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US Securities and Exchange Commission

SEC Seeks Input on Climate Change Disclosures

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

The SEC is seeking the public’s input on climate change disclosures, Acting Chair Allison Herren Lee said in a statement on March 15, 2021.

The request for feedback, due within 90 days, coincided with a major speech Lee gave on environmental, social, and governance (ESG) matters before an event hosted virtually by the Center for American Progress (CAP), a left-leaning think tank.

“I am asking the staff to evaluate our disclosure rules with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change,” Lee said in the statement. “Public input on the Commission’s disclosure rules and guidance as they apply to climate change disclosures, and whether and how they should be modified, can include comments on existing disclosure requirements in Regulation S-K and Regulation S-X (or, for foreign private issuers, Form 20-F), potential new Commission disclosure requirements, and potential new disclosure frameworks that the Commission might adopt or incorporate in its disclosure rules.”

The move comes as the SEC in 2010 issued Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change, to better help companies determine what to disclose. It asked them to disclose material information related to climate change, including lawsuits, business problems, regulatory supervisions, or international treaties. Since then, investor demand and corporate disclosure have grown dramatically.

But many investor groups have complained that the information provided has been of little use. Moreover, the existential threat of climate change has become much clearer over the years.

“Consequently, questions arise about whether climate change disclosures adequately inform investors about known material risks, uncertainties, impacts, and opportunities, and whether greater consistency could be achieved,” Lee said.

She noted that the SEC’s Investor Advisory Committee in May last year recommended that the commission begin a project to update the reporting requirements for public operating companies to include ESG information factors.

Similarly, a subcommittee of the SEC’s Asset Management Advisory Committee in December issued a preliminary recommendation that the commission require the adoption of standards by which companies disclose material ESG risks. 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.

Lee’s statement contains 15 questions that interested parties should answer.  The first question, for example, asks how the commission can best regulate, monitor, review, and guide climate change disclosures in order to make the information more consistent, comparable, and reliable. The first question also asks where and how should the disclosure be provided.

Question 9 asks what the pros and cons of developing a single set of global standards applicable to all companies around the world. Lee encouraged commenters to submit empirical data and other information to back up their comments.

“Original data from respondents, including academics, data providers, and other organizations, may assist in assessing the materiality of climate-related disclosures, and the costs and benefits of different regulatory approaches to climate disclosure,” she said.

Ever since Lee became the acting chair of the SEC following Joseph Biden’s presidential inauguration on January 20, she has started a number of initiatives on ESG, including climate change, matters. The staff will scrutinize more closely company filings on ESG and climate change matters, examiners will also put an extra focus when reviewing ESG practices of investment advisers, and an enforcement task force was created to make sure ESG disclosures and practices are not egregious.

In her speech at the Center for American Progress, she shared far-reaching views about what she thinks the SEC should do in terms of matters beyond climate change.

“Climate is unique in the potentially systemic nature of the risks it presents. But we must also make progress on standardized ESG disclosure more broadly,” she said in her speech. “That means working toward a comprehensive ESG disclosure framework.”

In the near term, she said the commission should consider other standalone initiatives, such as guidance on human capital management (HCM) disclosures and more specific guidance or rulemaking on board diversity. Political spending disclosure is another significant ESG issue that deserves attention, Lee said in her speech.

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