The SEC has issued a slew of statements intended to tackle environmental, social, governance (ESG) issues, especially on climate change matters.
But the two Republicans on the commission—Hester Peirce and Elad Roisman—had questions about what those statements really mean. The market regulator announced some changes, but the SEC has always enforced the securities laws, and as it currently stands, there are no new requirements on ESG matters.
Under the direction of Acting Chair Allison Herren Lee, the Division of Corporation Finance (CorpFin) was instructed to enhance its review of climate-related disclosure in public company filings. Lee also directed the staff to work on updating a 2010 disclosure guidance on climate change risks. Further, the Division of Examinations said its examiners will also put a heightened focus on climate-related risks when reviewing investment advisers and investment companies for compliance with SEC rules. In addition, the commission created a separate enforcement task force on ESG and climate issues.
“What does this ‘enhanced focus’ on climate-related matters mean?” Peirce and Roisman asked in a joint statement published on March 4, 2021. “The short answer is: it’s not yet clear. Do these announcements represent a change from current Commission practices or a continuation of the status quo with a new public relations twist? Time will tell.”
They believe that the announcements mainly amount to a continuation of the SEC’s work.
For example, if the SEC were to write a new disclosure rule to elicit more specific line-item ESG disclosures, it would have to go through due process of notice and comment before finalizing any rules. Rulemaking—especially controversial rules—can take two to three years from start to finish.
“After all, the Commission has not voted on any new standards or expectations relating to climate-related disclosure,” the commissioners said. “The timing of this release—just before many public companies were due to file their annual reports—underscores its apparent function as a re-framing of the ongoing work, rather than the announcement of anything new.”
Christina Thomas, a partner at Mayer Brown LLP who previously worked at the SEC, also believes that the announcements do not represent substantive regulatory change.
For example, on the enforcement task force, public companies and funds have always had a requirement to provide material information. This means companies should disclose information that a reasonable person would find important in the total mix of information to make a voting or investing decision.
“And that requirement is the same whether it’s about ESG information or financial information. If it’s material, you have to disclose it; that’s not a new requirement,” Thomas said. “So, the enforcement division isn’t getting a new power or new authority. They have been policing all along. They bring cases all the time about misleading disclosures or omitted material disclosures. This is really … saying that they are working in a specific… area. But it’s not a new securities law violations by any means.”
The SEC’s recent actions in part respond to demands by investors for more prescriptive disclosure requirements on ESG issues. They believe the information is important for their investing and voting decisions. But the current principles-based disclosure rules go only so far as it leaves up to the companies to decide what is material for investors, they have argued.
Democrats are willing to write stricter rules, but Republicans have resisted. They say the principles-based rules rooted in the concept of materiality have worked well as each company has its own unique set of facts and circumstances. Moreover, they pointed out that there is no agreement on what E or S really stands for.
But with President Joseph Biden prioritizing policies to combat the effects of climate change, the SEC has not waited until the chair nominee—Gary Gensler—is confirmed by the Senate, which is likely to happen soon.
Still, Peirce and Roisman want the commission to slow down on ESG issues. Many businesses believe ESG matters have little to do with financial performance. But providing the information is burdensome, business groups say, while some activist investors would use the information just to shame companies.
Companies Should Still Review Disclosures
In the meantime, securities lawyers nevertheless want companies to carefully review their disclosures, given the enhanced focus on ESG information by the SEC.
“The SEC is about to shine a spotlight on how companies and investment funds describe the ESG practices, and how closely their practices conform to their disclosures,” said Mark Schonfeld, co-chair of Gibson, Dunn & Crutcher LLP’s securities enforcement practice and former director of the SEC’s New York Regional Office. “Now is the time for companies and investment managers to review their ESG disclosures and controls and fix any gaps before the SEC comes looking.”
Mayer Brown’s Thomas said the SEC’s emphasis on ESG is prompting company management to think about their legal obligations even if there are no new legal obligations.
“I think it’s good practice to sort of to dust off that 2010 guidance, read it, and as a company, ask yourself questions, ‘should I be enhancing this disclosure. Has anything changed since last, to the extent that I haven’t been looking at this regularly and evaluating my disclosure and response to it. Is there anything I should be changing in my next filing to be more responsive to this?’” she said. “It’s just good corporate hygiene to be constantly reviewing your disclosure and ensuring that you are providing material disclosure.”
Dave Brown, a partner with Alston & Bird LLP, said the series of ESG-related announcements show that the SEC is pursuing it from all sides.
“Issuers must take specific steps to ensure that their ESG related disclosures go through the same disclosure controls and procedures as financial information, MD&A, etc.,” he said. “Companies should take steps now to establish or re-evaluate their disclosure controls and procedures regarding their sustainability efforts. The SEC will likely want to use this enforcement task force to make a few public examples, and it is best to take steps not to be in their cross-hairs.”
This article originally appeared in the March 8, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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