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Mar 16, 2021

SEC’s Lee seeks input on climate disclosure

Call follows new initiatives across the agency

Acting SEC chair Allison Herren Lee has taken the latest in a series of swift steps to bring ESG issues onto the agency’s agenda, this time by asking for feedback from companies and others on reporting.

‘In light of demand for climate change information and questions about whether current disclosures adequately inform investors, public input is requested from investors, registrants and other market participants on climate change disclosure,’ Lee says in a statement issued on Monday.

She notes that the agency in 2010 provided guidance to companies on how existing disclosure requirements apply to climate change matters. Among other things, the 2010 guidance outlines certain ways in which climate change may trigger disclosure obligations under the SEC’s rules.

Lee also noted that last May the SEC Investor Advisory Committee approved recommendations urging the commission to launch efforts to update reporting requirements for issuers to include material, decision-useful ESG factors.

‘Since 2010, investor demand for, and company disclosure of information about, climate change risks, impacts and opportunities has grown dramatically,’ Lee says in her statement. ‘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.’

Separately, yesterday Lee told a Center for American Progress (CAP) event: ‘The most fundamental role the SEC must play with respect to climate and ESG is the provision of information – helping to ensure material information gets into the markets in a timely manner. Investors are demanding more and better information on climate and ESG, and that demand is not being met by the current voluntary framework.’

In her statement, she calls for commenters to submit empirical data and other information from respondents such as academics, data providers and other organizations. She also outlines questions in 15 areas for commenters to respond to, including:

  • ‘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? How are markets currently using quantified information?’
  • ‘What are the advantages and disadvantages of permitting investors, registrants and other industry participants to develop disclosure standards mutually agreed by them?’
  • ‘What are the advantages and disadvantages of establishing different climate change reporting standards for different industries, such as the financial sector, oil and gas, transportation, and so on?’
  • ‘What are the advantages and disadvantages of rules that incorporate or draw on existing frameworks, such as, for example, those developed by the [TCFD], [SASB] and the Climate Disclosure Standards Board?’
  • ‘How should any disclosure requirements be updated, improved, augmented or otherwise changed over time?’
  • ‘What is the best approach for requiring climate-related disclosures? For example, should any such disclosures be incorporated into existing rules such as Regulation SK or Regulation SX or should a new regulation devoted entirely to climate risks, opportunities and impacts be promulgated?’
  • ‘How, if at all, should registrants disclose their internal governance and oversight of climate-related issues? For example, what are the advantages and disadvantages of requiring disclosure concerning the connection between executive or employee compensation and climate change risks and impacts?’
  • ‘What are the advantages and disadvantages of a ‘comply or explain’ framework for climate change that would permit registrants to either comply with, or if they do not comply, explain why they have not complied with the disclosure rules?’
  • ‘Should climate-related requirements be one component of a broader ESG disclosure framework?’

Comments are due within 90 days.

The call for public input follows other steps taken by Lee across different agency divisions since becoming acting chair earlier this year. Last month she announced that she had directed the division of corporation finance to ‘enhance its focus on climate-related disclosure in public company filings.’

As part of its enhanced focus, the division will review the degree to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations, engage with public companies on these issues and learn how the market is managing climate-related risks. The division will use this process to begin updating the 2010 guidance, taking into account developments of the past 11 years, according to the announcement.

Then the SEC’s division of examinations on March 3 released its 2021 exam priorities, which include a greater focus on climate-related risks.

The following day, the agency announced the formation a climate and ESG task force within its enforcement division. The task force will ‘develop initiatives to proactively identify ESG-related misconduct’, according to the announcement. The initial priority is to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force will also look at disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.

Lee also believes the SEC should consider ESG disclosure issues beyond climate change. In her CAP speech on Monday she pointed to political spending disclosure.

‘The SEC is currently prevented from finalizing a rule in this area, but political spending disclosure is inextricably linked to ESG issues,’ she said. ‘Consider, for instance, research showing that many companies that have made carbon-neutral pledges, or otherwise state they support climate-friendly initiatives, have donated substantial sums to candidates with climate-voting records inconsistent with such assertions.’

She also noted that some companies made pledges to alter their political spending practices in response to racial justice protests and asked whether, without political spending disclosure requirements, investors can test these claims or would ‘have held corporate managers accountable for those risks before they materialized.’

Disclosure of companies’ political spending has become a high-profile issue, particularly since the riot in the US Capitol on January 6. Gary Gensler, President Joe Biden’s nominee to become the next SEC chair, was asked about the topic at a Senate hearing earlier this month. He noted that there have been requests for SEC action and said there was widespread support last proxy season for shareholder proposals on political spending disclosure. ‘It is something I think the SEC should consider in light of the strong investor interest,’ he told senators.

Similarly, when asked about diversity, Gensler said that at a broader level ‘human capital is a very important part of the value proposition in so many companies’ and that as SEC chair he would look at what investors want.