IMPACT INVESTING AND OWNING A Tool In Greening Cities. The Green Economy Symposium Steven J. Poplawski. October 5, 2017

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1 IMPACT INVESTING AND OWNING A Tool In Greening Cities The Green Economy Symposium Steven J. Poplawski October 5,

2 Overview Opportunity Basic Terminology ESG, PRI, SRI, B-Corp, Benefit Corporation Investor Metrics and Shareholder Engagement SEC Disclosure Materiality, Mandated Disclosures, SASB and Disclosure Standards Shareholder Activism Fiduciary Duties moving from stockholder primacy to enterprise model Beyond Mandates Private Sector Leads Cities Benefit 2

3 Opportunity Large pools of capital ($8.72 Trillion in U.S. alone) with ESG focus Over $21 Trillion worldwide Pressure for more and better disclosure (less boilerplate, more metrics) Marketing to consumers Growing interest in new fiduciary duty models for business entities 3

4 Basic Terminology CSR Corporate Social Responsibility ESG Environmental, Social and Governance GRI Global Reporting Initiative Benefit Corporation/Public Benefit Corporation/B Corp. PRI Program Related Investment SRI Socially Responsible Investment SASB Sustainability Accounting Standards Board 4

5 Investor Metrics and Engagement Shareholder Engagement seeking better disclosure, more transparency and corporate policy changes State and other pension funds Large asset managers (e.g., BlackRock) Studies showing better performance by companies with integrated sustainability practices Increased use of ESG Measures in Corporate Credit Ratings New Investment Vehicles Index Funds PE and Hedge Funds with ESG/SRI focus SRI portfolios Green Bonds How to measure and report with regard to ESG issues? Voluntary disclosure and reports In 2016, 81% of S&P 500 Companies issue Sustainability Reports Sustainability measures SASB, Global Impact Investing Network (GIIN), hundreds of ranking and rating groups Socially responsible (CSR) vs. Sustainable 5

6 SEC Disclosure - Current Traditional materiality applies Guidance requiring disclosure of specific risks from climate regulation. Exchange Act Rule 13(p) -1 Conflict Minerals Disclosure. Material impacts of compliance with environmental law on capital expenditure, earnings and competitive position. Item 103 of Regulation S-K environmental enforcement disclosure if: (1) material; (2) claim greater than 10% of assets; or, (3) claim by government greater than $100,000. Item 303 of S-K: Issue reasonably likely to cause reported financial info not to be indicative of future financial condition. 6

7 SASB Disclosure Approach Physical effects - materially impact industries with coastal physical assets; industries where infrastructure, resiliency and business continuity are societal necessities (e.g., health care delivery, telecommunications/internet, utilities); and industries that depend on natural capital (e.g., those that rely on productive land and availability of water), Transition to a low-carbon, resilient economy - producers of energyconsuming products (e.g., white goods, automobiles, home builders); producers of direct products, ancillary technologies, and services related to renewable energy; industries offering energy efficiency products and services; and industrial manufacturers that are large consumers of energy and/or water, and, Climate regulation - material impacts on large GHG emitters; renewable energy entities; fossil fuel suppliers; producers of (regulated) energy consuming products (e.g., auto, aerospace, industrial machinery); and energy providers). Impact of above on: 1) cash flow and operations: a) revenue and b) expense; 2) asset value; and 4) financing. 7

8 SASB Disclosure v. Reality Physical effects: disclosures of these risks are predominately boilerplate across all sectors. Climate regulation: disclosure of these risks was more industry-specific as there is more certainty about the regulation and its effects. Transition to a low-carbon, resilient economy: despite being the most prevalent (affecting 89 percent of the U.S. equity market capitalization) these risks have the least disclosure. 8

9 Shareholder Activism Occidental Petroleum Corp. shareholders passed a resolution requiring a climate stress test. ExxonMobil shareholders voted to require assessment of Company s preparation for a low carbon future. Financial Choice Act 2.0 restrictions on shareholder standing to those owning at least 1 percent of the stock. 9

10 Fiduciary Duties Board of Directors - Traditional shareholder primacy model Business Judgment Rule - wide latitude Revlon duties and other special situations Constituency Statutes permissive consideration of other stakeholders interests Enterprise model Benefit Corporations (30+ jurisdictions) 10

11 Fiduciary Duties Benefit Corporations Fundamental shift in fiduciary obligations. Traditional fiduciary duties generally apply. Balance of interests of multiple stakeholders mandatory Stockholders pecuniary interests Best interests of stakeholders materially affected by the corporation s conduct Specific or general public benefit, as set out in the charter Periodic reports required 11

12 The Future Private Sector Leads No expectation of mandates as primary vehicle for addressing ESG issues for intermediate term. Systemic approach driven by investors and capital pools and businesses and using proxy process. More disclosure, evolving standards, evolving expectations. Potential benefit from proactive Board/management engagement with long term investors on sustainability issues. Further growth in use of benefit corporations and similar alternative entities. 12

13 Cities Can Engage Private Sector Start up community Sustainability Lab at T-Rex Hallmark Social Responsibility Report Sprint Good Works Report ates-cities-and-regions-leading-the-way.pdf Commitments by non-government actors and state and local government will still substantially reduce U.S. carbon emissions. 13

14 QUESTIONS?

15 More Resources Fiduciary Duty in the 21 St Century 21st_century.pdf Blackrock, Adapting portfolios to Climate Change (September 2016) bii-climate-change-2016-us.pdf Center for Climate and Energy Solutions, The Business of Pricing Carbon (September 2017) pdf 15