The Markets November 22, 2022

Alternative Asset Managers Release Tool for ESG Disclosure

The ESG Integrated Disclosure Project is intended to provide a standard format for ESG-related disclosures and to offer companies a baseline from which to develop their ESG reporting capacity.

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In a move to improve transparency and consistency regarding environment, social and governance disclosures for private companies and credit investors, a group of alternative asset managers have launched a template for ESG disclosure. [Source]

The ESG Integrated Disclosure Project template is intended to provide a standard format for ESG-related disclosures and to offer companies a baseline from which to develop their ESG reporting capacity. The project is led by the Alternative Credit Council–the private credit affiliate of the Alternative Investment Management Association–the Loan Syndications and Trading Association and the United Nations-supported Principles for Responsible Investment.

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“By simplifying and harmonizing existing market practices, this new industry-led initiative will reduce the burden on borrowers while improving the materiality and comparability of ESG disclosure for investors,” Jiří Król, global head of the Alternative Credit Council, said in a statement.

The group behind the template says it was designed to be completed by borrower companies and shared with their lenders. Companies can access the template themselves or share it with their lenders or the arranger in a syndicated loan. The group also said the executive committee spearheading the project will review the template and make any necessary updates on an annual basis.

The Alternative Credit Council represents 250 asset management firms that manage over $600 billion of private credit assets. The LSTA is a not-for-profit trade association that includes commercial banks, investment banks, broker-dealers, hedge funds, mutual funds, insurance companies, fund managers and other institutional lenders.

The template’s launch comes as business, associations and financial regulators increasingly seek out ways to standardize ESG and climate-related disclosure data. Earlier this year, the Securities and Exchange Commission said ESG-related issues would be a major focus of the regulator this year. In particular, it wants to know if investment advisers and registered funds are accurately disclosing ESG investing approaches and if they have controls in place to prevent securities laws violations regarding the disclosures.

The SEC also proposed in March rule changes that would require publicly traded companies to disclose climate-related risks that are “reasonably likely to have a material impact” on their businesses, earnings results, or financial condition. The climate-related risk information would also include disclosure of greenhouse gas emissions, as well as certain climate-related financial metrics in an audited financial statement.

Compliance November 22, 2022

S&P Global Settles Mortgage-backed Security Case with SEC

Ratings agency agrees to $2.5 million fine over charges its sales and marketing team influenced analytics.

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S&P Global Ratings has agreed to pay $2.5 million to settle Securities and Exchange Commission charges that it violated conflict-of-interest rules by allowing its sales and marketing team to influencing its credit ratings.

According to the SEC’s cease-and-desist order, the ratings agency was hired by an issuer to rate a jumbo residential mortgage-backed security transaction in July 2017. The SEC said S&P provided preliminary feedback to the issuer indicating that certain tranches issued as part of the transaction met the firm’s minimum credit enhancement floor required to assign them “AAA” ratings. However, one month later, S&P’s analytical team told the issuer they had made a miscalculation and the tranches were actually 10 basis points below the minimum credit enhancement floor needed for “AAA” ratings.

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But “after further analysis and discussion,” the same S&P analytical team drew a different conclusion just a few days later and told the issuer the transaction actually did meet the minimum requirements. According to the order, the issuer was disappointed and frustrated with S&P and threatened to sue the agency because it had revised its ratings feedback during a key marketing period for the offering. The issuer allegedly told S&P commercial employees, who were responsible for managing the relationship with the issuer, that if the firm could not rate the super senior and senior support classes “AAA” and “AA,” respectively, that it would drop S&P from the transaction and permanently end its relationship with S&P’s RMBS team.

At that time, S&P had not rated a prime “jumbo” RMBS transaction in more than two years, according to the order, nor had it rated any transaction for this particular issuer in nearly three years. S&P employees viewed the engagement as “a very positive development” for the company and its RMBS rating business, said the order.

The SEC alleges that S&P commercial employees attempted to pressure the analytical team to rate the transaction consistent with the preliminary feedback, despite the fact that it “turned out to include a calculation error.” S&P commercial employees allegedly tried to persuade S&P’s analytical team to “find a way to rate the transaction consistent with the preliminary indications that S&P had provided to the issuer.”

The SEC said that, despite sending the communications through the compliance department as required by company policy, some emails sent by the S&P commercial employees to the analytical team contained statements reflecting sales and marketing considerations.

 “As a result of the content, urgent nature, high volume and compressed timing of the communications, the S&P commercial employees became participants in the rating process during a time when they were influenced by sales and marketing considerations,” the order says.

According to the SEC, after S&P discovered the circumstances regarding the rating of the RMBS transaction, it self-reported the conduct to the regulator and cooperated with its investigation. The SEC said the firm also took remedial steps to improve its conflict-of-interest policies and procedures.

“Credit rating agencies play a systemically important role in the structured products markets,” Osman Nawaz, chief of the SEC’s Complex Financial Instruments Unit, said in a statement. “The federal securities laws require them to insulate their analytical functions from the influence of business considerations.”

Without admitting or denying the SEC’s findings, S&P agreed to the entry of a cease-and-desist order and a censure, in addition to the $2.5 million penalty.

S&P said in a statement that it “takes compliance with regulatory obligations very seriously and is committed to the integrity of its ratings process and high-quality independent credit ratings.” 

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