SEC’s Lee puts climate disclosure on the agenda

Mar 01, 2021
Agency to use review process to begin updating 2010 guidance

Acting SEC chair Allison Herren Lee has taken action on corporate reporting around climate change.

Lee last week issued a statement announcing that she has directed the division of corporation finance to ‘enhance its focus on climate-related disclosure in public company filings’, noting that the SEC in February 2010 issued guidance on existing disclosure requirements as they apply to climate change.

As part of its enhanced focus, the division will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations, engage with public companies on these issues and learn how the market is managing climate-related risks. The division will use this process to begin updating the 2010 guidance, taking into account developments of the past 11 years, according to the announcement.

‘Now more than ever, investors are considering climate-related issues when making their investment decisions,’ Lee states. ‘It is our responsibility to ensure they have access to material information when planning for their financial future. Ensuring compliance with the rules on the books and updating existing guidance are immediate steps the agency can take on the path to developing a more comprehensive framework that produces consistent, comparable and reliable climate-related disclosures.’

The decision to place climate-related disclosures on the SEC’s agenda has been anticipated. For example, Lee last year suggested the agency should help create standards for banks to release information about the climate-change risks associated with their decisions to finance companies and their activities.

She noted at the time the growing consensus that climate change may present a systemic risk to financial markets, and said there is a need for complete, accurate and reliable information in order to assess that risk, starting with public company disclosure and financial services company reporting.

‘Investors also need this information so they can protect their investments and drive capital toward meeting their goals of a sustainable economy,’ Lee added. ‘The bottom line is that businesses now actively compete for capital based on ESG performance, and that competition needs to be open, fair and transparent. This requires uniform, consistent and reliable disclosure.’

Although non-governmental efforts have made significant progress, a degree of regulatory involvement is required to achieve standardization and comparability, Lee said last year.

The new US administration has made the climate crisis a priority and governance professionals say that could lead to rules on corporate disclosures regarding climate risks. Investors are increasingly pressing companies to release such information and many are already doing so.

Law firm Linklaters says in a notice on the administration: ‘[President Joe] Biden will take action to require public companies to disclose climate risks and greenhouse gas emissions in their operations and supply chains. Former SEC chairman Jay Clayton took a principles-based approach to recent amendments to the SEC’s disclosure rules, generally avoiding mandating ESG disclosures. [But] it is expected that the SEC will institute broader rulemaking and guidance on the federal monitoring of ESG issues under the new administration.’

Any potential rulemaking around the issue would depend on the incoming permanent chair of the commission, with President Biden’s pick, former Commodity Futures Trading Commission chair Gary Gensler, awaiting Senate confirmation.

Clayton on disclosure

Separately this week, Clayton discussed his own views on disclosure and climate change. Speaking at the Funds Congress virtual conference, he described the transition over the coming years to a lower-carbon economy as similar in magnitude to the transition in recent decades to digitization, and one companies need to be discussing with their investors.

He and fellow panelist Mark Wiseman, former chair of BlackRock’s global investment committee, discussed the limitations of climate-related metrics. Wiseman said investors need both backward-looking metrics to assess companies’ progress in areas such as greenhouse gas emissions and forward-looking disclosures about companies’ plans to adapt and change. One problem, he noted, is that companies have not been given much guidance on how to do the latter and fear potential liability arising from disclosures that may turn out to be inaccurate.

Clayton said a safe harbor would be helpful to companies in this regard. Wiseman agreed: ‘Let’s put a legal framework around this. Let’s create that safe harbor that allows companies to provide what investors need today.’

Clayton does not believe agencies such as the SEC should have a role in policy beyond reporting. ‘My view is that securities regulators should not be involved in environmental policy,’ he said. But he added that they should be adapting disclosure requirements to reflect what is taking place with environmental policy set by lawmakers or bodies such as the Environmental Protection Agency.

Wiseman echoed these sentiments, saying that a role of securities regulators is in tackling disclosure requirements so that investors have the information they need to make informed decisions. As environmental policy changes, so will the information investors need, he told the online audience. This requires a framework robust enough to help investors continually adjust their allocation of capital, he added.

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