the compliance dates contemplated by the Final Rules. As a result, if the Final Rules are upheld, whether or how the phase-in and compliance schedules would be modified are uncertain at this point. In addition, other climate-related reporting requirements remain in place. For example, the stay order noted that the SEC’s 2010 guidance on climate-related disclosures, which the SEC has referenced in a number of recent comment letters questioning climate-related information included in companies’ SEC filings, will be in effect while the stay order is in place. Many companies are also subject to climate-related disclosure requirements in other jurisdictions, such as California’s climate disclosure laws and the EU’s Corporate Sustainability Reporting Directive. Furthermore, it remains to be seen what actions the SEC will take in connection with other rulemaking proposals involving ESG topics, including the its proposed ESG disclosure requirements for investment advisers and investment companies.
U.S. releases second National Action Plan on Responsible Business Conduct. On March 25, the Biden-Harris Administration released the United States’ second National Action Plan (NAP) on Responsible Business Conduct. The NAP focused on the U.S. government’s commitment to “strengthen and improve respect for human rights and labor rights, expand use of green energy, counter corruption, protect human rights defenders, advance gender equity and equality, and promote rights-respecting use of technology.” Among other actions, the NAP outlined plans for “strengthening respect for human rights in federal procurement policies and processes,” including planned action by (1) the Department of State to pilot a human trafficking risk-mapping process for high-risk and high-volume contracts to assist the acquisition workforce and federal contractors conduct due diligence during project design, solicitation and monitoring; (2) the Department of Homeland Security’s Customs and Border Protection (CBP) to draft guidance to direct proactive consideration on a case-by-case basis of suspending and debarring companies from doing business with the federal government in connection with certain penalties issued by CBP; and (3) the U.S. Government Hotlines Working Group, chaired by multiple Departments, to identify options for improving methods for whistleblowers to inform the government of human trafficking violations by federal contractors and sub-contractors. In addition, the NAP also outlined plans to strengthen remedy procedures and anti-retaliation protections for groups and individuals that make complaints using specified grievance mechanisms.
European Union
EU nears agreement on CSDDD. On March 15, the European Council reached an agreement on revisions to the proposed CSDDD that would significantly reduce the scope of the directive. On March 19, the Legal Affairs Committee of the European Parliament approved the European Council’s revised text, which is expected to be subject to a plenary vote of the European Parliament on April 25. If passed by the European Parliament, EU Member States will be required to transpose the CSDDD into their national legislation.
Pursuant to the revised text, the CSDDD is now proposed to only apply to EU companies with more than 1,000 employees (compared to 500 employees in the December proposal) and annual net turnover of more than EUR €450 million (compared to €150 million in the previous proposal). This means that almost 70% of the EU companies that would have been covered under the proposed directive will now be exempt. For non-EU companies, the threshold would now be a turnover of €450 million in the EU (compared to €150 million in the previous proposals). The provision on franchisees is modified to cover companies that had, or are the ultimate parent of a group with, a net turnover of €80 million (compared to €40 million in the previous proposals). The revised text further exempts ultimate parent companies of groups where the parent company’s main activity is limited to holding shares in operational subsidiaries, provided the parent company is not engaged in management, financial or operational decisions; instead, the CSDDD would only apply to a subsidiary within the group. The revised text provides for the Commission to assess potential additional sustainability due diligence requirements applicable to financial institutions.
2. Shareholder and Stakeholder Engagement Updates
Global
SBTi removes certain companies’ net zero targets from its dashboard. On March 7, the Science Based Targets initiative (SBTi), which develops corporate climate standards and validates companies’ targets against such standards, published an updated dashboard which shows the organizations with SBTi-validated GHG emissions reduction targets. This update removed the net zero target commitments of 235 companies affiliated with the Business Ambition for 1.5°C Campaign (the “Campaign”). In a report published on March 7, SBTi explained that, following the implementation of its January 2023 revised Commitment Compliance Policy, companies that had committed to setting science-based targets as part of the Campaign had until January 31, 2024 to submit such targets. Any companies that failed to submit such targets by the deadline were marked as “Commitment Removed” on SBTi’s dashboard in its March 7 update. SBTi’s report further noted that companies are “welcome and encouraged to submit targets at any time,” and that once such targets have been validated, the dashboard will be updated accordingly.
United States
SOC terminates ESG-focused proxy fight at Starbucks. On March 5, the Strategic Organizing Center (SOC), a coalition of North American labor unions, withdrew its nomination of three director candidates to the board of Starbucks. SOC’s campaign, which was focused on Starbucks’ perceived failure to oversee human capital management and address labor rights issues, was notable for being the first ESG-focused board fight since the effectiveness of the SEC’s universal proxy rules. On February 27, Starbucks announced that it would begin discussions on a foundational framework to achieve collective bargaining agreements, including a fair process for organizing and the resolution of outstanding labor-related litigation. After the announcement, proxy advisory firms ISS and Glass Lewis both recommended in favor of Starbucks’ director nominees, declining to support those recommended by SOC. SOC’s notice of withdrawal, which was released after the proxy advisory firms issued their recommendations and before Starbucks’ March 13 annual meeting, cited the Starbucks’ commitments, noting that the SOC had “meaningful dialogue” with a number of other shareholders who are “optimistic” that Starbucks has committed to these changes in good faith.
Unions use “floor proposals” to bypass Rule 14a-8 limitations. On March 26, United Mine Workers of America (UMWA) announced that they and the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) were launching a proxy solicitation at Warrior Met Coal. The company had faced labor-related legal proceedings, as well as a strike from UMWA members. In early March, the UMWA and AFL-CIO filed five shareholder proposals—with four proposals related to corporate governance matters and one proposal requesting an assessment of the company’s labor relations—as “floor proposals,” or proposals submitted pursuant to a company’s organizations documents that are not intended for inclusion in the company’s proxy materials pursuant to Rule 14a 8. As a result, UMWA and AFL-CIO must distribute their own solicitation materials to shareholders under Rule 14a-4. However, in electing not to take advantage of Rule 14a-8, the unions were also able to bypass certain limitations of Rule 14a-8, including the requirement that each proponent only submits one proposal.
Other unions face SEC headwinds this year in connection with Rule 14a-8 proposals. Various regional carpenters’ unions submitted Rule 14a-8 proposals requesting changes to companies’ policies for director resignations following a failure to obtain majority support in uncontested elections. In March, the SEC granted several no-action requests to exclude these proposals on the basis that they would violate Delaware law (see the SEC’s letters to Verizon and Bristol-Myers). Subsequently, the unions withdrew the director resignation proposals submitted to several companies, including ones that did not seek relief from the SEC.
3. Insurance Updates
United States
NAIC Issues Homeowners’ Insurance Data Call. On March 8, the National Association of Insurance Commissioners (NAIC) announced that state insurance regulators intend to issue and coordinate a comprehensive, multi-state Property & Casualty Market Intelligence Data Call (PCMI) to collect and analyze homeowners’ insurance data. The PCMI will cover more than 80% of the U.S. property insurance market by premium volume and will gather ZIP-code-level data from more than 400 insurance companies, spanning over 70 data fields relating to homeowners’ insurance premiums, policies, claims, losses, limits, deductibles, non-renewals and coverage types. An anonymized subset of the data collected by the NAIC and state insurance regulators will be provided by the NAIC to the Federal Insurance Office (FIO). As a result, FIO will no longer pursue its previously proposed data collection of homeowners’ insurance data, which the FIO proposed to collect to assist in its assessment of climate-related exposures and their potential effects on the availability and affordability of insurance coverage (see our November/December newsletter for more information on the FIO’s previous plan). Responses to the PCMI are due by June 6. For more information, see our memo.