Thursday, July 7, 2016

Investor group takes SASB to task for its "misdefinition" of materiality

The Investor Environmental Health Network sent a letter to the Sustainability Accounting Standards Board on Wednesday to provide feedback on the SASB Conceptual Framework as well as comments submitted by SASB to the Securities and Exchange Commission earlier in the week.

The IEHN letter notes that while SASB has undertaken a worthwhile effort to identify sustainability metrics that correlate directly to potential value impacts for reporting registrants, the Conceptual Framework and correspondence with the SECs or blurs the definition of materiality.

 Under Supreme Court decisions,materiality refers to information which a reasonable investor would seek in the total mix of information, which may affect decisions to buy or sell stock, or to affect voting decisions. Contrary to the SASB approach, material information is not limited to information with a direct correlation to financial value– for instance, disclosures on political spending or climate change impacts are relevant to investor interest and concerns regardless of whether they represent a significant financial impact on the registrant company. Similarly, disclosures regarding significant externalities or systemic risks imposed on society by a firm are of interest to the reasonable investor, regardless of the likely prospect for costly internalization to the firm.

 The letter notes that as a result of this distorted interpretation of materiality, the SASB took some positions in its comments to the SEC that were surprisingly off the mark. For instance, they took the position that line item disclosures of sustainability issues would not be appropriate to be required by the SEC, because they would require disclosure of immaterial information by some companies. This mistaken assumption seems to flow directly from the SASB’s erroneous interpretation of materiality. 

As as an attorney who has long focused on issues of disclosure and sustainability, I believe there would be significant long-term implications to the distortion of the materiality standard by the SASB, especially given the intention of SASB to become a third-party rule maker equivalent to the FASB. I am hopeful that by calling this issue to their attention at this point in the process, they will develop a more accurately articulated description of their own process as well as the definition of materiality.

- Sanford Lewis

Monday, April 4, 2016

What If Exxon's Climate Bet Fails? SEC to Allow ExxonMobil Shareholders to Press for Disclosure of Costs

by Sanford Lewis

The views expressed in this article are those of the author and do not necessarily reflect the views and opinions of the New York State Common Retirement Fund.

A recent SEC ruling on a shareholder proposal at Exxon Mobil seems a historic moment in investors'  efforts to get a handle on the costs and risks of climate change. It's not every day that a lawyer gets the feeling he just participated in history being made. This was one of those moments for me, as outside counsel to the New York State Common Retirement Fund (New York State employees pension).  

Short version: ExxonMobil has essentially been betting that economic pressures would preclude restrictions on oil and gas demand in public policy. In essence, the recent SEC ruling allows shareholders to vote on a proposal that would ask the company to disclose the costs and risks it will face if that bet fails.

Longer version:
In 2014, shareholders, including Arjuna Capital and the As You Sow Foundation, filed a proposal asking ExxonMobil to issue a report on climate risk. The result was a surprising and notorious report which simply claimed that national and world leaders will not have the backbone to restrict carbon sufficient to keep temperature increase down to 2°C, the global consensus target needed to prevent catastrophic climate impacts. The company asserted and continues to assert that the economic pressures to burn fossil fuels are just too strong. It also asserts that if there are carbon restrictions, other forms of carbon emitting fuels such as coal will be restricted before oil and gas.

As a result, according to ExxonMobil's published analysis, there is not much risk to their bottom line associated with climate change, because global policy will not restrain fossil fuels sufficiently to prevent them from selling their products.

The New York State Comptroller on behalf of the New York State Common Retirement Fund, which is a very large institutional shareholder and the pension fund for New York State employees, filed a shareholder proposal (together with the Church of England) which asks the company to nevertheless calculate the costs to its bottom line associated with successful global policy to restrain carbon sufficient to keep temperature increase down to 2°C. Many experts believe this means keeping a substantial portion of fossil fuels, Including oil and gas, in the ground.

In its specifics the proposal asks:
“RESOLVED: Shareholders request that by 2017 ExxonMobil publish an annual assessment of long term portfolio impacts of public climate change policies, at reasonable cost and omitting proprietary information. The assessment can be incorporated into existing reporting and should analyze the impacts on ExxonMobil's oil and gas reserves and resources under a scenario in which reduction in demand results from carbon restrictions and related rules or commitments adopted by governments consistent with the globally agreed upon 2 degree target. The reporting should assess the resilience of the company's full portfolio of reserves and resources through 2040 and beyond and address the financial risks associated with such a scenario.

The Company challenged the proposal at the SEC saying, in essence, that since their analysis indicates that global policy will not restrain oil and gas, they shouldn't have to calculate those potential losses, the so-called stranded assets associated with their oil and gas development in the face of climate change. They claimed that their optimistic characterization of global climate policy as not constraining their product sales is the only risk analysis that they need to do to fulfill shareholder concerns.

Technically this argument was based on substantial implementation -- that they had fulfilled the essential purpose of the proposal, which, as they characterized it, was simply to weigh and disclose risks associated with climate policy. But to the shareholders who filed the proposal, the purpose was really to disclose what's at risk if Exxon Mobil loses its bet regarding global policy -- if the world DOES constrain fossil fuels to head off an even worse disaster than what's already happening.

The company also argued that the proposal was vague in requesting the disclosure of the risks associated with the 2° policy scenario, because no one can predict exactly what policy mechanisms will be put in place to implement needed constraints, and for instance, the Paris agreement, does not contain sufficient restrictions in itself to meet such a goal.

The SEC denied the company's unusually aggressive and detailed arguments. In so doing, it requires that shareholders be entitled to vote the proposal requesting that the company calculate the financial losses associated with a successful global climate policy framework.

In my opinion the underlying, unspoken issue is: what will it cost the company if its efforts to forestall effective global climate policy fail?

You can read the exchange of correspondence on this matter here. My letters on behalf of the New York State Common Retirement Fund are numbers 2 and 4. The SEC decision is number 5.


* Thanks to Bill Baue for helpful feedback and critical thinking on this blog and issue.