With climate change at the forefront of investor’s minds these days, you might wonder what the top regulators are doing to ensure that such interests align with the duties of corporate boards. In March of this year, the Securities and Exchange Commission’s (“SEC”) Division of Examinations announced that one of its examination priorities will be to focus on climate-related risks. This is among a number of examination priorities published annually by the Division to provide greater insight into certain areas it believes might pose potential risks to investors and or harm the integrity of the U.S. capital markets. 

Because issues around environmental and social responsibility regarding climate change have moved from a fringe movement to the mainstream, the SEC has recently addressed the efficacy of “ESG” disclosures in a comprehensive manner. The acronym “ESG”  is shorthand for Environmental, Social or Governance concerns. It is also sometimes more popularly referred to as “Sustainability”. 

Acting Chair Allison Herrer Lee commented that “[t]his year, the Division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change.”  She went on the state that “[t]hrough these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework.”

The Director of that Division, Pete Driscoll, stated “Our priorities reflect the complicated, diverse, and evolving nature of the risks to investors and the markets, including climate and ESG.”

The history of the SEC’s involvement in climate related regulation dates back to 2010 when the Commission issued an interpretive release that provided guidance to issuers of securities regarding the way that existing disclosure requirements would apply to climate change disclosures. That release, which was titled “2010 Climate Change Guidance” provides that there are circumstances where certain disclosures about climate change-related risks and opportunities might be required. The Climate Change Guidance release outlined certain events such as legislation and regulations governing climate change, international accords, changes in market demand for goods or services, and physical risks associated with climate change could trigger disclosure requirements.

Beginning about a decade ago, investors started to demand that companies disclose information concerning the potential risks and impacts of climate change to their stock prices.  In response, the SEC addressed the questions raised about whether  climate change disclosures could effectively inform investors about the known material risks, and whether  they might achieve greater consistency in those disclosure. Finally, in May 2020, the SEC approved certain advisory committee recommendations which urged the Commission to update its reporting requirements in order to include material, decision-useful environmental, social, and governance, or ESG factors. 

Because there was no consistency to the manner in which ESG disclosures were being made, in December 2020, the ESG Subcommittee of the SEC Asset Management Advisory Committee published its preliminary recommendations urging the adoption of standards for corporate issuers in disclosing material ESG risks 

The SEC has asked for public comment on these disclosures. In doing this, in March 2021 the SEC published, for comment, a  list of 15 items of disclosure. These include the following questions seeking public feedback:

Questions for Consideration

1. 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?

2. 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?

3. 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.)?

4. 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?

5. 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)?[7] Are there any specific frameworks that the Commission should consider? If so, which frameworks and why?

6. 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?

7. 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?

8. 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?

9. 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?

10. 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?

11. 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?

12. 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?

13. 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?

14. 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?

15. 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?

ESG investing has become popular as socially conscious investors flock to these investments. Sometimes they perform as represented although the regulation in this area has been inconsistent. Sometimes they don’t.  Have you  lost money in an ESG investment due to the wrongdoing or negligence of a stock broker or investment advisor? Our investor fraud lawyers are here to help.

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