United States: Heat's On For Climate Change Disclosure Rules

A new rulemaking petition advocating that the SEC mandate environmental, social and governance disclosure under a standardized comprehensive framework has just been submitted by two academics and multiple institutional investors, representing over $5 trillion in assets. Not only is ESG disclosure material and relevant to understanding long-term risks, the petition contends, but the variety of approaches currently employed highlight the need for a more coherent standard that will provide clarity, completeness and comparability. In the past, concerns have been raised about whether uniform disclosure rules could really be effective for ESG. Can those concerns be overcome?

The petition contends that requiring ESG disclosure will "promote market efficiency, protect the competitive position of American public companies and the U.S. capital markets, and enhance capital formation." Further, the petition indicates, recent investment industry analyses confirm that much ESG information is financially material. In addition, companies often provide ESG information on a voluntary basis, but struggle to provide information that is adequate and useful for investors, often providing information that is "episodic, incomplete, incomparable, and inconsistent," even when included in SEC filings. Many stakeholders are requesting ESG information, including large asset managers such as BlackRock, which also militates in favor of action from the SEC. For example, the petition reports, investors with $68.4 trillion of capital have indicated that they are committed to incorporating ESG factors in their investing and voting decisions as part of the U.N. PRI. Because of demands from investors and the public, more and more companies have begun to disclose ESG information voluntarily. However, the variety of approaches adopted, along with the proliferation of voluntary disclosure frameworks, have led to inconsistency and lack of comparability. SEC rulemaking, they maintain, would reduce the burden on companies by providing clearer standards that offer more consistency and comparability for investors and other consumers of the information.

The SEC first addressed disclosure of material environmental issues in the early 1970s, and specific environmental disclosure requirements were not revisited by the SEC for decades. In 2010, however, the SEC did issue guidance on climate change disclosure, examining the application of existing rules in the context of climate change. (You might recall that the interpretive release was approved on a split vote at the SEC, with two commissioners voting against it for a variety of reasons, including that the science was "unsettled." See this Cooley News Brief.)

During her tenure, former SEC Chair Mary Jo White acknowledged that disclosure regarding sustainability could be tricky under the existing rules and guidance: "to the extent issues about sustainability are material to a company's financial condition or results of operations, they must be disclosed. But deciding whether such disclosures are triggered in a particular context is often easier said than done when trying to calibrate materiality to phenomena that have a longer term horizon than most other financial metrics do. And measuring whether and how a company will sustain its performance in a changing global physical and legal environment, which is itself uncertain, is not an easy undertaking." Moreover, the concept of ESG is itself broad, encompassing topics such as climate change, resource scarcity, corporate social responsibility and good corporate citizenship, any of which have the potential to impact financial performance, depending on the industry and the company.

In 2016, the SEC issued a Concept Release requesting comment on an enormous variety of potential changes to Reg S-K, including sustainability. (See this PubCo post.) As reported by BNA, then-Director of Corp Fin, Keith Higgins, reported that the highest proportion of comments received on the Reg S-K Concept Release related to better environmental and social responsibility disclosure. He observed that, of the 360 "unique" comment letters (i.e., non-form letters) received on the Concept Release, about 80% "were looking for improved sustainability disclosure." The problem, he recognized, was that those types of sustainability disclosures were not necessarily amenable to one-size-fits-all rulemaking. According to Higgins, "[c]limate change tops the list of issues...." However, he acknowledged, the issues involved in sustainability "cut across 79 different industries and aren't suited to a constant set of rules....'Everyone recognizes that one-size-fits-all disclosure is likely not to be so effective in the sustainability area—others recognize the enormity of that task.'" Nevertheless, many commenters wanted the SEC to at least come up with "a framework for sustainability disclosure." (See this PubCo post.)

As discussed in the petition, there have been numerous petitions submitted in the past requesting that the SEC promulgate rules requiring ESG-related disclosure (see, e.g., this PubCo post), but none led to any action by the SEC. Although demand for ESG disclosure has grown, will the SEC believe that it has reached an inflection point? In this relatively anti-regulatory political environment, what are the chances that this petition will be the one?

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