In a series of recent public statements and announcements, the U.S. Securities and Exchange Commission (SEC) has signaled that climate change disclosures will be front and center on its agenda.
These announcements come as Gary Gensler, President Biden’s nominee for Chairman of the SEC, awaits confirmation from the U.S. Senate. Mr. Gensler’s confirmation appears imminent following the vote, on March 10, 2021, by the Senate Banking Committee to send his nomination to the full Senate for approval.
With Mr. Gensler’s confirmation pending, the SEC is being led by Acting Chair Allison Herren Lee, a consistent advocate of more robust climate change disclosure requirements. On March 15, 2021, in a speech at the Center for American Progress, Acting Chair Lee stated that “no single issue has been more pressing for [her] than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy.” In her speech, Acting Chair Lee summarized many of the recent steps that the SEC has begun taking “toward a comprehensive ESG disclosure framework aimed at producing consistent, comparable, and reliable data that investors need.” These steps include, among others:
- Division of Corporation Finance – Enhanced Focus on Climate-Related Disclosure. On February 24, Acting Chair Lee issued a public statement directing the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. This enhanced focus will include, among other things, a review of the extent to which public companies are addressing the topics identified in the SEC’s 2010 interpretive guidance regarding disclosure related to climate change (referred to as the 2010 guidance), and staff engagement with public companies on these issues, with a view to begin updating the 2010 guidance.
- Request for Public Comment on and Staff Evaluation of Climate Change Disclosure. On March 15, Acting Chair Lee issued a public statement soliciting public input on climate change disclosure including, among other things, input on the applicability of existing rules and guidance to climate change disclosure and whether and how these existing rules should be modified, as well as potential new disclosure requirements or frameworks that the SEC might adopt.In her statement, Acting Chair Lee discussed the 2010 guidance, which includes a reminder that information related to climate change risks and opportunities may, depending on the circumstances, be required in disclosures related to the description of the business, legal proceedings, risk factors, or MD&A (including, in particular, relating to known trends and uncertainties). The 2010 guidance also outlines several climate-related topics that may trigger disclosures under these disclosure rules, such as the impacts of federal and state legislation relating to climate change, international accords, indirect consequences of regulation or business trends, and the physical impacts of climate change. Acting Chair Lee also cited recent recommendations by the SEC Investor Advisory Committee and the ESG Subcommittee of the SEC Asset Management Advisory Committee for ESG-related disclosure standards.Acting Chair Lee stated that she is “asking the staff to evaluate [the SEC’s] disclosure rules with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change.” As part of these efforts, the statement includes a list of wide-ranging questions for consideration, from asking whether SEC rules should address private companies’ climate disclosures to asking whether and how climate risks should be quantified and measured. This list of questions is reproduced as an Annex to this alert.
- Division of Examinations 2021 Priorities – Climate and ESG Related Matters. On March 3, the SEC’s Division of Examinations (previously called the Office of Compliance and Inspections) announced its 2021 examination priorities, including “a greater focus on climate-related risks.” In particular, as part of its priorities relating to information security and operational resiliency, the Division of Examinations stated that it will, among other things, focus on whether “systemically important registrants” have business continuity plans in place that “account for the growing physical and other relevant risks associated with climate change.” In addition, noting that registered investment advisers (RIAs) “are increasingly offering investment strategies that focus on sustainability,” the Division of Examinations stated that it will review the consistency and adequacy of the disclosures made by RIAs to clients relating to these strategies and products (such as open-end funds and ETFs), and will “determine whether the firms’ processes and practices match their disclosures, review fund advertising for false or misleading statements, and review proxy voting policies and procedures and votes to assess whether they align with the strategies.”
- Division of Enforcement – Climate and ESG Task Force. On March 4, the SEC announced the creation of a Climate and ESG Task Force in its Division of Enforcement, which will be tasked with developing “initiatives to proactively identify ESG-related misconduct.” As part of its initial focus, the announcement stated that the task force will “identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules[,]” and will “also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”
- Domestic Sustainability Standard-Setter. In her March 15 speech, Acting Chair Lee noted that “[o]ne of the most challenging questions for the SEC is how to devise a climate and ESG disclosure framework that is flexible and can efficiently evolve as needed.” She stated that the SEC should consider “the development of a dedicated standard setter for ESG (similar to FASB) under SEC oversight to devise an ESG reporting framework that would complement [the SEC’s] financial reporting framework.”On March 11, John Coates, the Acting Director of the Division of Corporation Finance, issued a public statement in connection with public remarks made at the 33rd Annual Tulane Corporate Law Institute, titled ESG Disclosure—Keeping Pace with Developments Affecting Investors, Public Companies and the Capital Markets, discussing similar sentiments relating to the need for a flexible and adaptable approach to ESG disclosure. Acting Director Coates discussed various considerations relating to the regulation of ESG disclosure, stating that the SEC “can and should continue to adapt existing rules and standards to the realities of climate risk” and “that investors increasingly are asking for ESG information to help them make informed investment and voting decisions.” His statement also highlighted some of the issues related to creating an effective ESG disclosure system, including, among other things, the role of the SEC in helping lead the creation of this disclosure system, the need for thoughtful engagement by relevant constituencies, including specialists, investors and companies, and the benefits of establishing a single global ESG reporting framework.
In response to this flurry of announcements, on March 4, Commissioners Hester Peirce and Elad Roisman issued a joint statement contextualizing the recent announcements, and querying whether these announcements represent a change from current SEC practices or a continuation of the status quo. They note that irrespective of the recent announcements, 1) staff in the SEC’s Division of Corporation Finance “has been reviewing companies’ disclosures, assessing their compliance with disclosure requirements under the federal securities laws, and engaging with them on climate change and a variety of issues that fall under the ESG umbrella, for decades” and 2) the SEC’s Division of Enforcement has been and “will continue to identify, investigate, and bring actions against those who violate [the SEC’s] laws and rules,” some of whom “might be public companies or advisers whose climate- or ESG-related statements are false or misleading[.]” Commissioners Peirce and Roisman assume that these new initiatives are a continuation of the status quo rather than an attempt to set any new disclosure or enforcement standards without SEC action, noting that “these new climate-related announcements raise more questions than they answer[.]”
What to Do Now?
Given the number of recent public announcements from the SEC, as well as Acting Chair Lee’s continued support for an ESG (and, in particular, climate-related) disclosure framework that provides “consistent, comparable, and reliable data,” we would expect the SEC, under this new administration, to focus efforts on proposed disclosure rules relating to climate change. While the staff evaluates the current disclosure rules and any potential new disclosure rules or frameworks relating to climate change disclosure, companies should review anew the entirety of the 2010 guidance and be ready for future SEC guidance and rulemaking.
In addition, interested persons should submit comments on climate change disclosure in response to Acting Chair Lee’s call for public comment. The statement asks that comments be submitted within 90 days (or by June 13) via email or webform.
- 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? Where and how should such disclosures be provided? Should any such disclosures be included in annual reports, other periodic filings, or otherwise be furnished?
- What information related to climate risks can be quantified and measured? How are markets currently using quantified information? 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)? What quantified and measured information or metrics should be disclosed because it may be material to an investment or voting decision? Should disclosures be tiered or scaled based on the size and/or type of registrant)? If so, how? Should disclosures be phased in over time? If so, how? How are markets evaluating and pricing externalities of contributions to climate change? Do climate change related impacts affect the cost of capital, and if so, how and in what ways? How have registrants or investors analyzed risks and costs associated with climate change? What are registrants doing internally to evaluate or project climate scenarios, and what information from or about such internal evaluations should be disclosed to investors to inform investment and voting decisions? How does the absence or presence of robust carbon markets impact firms’ analysis of the risks and costs associated with climate change?
- What are the advantages and disadvantages of permitting investors, registrants, and other industry participants to develop disclosure standards mutually agreed by them? Should those standards satisfy minimum disclosure requirements established by the Commission? How should such a system work? What minimum disclosure requirements should the Commission establish if it were to allow industry-led disclosure standards? What level of granularity should be used to define industries (e.g., two-digit SIC, four-digit SIC, etc.)?
- 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, etc.? How should any such industry-focused standards be developed and implemented?
- What are the advantages and disadvantages of rules that incorporate or draw on existing frameworks, such as, for example, those developed by the Task Force on Climate-Related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), and the Climate Disclosure Standards Board (CDSB)? Are there any specific frameworks that the Commission should consider? If so, which frameworks and why?
- How should any disclosure requirements be updated, improved, augmented, or otherwise changed over time? Should the Commission itself carry out these tasks, or should it adopt or identify criteria for identifying other organization(s) to do so? If the latter, what organization(s) should be responsible for doing so, and what role should the Commission play in governance or funding? Should the Commission designate a climate or ESG disclosure standard setter? If so, what should the characteristics of such a standard setter be? Is there an existing climate disclosure standard setter that the Commission should consider?
- What is the best approach for requiring climate-related disclosures? For example, should any such disclosures be incorporated into existing rules such as Regulation S-K or Regulation S-X, or should a new regulation devoted entirely to climate risks, opportunities, and impacts be promulgated? Should any such disclosures be filed with or furnished to the Commission?
- 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 developing a single set of global standards applicable to companies around the world, including registrants under the Commission’s rules, versus multiple standard setters and standards? If there were to be a single standard setter and set of standards, which one should it be? What are the advantages and disadvantages of establishing a minimum global set of standards as a baseline that individual jurisdictions could build on versus a comprehensive set of standards? If there are multiple standard setters, how can standards be aligned to enhance comparability and reliability? What should be the interaction between any global standard and Commission requirements? If the Commission were to endorse or incorporate a global standard, what are the advantages and disadvantages of having mandatory compliance?
- How should disclosures under any such standards be enforced or assessed? For example, what are the advantages and disadvantages of making disclosures subject to audit or another form of assurance? If there is an audit or assurance process or requirement, what organization(s) should perform such tasks? What relationship should the Commission or other existing bodies have to such tasks? What assurance framework should the Commission consider requiring or permitting?
- Should the Commission consider other measures to ensure the reliability of climate-related disclosures? Should the Commission, for example, consider whether management’s annual report on internal control over financial reporting and related requirements should be updated to ensure sufficient analysis of controls around climate reporting? Should the Commission consider requiring a certification by the CEO, CFO, or other corporate officer relating to climate disclosures?
- 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? How should this work? Should “comply or explain” apply to all climate change disclosures or just select ones, and why?
- How should the Commission craft rules that elicit meaningful discussion of the registrant’s views on its climate-related risks and opportunities? What are the advantages and disadvantages of requiring disclosed metrics to be accompanied with a sustainability disclosure and analysis section similar to the current Management’s Discussion and Analysis of Financial Condition and Results of Operations?
- What climate-related information is available with respect to private companies, and how should the Commission’s rules address private companies’ climate disclosures, such as through exempt offerings, or its oversight of certain investment advisers and funds?
- In addition to climate-related disclosure, the staff is evaluating a range of disclosure issues under the heading of environmental, social, and governance, or ESG, matters. Should climate-related requirements be one component of a broader ESG disclosure framework? How should the Commission craft climate-related disclosure requirements that would complement a broader ESG disclosure standard? How do climate-related disclosure issues relate to the broader spectrum of ESG disclosure issues?
 In August 2020, then-Commissioner Lee issued a public statement in dissent of the final amendments to Items 101, 103, and 105 of Regulation S-K stating that the final rule “is silent on two critical subjects: diversity and climate risk disclosures,” and noting that the adopting release did not “include even a discussion of climate risk…despite significant comment on the subject.” Commissioner Crenshaw issued her own public statement in dissent of the final amendments echoing Commissioner Lee’s concerns about the final rule’s failure to address climate change risk and human capital, and recommending that the Commission form both an internal task force to study how investors are using climate and other environmental, social, and governance (ESG) disclosures to assess the long term performance of companies, and an external ESG advisory committee to provide advice and guidance on ESG trends and disclosures. In November 2020, Commissioners Lee and Crenshaw issued a joint statement in dissent of the final amendments to Items 301, 302, and 303 of Regulation S-K citing, among other things, the failure of the final amendments to address climate risk disclosure. In addition, on February 1, 2021, the SEC announced that Satyam Khanna was named as Senior Policy Advisor for Climate and ESG, a new role housed in the office of Acting Chair Lee.
This post comes to us from Wilson Sonsini Goodrich & Rosati. It is based on the firm’s client alert,“Climate Change Disclosures High on SEC’s Agenda,” dated March 17, 2021, and available here.