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Jun 30, 2023

The week in GRC: BNY Mellon creates diversity-supporting funds and Treasury says climate risk a challenge to insurers

This week’s governance, compliance and risk-management stories from around the web

– The Financial Times (paywall) reported that BNY Mellon’s investment management arm is turning to funds that donate part of their revenue to diversity charities, even as US financial services firms are facing criticisms from ‘anti-woke’ politicians. The custody bank’s Dreyfus Government Cash Management Fund recently filed with the SEC to launch a share class that would allow clients to donate part of net revenue to a charity of their choice. This builds on the existing Bold class of shares that contributes 10 percent of net revenue to a scholarship fund at Howard University, a historically black university. A separate BNY Mellon-branded ETF launched last month invests in companies that promote ‘women’s opportunities’ and donates 10 percent of the management fee to a charity with similar goals.

The new funds come as Republicans and Democrats are facing each other over the use of ESG factors in investing. ‘We have certain clients who really like [the] idea that they can do well financially and do good at the same time,’ said Hanneke Smits, CEO of BNY Mellon Investment Management. ‘It’s not for every client so we have a whole wide range of capabilities.’

Reuters (paywall) reported that companies will face more pressure to disclose how climate change affects their business under a new set of G20-backed global standards intended to help regulators clamp down on greenwashing. The norms have been written by the International Sustainability Standards Board (ISSB) as trillions of dollars flow into investments that tout their ESG credentials. It would be up to individual countries to decide whether to require listed companies to apply the standards, ISSB chair Emmanuel Faber said, adding that the standards can be used for annual reports from 2024 onwards. Canada, the UK, Japan, Singapore, Nigeria, Chile, Malaysia, Brazil, Egypt, Kenya and South Africa are considering their use, Faber said.

– According to The Wall Street Journal (paywall), large private equity firms are using their record war chests to buy smaller companies in deals that are typically easier to complete at a time of higher borrowing costs and economic uncertainty. Volatile markets and a cloudy economic outlook have made it harder for buyers and sellers to agree on the worth of companies. More expensive debt and a lack of bank financing is also making large buyouts more challenging, bankers and private equity dealmakers say. So far this year, private equity-backed deals have an average value of $65.9 mn, the smallest for the comparable period since the financial crisis, according to Refinitiv.

Reuters reported that activist investor Elliott Investment Management issued a public letter calling for a new CEO at utility company NRG Energy, increasing pressure on incumbent Mauricio Gutierrez. Elliott said NRG’s recent measures were ‘wholly insufficient to remedy a deeply flawed strategy overseen by a leadership team unfit to execute.’ NRG’s investor-day commitments of generating significant excess cash flow and promises of returning nearly its entire market value to shareholders were not new, Elliott said in the letter, continuing its call for a board overhaul and strategic changes in the company.

‘The board fully supports NRG’s CEO Mauricio Gutierrez and management team and the strategy they are executing to drive substantial, sustainable shareholder value,’ an NRG spokesperson said.

– US companies’ spending on jet travel has increased for the second year in a row, highlighting how companies continue to spend on flying perks they insisted were needed during the Covid-19 pandemic, according to the FT. Jet spending for chief executives at S&P 500 companies increased to $41.3 mn last year, up 22 percent from the year before and the highest amount in at least 10 years, according to data from ISS Corporate Solutions. The optics of extensive corporate jet travel could prove difficult for executives, said Matteo Tonello, managing director at The Conference Board: ‘With a growing debate about inequity, it can be a problem for a company if its leaders are publicly displaying their privilege.’ Such travel can also appear to clash with a company’s efforts to cut carbon emissions.

The week in GRC: BNY Mellon creates diversity-supporting funds and Treasury says climate risk a challenge to insurers

CNN reported that a Munich court has handed former Audi CEO Rupert Stadler a suspended jail sentence of one year and nine months for fraud in the 2015 diesel emissions scandal at Volkswagen Group. Stadler was also fined €1.1 mn ($1.2 mn), which will go to the German government and charities, the court said in a ruling. Stadler is the first Volkswagen board member to be sentenced in the affair, around four years after German prosecutors brought fraud charges against the executive. He entered a plea bargain with the court, confessing to his crimes in order to avoid spending time in jail. His sentence has been suspended for three years.

Audi and its parent company Volkswagen admitted in 2015 to having rigged diesel engines to cheat on emissions tests. In separate statements, Volkswagen and Audi said they were not party to Tuesday’s proceeding, which should be ‘viewed independently’ of proceedings against the companies that concluded in 2018.

‘Audi has made good use of the crisis as an opportunity to start over. We have updated our systems, processes and checks to ensure compliance company-wide,’ Audi said, noting it had since ‘cultivated and strengthened a culture of constructive debate.’

Reuters reported that, according to a person familiar with the matter, Goldman Sachs Group plans to add former Bank of America executive Tom Montag to its board. Montag, who has previously worked at Goldman Sachs, is currently CEO of Rubicon Carbon, a carbon-market venture backed by asset manager TPG. He did not immediately respond to a request for comment. Goldman Sachs declined to comment.

– A Delaware judge ruled that The Walt Disney Company’s board did not act negligently when it criticized a sexual identity bill – which critics have derided as the ‘don’t say gay’ law – signed by Florida Governor Ron DeSantis, Reuters reported. The ruling by Lori Will of Delaware’s Court of Chancery means Disney will not have to turn over internal records, including years of board members’ emails, sought by shareholder Kenneth Simeone, who sued Disney in December. Will said that while it might turn out to have been a bad business decision, the evidence at trial showed directors did not allow their personal views to dictate the company’s response to the bill. The judge said Simeone cannot use a provision of Delaware corporate law meant to allow shareholders to investigate board wrongdoing to ‘search for hypothetical conflicts’.

Simeone and Disney did not respond immediately to requests for comment.

– According to the WSJ, the US Department of the Treasury said climate-related risks are becoming an increasing challenge for insurers, and urged state regulators to step up their efforts to address the issue. Insurance companies face risks such as increased litigation and reputational harm that are associated with climate change, but the response from regulators remains in its early stages, the Treasury Department’s Federal Insurance Office said in a report. Insurance regulators’ efforts to tackle climate risk should be ‘deepened and broadened,’ said Treasury Secretary Janet Yellen.

– A group of pension schemes said plans to ease the UK’s company listings rules to attract IPOs would erase fundamental investor protections and weaken investors’ ability to challenge company boards, Reuters reported. The Financial Conduct Authority (FCA) suggested in a public consultation discussion paper in May that the country’s twin-track listings regime could be merged into a single entry point to attract more start-ups. It also suggested raising the threshold for requiring shareholder approval for major transactions.

Railpen and nine other UK pension schemes said in a letter to the FCA that the proposals need a ‘broad and evidence-based policy discussion’. Caroline Escott, senior investment manager at Railpen, said in a statement: ‘Proponents of a more relaxed UK approach to shareholder rights underestimate the extent to which investor-friendly corporate governance standards have shaped the UK’s attractiveness on the world stage.’

– Michael Solomon, head of examinations at FINRA, has said one priority this year is looking broadly at financial services firms’ written procedures for supervising off-channel communications, including newer ways of communicating, such as the use of emojis to convey subtextual messages, according to the WSJ. Texts tend to be shorter than emails and include more acronyms, so deploying a surveillance system that interprets messages and identifies red flags could be more complicated, Solomon said. Emojis, which are used more often in texts but are also seen in emails, can complicate the meaning of a message, he said.