Corporate Governance

Shearman & Sterling LLP 31 | ESG and Incentive Compensation Plans: Are Investors Satisfied? 4 See Hester Peirce, "Rethinking Global ESG Metrics," Views — the Eurofi Magazine, at 208, https://www.sec.gov/news/public-statement/rethinking-global-esg-metrics (April 14,2021). IFRS Sustainability Disclosure Standards In March of 2022, the International Sustainability Standards Board (ISSB) issued exposure drafts of its first two sustainability disclosure standards. The first exposure draft focuses on disclosure of material information about all significant sustainability-related risks that could impact enterprise value. The second exposure draft covers climate-related risks and opportunities. The ISSB was founded by the International Financial Reporting Standards Foundation (IFRS), which is the parent organization of the International Accounting Standards Board (IASB). The purpose of the ISSB is to provide sustainability standards similar to how the IASB provides financial accounting standards. The exposure incorporates recommendations from the Task Force on Climate-Related Financial Disclosures (TFCD) and the industry- specific disclosure requirements set forth by the Sustainability Accounting Standards Board (which has since been incorporated into IFRSF). SEC Proposed Rule on Climate-Related Disclosures In March of 2022, the SEC proposed rules that would require issuers to include climate-related disclosures in certain public filings. In proposing these rules, Commissioner Gensler emphasized that climate risks can pose a financial risk to issuers and investors are demanding "consistent and comparable information that may affect financial performance." Please refer to our earlier article titled "After Years of Debate, Climate Change Impact Reporting Gets Real" for a more in-depth discussion of this proposal. EFFORTS TO HARMONIZE METRIC SETTING Notwithstanding the desire for more robust disclosures, the debate continues about whether there should be a global standard of reporting for ESG metrics. For example, SEC Commissioner Hester M. Peirce has stated that "global reliance on a centrally determined set of metrics could undermine the very people- centered objectives of the ESG movement by displacing the insights of the people making and consuming products and services." 4 On the other side of the debate are organizations such as the Americans for Financial Reform Education Fund, which, in their comment letter to the SEC, noted that the SEC should require that "ESG pay for performance measures be standardized in alignment with other SEC proposals currently or soon under consideration." Similarly, the Responsible Asset Allocator Initiative at New America, in arguing for inclusion of ESG metrics in the pay vs performance rule, stated that "to avoid greenwashing, the metrics should be material to the company and to its industry, as defined by internationally recognized standards setting organizations ..." The last year has witnessed a number of proposals aimed at providing standardized reporting of ESG metrics. Below are two of the most prominent recent developments in the area:

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