Securities Regulation and Corporate Governance > Posts > SEC Chair Lays Out a Climate- and ESG-Oriented Agenda and Calls for Comments on Mandatory Climate-Related Disclosure Rules
|SEC Chair Lays Out a Climate- and ESG-Oriented Agenda and Calls for Comments on Mandatory Climate-Related Disclosure Rules|
On March 15, 2021, the Acting Chair of the Securities and Exchange Commission (SEC), Allison Herren Lee, gave a speech entitled “A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC," in which she sets forth a near-term regulatory agenda for the SEC that centers on climate and Environmental, Social, and Governance (ESG) topics. On the same day, she also jump-started the regulatory process toward adopting potentially extensive new disclosure requirements for public companies on climate-change matters by issuing a request for comments on 15 broad issues.
The SEC's ESG-Oriented Rulemaking Agenda.
In her speech, Acting Chair Lee proclaimed climate and ESG issues to be “front and center for the SEC." This is due to what Chair Lee referred to as “ESG integration" over the past decade – in other words, a shift in investor focus toward the use of climate and ESG risk analysis in investment decision-making. Chair Lee stated:
ESG factors often represent a core risk management strategy for portfolio construction. That's because investors, asset managers responsible for trillions in investments, issuers, lenders, credit rating agencies, analysts, index providers, and other financial market participants have observed their significance in terms of enterprise value. They have embraced sustainability factors and metrics as significant drivers in decision-making, capital allocation, and pricing.
As a result, Chair Lee stated that the SEC is “taking a holistic look at all of the ways climate and ESG intersect with our regulatory framework." In that context, she set forth the following topics as potential areas for SEC regulatory action in the coming years:
- Adopting a mandatory comprehensive ESG disclosure framework for reporting companies aimed at producing “consistent, comparable, and reliable data that investors need." This initiative encompasses (1) the Chair's directive to the SEC Staff to enhance its focus on reviewing and commenting on companies' climate-related disclosures, (2) the Chair's request for comments on climate disclosures discussed further below, and (3) “mak[ing] progress on standardized ESG disclosure more broadly," including by providing guidance on disclosure of specific metrics regarding human capital, such as workforce diversity, and considering more specific guidance or rulemaking on board diversity.
- Developing proposals for revising SEC or Staff guidance on the shareholder proposal no-action process, and potentially revising Rule 14a-8 itself, in order “to bring greater clarity to the no-action relief process, increase the number of proposals on the ballot that are well-designed for shareholder deliberation and votes, and reduce the number that are not." Chair Lee noted specifically that this could involve reversing some or all of the Rule 14a-8 amendments adopted last year, which are currently scheduled to apply to next year's proxy season.
- Addressing the proxy voting process for funds and advisors by enhancing, supplementing, or replacing guidance issued by the SEC in 2019 that is viewed as discouraging fiduciaries from voting on certain proposals, requiring greater transparency on how mutual funds vote their shares at companies' annual meetings, and adopting a universal proxy rule.
- Supporting the call for an international Sustainability Standards Board to set disclosure standards on ESG matters, and considering whether to establish a U.S. oriented standard setter that would establish rules for ESG disclosures under SEC oversight; essentially, an ESG-oriented FASB.
- Reiterating the focus on increased accountability for ESG disclosures through reviews by the Divisions of Enforcement and Examinations.
- Drawing a connection between political spending disclosure and ESG issues, by raising the question whether investors can adequately test companies' claims to support climate-friendly initiatives or racial justice without having full transparency on these companies' political spending. Chair Lee concluded, “Political spending disclosure is key to any discussion of sustainability."
While some of these topics have long been on the SEC's agenda, Chair Lee's speech should be viewed as giving them new life and indicating likely areas of SEC action over the coming four years.
A Call for Comments on Mandatory Climate-Related Disclosures
Chair Lee used the occasion of her speech to bypass the traditional process of seeking input and comments on new regulatory approaches through a “concept release," instead calling for comments on 15 significant aspects of a possible comprehensive climate-related disclosure regime for public companies. By setting up a webform and email box that are now available on the SEC's website and calling for comments within 90 days, Chair Lee has positioned the SEC to move quickly in proposing new climate-related disclosure rules.
The 15 comment topics set forth in Chair Lee's statement are focused on how the SEC can best regulate climate change disclosures. They demonstrate not only the breadth of regulatory change that is on the table and the extent of work that is necessary to establish a new mandatory disclosure regime, but also the scope of tools that the SEC has at hand. Some of the questions posed by Chair Lee include:
- How can the Commission best regulate, monitor, review, and guide climate change disclosures in order to provide more consistent, comparable, and reliable information for investors while also providing greater clarity to registrants as to what is expected of them?
- What information related to climate risks can be quantified and measured? Are there specific metrics on which all registrants should report (such as, for example, scopes 1, 2, and 3 greenhouse gas emissions, and greenhouse gas reduction goals)?
- Should disclosures be tiered or scaled based on the size and/or type of registrant)? Should there be different climate change reporting standards for different industries, such as the financial sector, oil and gas, and transportation?
- What are the advantages and disadvantages of permitting investors, registrants, and other industry participants to develop disclosure standards mutually agreed by them? Are there any specific frameworks that the Commission should consider?
- How are the disclosure standards updated? Should the Commission designate a climate or ESG disclosure standard-setter equivalent to FASB?
- Should any such disclosures be incorporated into existing rules such as Regulation S-K or Regulation S-X, or should a new regulation be devoted entirely to climate disclosures? Should mandatory metrics disclosure be accompanied with a “sustainability disclosure and analysis"? Should disclosures be filed or furnished?
- Should disclosures be audited or subject to another form of assurance? Should executives be required to certify the disclosures?
- Should climate-related requirements be one component of a broader ESG disclosure framework?
These questions clearly indicate that, while the goal of enhancing ESG-related disclosures may be in clear focus, the devil will be in the details. One can expect that Chair Lee's statement will lead to a flood of comments over the next three months. It will be important for public companies, pre-IPO companies and investors to weigh in, both individually and collectively, on the pragmatic and practical hurdles that companies have encountered in providing their existing climate-related disclosures and the challenges faced or benefits realized while seeking to enhance their ESG disclosures. We expect the rulemaking process for these new disclosures, which will include a cost-benefit analysis, will be subject to significant scrutiny by investors, companies, standard setters, and the marketplace, as well as potentially to Congressional oversight and judicial scrutiny.
For additional guidance on recent SEC initiatives relating to climate change disclosures and steps public companies should be considering now with respect to such disclosures see our recent client alert entitled, “Considerations for Climate Change Disclosures in SEC Reports" and our previous post entitled, “SEC Announces Enforcement Task Force Focused on Climate and ESG Issues."
 Available at https://www.sec.gov/news/speech/lee-climate-change.
 Public Statement: Public Input Welcomed on Climate Change Disclosures, available at https://www.sec.gov/news/public-statement/lee-climate-change-disclosures.
 Available at https://www.gibsondunn.com/considerations-for-climate-change-disclosures-in-sec-reports/.
 Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=440.
Special thank you to Charli Gibbs-Tabler for her assistance with this article.
© Copyright 2019 Gibson, Dunn & Crutcher LLP.
Attorney Advertising. Prior results do not guarantee a similar outcome. All information provided on this site is for informational purposes only, does not constitute legal advice, is not confidential, and does not create an attorney-client relationship. Statements and content posted to this site do not represent the opinion of Gibson Dunn & Crutcher LLP ("Gibson Dunn"). Gibson Dunn makes no representations as to the accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors or omissions therein, nor for any losses, injuries, or damages arising from its display or use.