Little Engine (No. 1) That Could: Exxon’s Proxy Battle and SEC’s Focus on ESG Disclosures

June 1, 2021

In one of the most expensive proxy fights ever, activist hedge fund, Engine No. 1, succeeded on May 26, 2021, in claiming at least two of Exxon Mobil Corp.’s board seats. In December 2020, Engine No. 1 began pushing Exxon to diversify its business after years of poor performance primarily due to a declining global reliance on fossil fuels. Exxon resisted Engine No. 1’s efforts, and in response Engine No. 1 launched a proxy battle for several seats on Exxon’s board. Backed by heavy-hitters Blackrock and some of the largest U.S. pension funds, at least two of Engine No. 1’s four candidates were elected to the board on May 26. While the tally of votes is not yet final and Engine No. 1 could gain another seat, winning at least two board seats marks a monumental win for ESG-focused activist shareholders.

As Engine No. 1’s victory reveals, environmental, social and governance (“ESG”) issues are gaining prominence among shareholders and, as a result, the U.S. Securities and Exchange Commission (“SEC”) is taking actions of its own. Throughout the first half of 2021, the SEC has taken numerous steps to highlight the growing importance of ESG-related disclosure in public company filings. Starting in February 2021, Allison Herren Lee, the SEC’s acting chair, instructed the Division of Corporation Finance to “enhance its focus on climate-related disclosure in public company filings” and noted, “[n]ow more than ever, investors are considering climate-related issues when making investment decisions.” While the SEC first provided guidance regarding climate change-related disclosures more than 10 years ago, Lee’s statements reveal the SEC’s understanding that ESG-related disclosures have once again moved to the forefront and require renewed attention.

Following Lee’s statements, the SEC’s Division of Examinations announced its 2021 examination priorities in early March, which included a greater focus on climate change and ESG-related risks. Notably, the division will pay closer attention to proxy voting policies and practices to ensure “voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change.”

One day after announcing its examination priorities, the SEC announced a new task force on climate and ESG issues. Kelly L. Gibson, acting deputy director of the Division of Enforcement, will lead the task force of 22 members from the SEC’s headquarters and offices nationwide. The task force’s priorities will be two-fold: (1) developing initiatives to proactively identify ESG-related misconduct and (2) coordinating the use of SEC resources to identify potential securities violations related to such misconduct. Interestingly, the SEC will utilize its advanced data analysis processes to gather and analyze ESG information across filers and investigate tips, referrals and whistleblower complaints related to ESG issues. The expansive reach of these efforts indicates that ESG-related governance and disclosure processes should be the focus of all registrants, not just those operating in an industry where climate change and ESG-related issues are at the forefront.

In mid-March 2021, the SEC made public statements and requested public comment on the standardization of ESG-related disclosures. In one statement, John Coates, the acting director of the Division of Corporation Finance, highlighted the growing importance of standardizing ESG-disclosure. Coates touched on three aspects of such disclosure in his comments: (1) considerations for an effective ESG disclosure system, (2) the costs of no ESG disclosure system and (3) the tension between a mandatory versus voluntary disclosure regime. Notably, the SEC emphasized its unique ability to lead and facilitate the conversation around these topics, ultimately moving toward a global standard of disclosure.

Two days later, the SEC requested public input from investors, registrants and market participants on the standardization of climate change-related disclosures. In the request, Lee highlighted the need for consistent, comparable and reliable information on climate change from filers. Through 15 extensive questions, the SEC requested comment on its disclosure rules, how they apply to climate change, any modifications that should be made and whether a new disclosure framework should be considered. The deadline to submit comments is June 14, 2021.

At the time of this writing, the SEC has received more than 60 comments in response to its request and held 24 meetings with a variety of market participants, including energy and other Fortune 500 companies. Although a request for comment does not necessarily indicate that significant changes are coming to the SEC’s regulatory framework, the wide-ranging conversation on ESG disclosure the SEC is leading and Engine No. 1’s proxy victory make it clear that ESG is a topic that is here to stay and that all reporting companies need to be prepared to address ESG in their business and in their public disclosures.

For additional guidance on the information in this alert, please contact any of the authors, any member of McGuireWoods’ securities compliance team or your primary McGuireWoods contact.

McGuireWoods’ securities compliance team assists private and public companies in capital-raising efforts through private and public offerings, and assists public companies with their reporting obligations under the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, Section 16 reports and DEF 14A (proxy statements), as well as with Regulation FD and Regulation G compliance. We prepare insider-trading policies, develop training programs and assist with other aspects of securities transactions engaged in by company officers, directors and significant security holders, including 10b5-1 plans and Rule 144 compliance.

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