Political Activity Disclosures: A Hidden ESG Requirement

King & Spalding

One ESG topic gaining substantial traction in the United States is stakeholder attention to corporate political involvement, which the SEC’s Acting Chair as of the date of this publication(*) said was “key to any discussion of sustainability”. Put simply, influential stakeholders have demanded public companies align their political activities with preferred causes. As companies and their leaders have responded, issuing statements and crafting policies on prominent issues of the day, some critics are taking note where the rhetoric conflicts with how companies have directed corporate political and lobbying dollars. How can a company commit to combat climate change if, for example, it contributes to politicians who are climate change deniers?

Recently, many companies appear to have chosen to suspend donations to candidates in response to violence at the U.S. Capitol in January 2021. A Washington Post study found that 20 of the 30 largest corporate backers of the Republican Party suspended their donations; 12 have done so completely, while eight have suspended donations only to lawmakers who objected to U.S. election results. Others have moved further away from partisan political involvement, with at least one major financial services company discontinuing its corporate political action committee.

The SFDR is part of a package of measures introduced to implement the EU action plan on sustainable finance(*) which aims to push more capital towards sustainable activities.

The political environment is likely to increase attention to these issues within the U.S., continuing an acceleration toward political activity transparency that was apparent even before the events at the U.S. Capitol. In the 2018 proxy year, there were 51 proposals at S&P 500 companies to enhance reporting of political and lobbying activity. None passed, with an average of 28.7% support. In the proxy year that ended June 30, 2020, there were 55 such shareholder proposals. Average support increased to 35.5%, and six proposals received majority support.

Investors are under pressure to support more of these proposals. Last year, BlackRock announced that it would “seek confirmation from companies, through engagement or disclosure, that their corporate political activities are consistent with their public statements on material and strategic policy issues. Moreover, we expect companies to monitor the positions taken by trade associations of which they are active members on such issues for consistency on major policy positions and to provide an explanation where inconsistencies exist”.

Even following this statement, BlackRock and a group of other major assets managers including Vanguard, State Street, Fidelity, JPMorgan, and BNY Mellon were targeted by two political action organizations, Majority Action and the Service Employees International Union, for not doing enough to step back from supporting political candidates. In a public letter released this February, the group claims that these large asset managers themselves donated heavily to candidates who opposed certification of electoral college results and also did little to encourage companies to be more transparent. According to the organizations’ letter, all but one of the named asset managers voted against a majority of shareholder proposals seeking greater disclosure; BlackRock and Vanguard voted against all such proposals.

This private interest in disclosure of corporate political involvement has also increased the likelihood of SEC mandated disclosure. At his confirmation hearings, SEC Chair (as at the date of this publication) Gary Gensler said that mandatory political disclosure “is something I think the Commission should consider in light of the strong investor interest”. Commissioner Allison Herren Lee, serving as Acting Chair prior to the confirmation vote for Chair of the SEC, addressed the issue in a March speech. “Another significant ESG issue that deserves attention is political spending disclosure. The SEC is currently prevented from finalizing a rule in this area, but political spending disclosure is inextricably linked to ESG issues. Consider, for instance, research showing that many companies that have made carbon neutral pledges, or otherwise state they support climate-friendly initiatives, have donated substantial sums to candidates with climate voting records inconsistent with such assertions. Consider also companies that made noteworthy pledges to alter their political spending practices in response to racial justice protests, and whether, without political spending disclosure requirements, investors can adequately test these claims, or would have held corporate managers accountable for those risks before they materialized. Political spending disclosure is key to any discussion of sustainability”.

The impediment to SEC activity referenced by Commissioner Lee may not exist much longer. A rider in the appropriations act prevents the SEC from finalizing, issuing, or implementing any rule regarding disclosure of “political contributions, contributions to tax-exempt organizations, or dues paid to trade associations”, but Democratic majorities in both chambers could repeal this restriction. A bill introduced in the Senate would go even further, not only requiring political spending disclosure, but also mandating shareholder votes to authorize corporate political spending. Although unlikely to pass, the bill reflects the significant public interest in transparency around corporate political activity.

In the current political environment - where companies are being pressured directly by stakeholders to do more, many of those stakeholders are also scrutinized for their advocacy efforts, and the political and regulatory branches of government are focused on these issues - reviewing corporate political involvement practices makes sense. Companies should be particularly mindful to evaluate how political decisions are overseen by senior management and the Board. As pressure continues to build for greater transparency about political involvement, companies may benefit from reviewing their current activities and considering voluntary enhancements to their own political involvement disclosures.

(*) The U.S. Senate vote on confirmation of Gary Gensler as Chair of the Securities and Exchange Commission is expected during the week of April 12, 2021

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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