The Biden administration brought many changes to government, not the least of which is a determined focus on sustainability. That focus is evident at the SEC, where Acting Chair Allison Herren Lee is using her time as head of the agency to promote increased disclosure on topics across the ESG spectrum. In a recent speech, Ms. Herren Lee stated that “no single issue has been more pressing for me 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.” Gary Gensler, Biden’s nominee for SEC Chairman, apparently has similar priorities.
Right now, ESG disclosure is generally subject only to the general concept of “materiality.” In other words, disclosure is required with respect to information a reasonable investor would consider material. Companies have largely been free to determine what topics to address, the format for disclosing information, and the amount of detail to provide. The result has been disclosure in a variety of vehicles (such as websites, CSR reports, and dedicated sections in proxies and annual reports) utilizing an assortment of reporting frameworks—or no framework at all. Many are unhappy with this arrangement. Companies that want to be transparent are responding to inconsistent information demands, and investors don’t have a convenient way to compare issuers. That could be about to change.
Let’s consider the recent landscape.
- In 2020, subcommittees of the SEC’s Investor Advisory Committee and Asset Management Advisory Committee urged the SEC to mandate specific types and formats of ESG disclosure.
- In early 2021, Ms. Herren Lee took a series of actions, including hiring the SEC’s first senior policy advisor for climate and ESG, directing the Division of Corporation Finance to focus on disclosures about ESG and related risks, and issuing a detailed request for public comment about climate change disclosure. Although climate is the most pressing priority, she envisions a “comprehensive ESG disclosure framework” that covers other issues.
- In a March 2021 speech, John Coates, the Acting Director of the Division of Corporation Finance, said, “The SEC should help lead the creation of an effective ESG disclosure system.”
- And, just so nobody misses the point, there’s a new page on the SEC website, prominently-linked from the home page, to consolidate the SEC Response to Climate and ESG Risks and Opportunities.
It seems clear that the SEC will issue either a mandate or guidance (or both) aimed at standardizing disclosure on at least a few topics—with climate, diversity, and political spending at the top of the list. Companies that don’t currently report on these issues should prepare now. That means:
- identifying the data that would be most material to the company and useful to the market,
- selecting appropriate metrics and setting goals,
- ensuring you have a good system for collecting information throughout your supply chain,
- choosing a reporting framework and format for your disclosure, and
- monitoring emerging issues.