By Steve Soter

After just one day past the expiration date on a gallon of milk, I look (and sniff) skeptically before I eat my breakfast cereal. You might do the same thing as you hear more and more about environmental, social, and governance (ESG) reporting. Is the U.S. government really going to mandate ESG reporting?

Maybe a rundown on SEC activity in the ESG arena so far in 2021 will answer that question. The agency has been really, really active of late in regard to ESG—in both policy and practical action. A quick review ought to overcome any lingering doubts about how serious the SEC is about rigorous ESG disclosures.

Where there’s smoke, there’s fire

I’ve provided a timeline of that burst of activity at the bottom of this blog. Let’s also review the SEC’s year to date with ESG in more detail.

1) Disclosures. Without question, the single-biggest action in recent months was then-acting SEC Chair Allison Herren Lee seeking public comment and ordering staff to evaluate the agency’s ESG disclosure rules “with an eye toward...consistent, comparable, and reliable information on climate change.” At the time, issuers were still sifting through her statement three weeks earlier directing the Division of Corporation Finance (the folks you can thank for comment letters) to enhance their focus on climate-related disclosures and to update the 2010 SEC guidance on the topic.

Lee gave issuers and other market participants until June 13 to comment on a list of 15 fundamental questions that will shape ESG disclosure rule-making. As of this writing, dozens of comments have been filed. Among the questions they discuss are:

  • How can the SEC best regulate climate change disclosures?

  • Which specific climate risk information can be quantified and measured?

  • What are the pros and cons of the SEC’s using existing standards like those from the Task Force on Climate-Related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB), or Climate Disclosure Standards Board (CDSB)?

It’s impossible to overstate the significance of the table-setting on ESG disclosure rulemaking. Just two months into the Biden administration, the SEC made it clear there will be comprehensive disclosure rules for U.S. issuers. It’s just a question of direction. In fact, a presidential executive order requiring disclosures on climate-related financial risk was issued on May 20. At the same time, Treasury Secretary Janet Yellen is boldly carving out an ESG role for her agency that includes prodding financial markets to demand reliable disclosures and risk-mitigation plans.  

2) Examinations. Just to remind you they’re not twiddling thumbs until new disclosure rules arrive, the SEC listed a greater focus on climate-related risk first on its 2021 exam priorities. The Examinations Division this year will eye “proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans” where climate change risks are concerned, Lee promised.

Also, the division issued a risk alert that faulted some investors and funds for potentially misleading statements about ESG policies and how well they are followed, and weak procedures to implement those policies. (Spoiler alert: Greenwashed ESG disclosures are a bad move.)

Okay, point made. Issuers need to verify the reality of ESG assurances made in proxies and to expect tough questions about their planning for ESG risks.

3) Enforcement. Exams need the teeth of tough enforcement, and the SEC laid groundwork by creating a Climate and ESG Task force in the Enforcement Division. It will pull 22 members from various agency offices and units and use data-mining techniques to spot gaps or misstatements in disclosures and “proactively identify ESG-related misconduct.” (Spoiler alert, part two: It’s never good when the SEC proactively identifies your company.)

4) Public Statements. Undoubtedly this wasn’t planned, but in a politically divided government agency like the SEC, you know that one side is serious when the other starts to cry foul. Case in point, when two SEC officials issued strongly worded statements of caution—seemingly diametrically opposed—related to all this movement on ESG.

On one hand, you had acting Finance Division Director John Coates praising the virtues of a global ESG reporting framework and particularly pointing to the work of the International Financial Reporting Standards Foundation. On the other, you had Commissioner Hester M. Peirce questioning the benefits of unified global ESG disclosure performance metrics and reminding us that ESG factors are not easily comparable across all issuers and industries.

More recently, SEC Commissioner Allison Herren Lee delivered keynote remarks at the 2021 ESG Disclosure Priorities Event hosted by the American Institute of CPAs (AICPA), the Chartered Institute of Management Accountants (CIMA), SASB, and the Center for Audit Quality (CAQ). In her speech, she reminded us that investors are ultimately “the arbiters of materiality,” and they have been “overwhelmingly clear in their views that climate risk and other ESG matters are material to their investment and voting decisions.”

5) Appointments. The Senate confirmed Gary Gensler as new SEC chair; we’ve discussed the implications of his nomination on ESG regulation before. He will work with a newly appointed senior policy advisor for climate and ESG, Satyam Khanna.

How do you see the ESG discussion shaking out?

Buckle up for a coming era of emphasis on ESG disclosures, oversight and enforcement from the SEC like none we’ve seen before.

What direction do you think the SEC will take with ESG compliance, and do you welcome it? Join the conversation by commenting below.


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