Erasing the Distinction Between What’s Good and What’s Profitable: The SEC’s Increased Focus on Climate and ESG

On March 22, 2021, the SEC launched a new page on its website to collect agency actions and resources about climate and environmental, social, and governance (ESG) issues in investing. This is the latest in a series of initiatives by the Commission signaling that climate and ESG disclosures—that is, the information asset managers and public companies provide to investors about their ESG-related risks and opportunities—will take center stage as the Commission adapts to the priorities of the Biden administration. Investors increasingly look to a company’s ESG impact or whether a fund follows ESG criteria to inform their investing decisions. Similarly, many younger consumers rely upon ESG factors to guide their purchasing choices. The lack of a standardized ESG framework makes it difficult for investors and other stakeholders to make “apples to apples” evaluations of a company’s or fund’s ESG practices.

Acting Chair Allison Herren Lee heralded the SEC’s new approach to climate and ESG in a speech on March 15 to the Center for American Progress. Lee emphasized that investor demand for more transparency into climate and ESG issues is not being met by the current regulatory framework, and she outlined the steps the SEC is taking to address this perceived gap. First, Lee emphasized the need for a “comprehensive ESG disclosure framework” to ensure that investors receive consistent and reliable information on climate and ESG. In the near term, this means revisiting the existing climate change guidance, which was issued in 2010, with an eye toward developing an updated set of disclosure rules. To assist in this effort, Lee called for input from market participants on the effectiveness of the current disclosure system, and how it should be modified.

In conjunction with re-evaluating the disclosure requirements, the SEC has signaled that climate and ESG are priorities for both the Examination and Enforcement Divisions. The Examination Division ranked climate and ESG as top priorities in its annual report and the SEC recently announced the creation of a “Climate and ESG Task Force” within the Enforcement Division. The task force’s mandate includes proactively identifying ESG-related misconduct, including “any material gaps or misstatements in issuers’ disclosure of climate risks under the existing rules.”  It is unclear whether the SEC will develop new rules specifically tailored to climate and ESG issues or seek to enforce climate disclosures by relying on the existing tools in its arsenal. Either way, it is clear that climate and ESG disclosures will face increased scrutiny and likely be a focus of exams and enforcement actions.

This is just the beginning of what promises to be significant change to climate and ESG disclosure requirements. Market participants can expect updated (and likely mandatory) disclosure requirements and new rulemaking efforts related to climate and ESG and should pay close attention to this changing regulatory landscape to make sure they are up to date on their disclosure obligations and level of exposure. 

Ariella E. Muller

Ariella E. Muller
Email | +1 212.746.8658

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