Letter from US: SEC looks towards mandatory ESG disclosure by companies

Another round of public comments will follow before a vote by commissioners to finalise new requirements.

The deadline for the public to submit comments was in mid-June, There was feedback ranging from calls for mandatory, annual ESG disclosures in annual reports, to claims that climate-related disclosures are politically charged and should be outside the scope of the SEC’s mission.

The new SEC chair, Gary Gensler, is in favour of mandatory disclosures. Speaking at the end of July in a webinar organised by the UN-backed Principles for Responsible Investment (PRI), he said: “Investors today are asking for the ability to compare companies with each other. Generally, I believe it’s with mandatory disclosures that investors can benefit from that consistency and comparability. When disclosures remain voluntary, it can lead to a wide range of inconsistent disclosures.” 

Most large public pension funds agree with that approach, among them CalSTRS and the New York State Common Retirement Fund.

These two funds joined 180 investors with assets approaching $2.7trn (€2.3trn) in June to sign a letter – co-ordinated by the sustainability nonprofit Ceres – calling on the SEC to require all corporations to disclose climate risk on an annual basis at minimum. 

“As the chief financial officers of two of the largest state economies and representatives of the nation’s largest public pension funds, we believe it is essential to address the financial impacts that climate change could pose to the economies, retirement systems and residents of our respective states,” California state controller Betty Yee and New York state comptroller Thomas DiNapoli wrote in a joint op-ed published on the Politco website. 

“Investors need material climate disclosures to make informed investment decisions but, for too long, our securities rules have led to incomplete and incomparable climate information, which is insufficient for protecting investors’ assets.”

Current SEC guidelines suggest that companies disclose both climate change physical risks – such as extreme weather events that can cause unexpected losses – as well as transition risks, which include government policies that force a move away from fossil fuels. 

But the guidance does not spell out specific, required disclosures, and companies decide on what to report. 

Energy lobby groups such as the US Oil and Gas Association (USOGA) and the Western Energy Alliance are strongly against a comprehensive ESG disclosure framework, which they wrote in a letter to the SEC, “would be yet another step into redefining the mission of the commission without Congressional authority” and would expand its “regulatory authority beyond investor protection and capital formation”.

The National Mining Association (NMA) also opposes the enactment of new rules: “The SEC shouldn’t create a one-size-fits-all, prescriptive, rules-based mandatory disclosure program given the breadth and scope of information already provided on a voluntary basis,” the NMA wrote in its submission to the SEC.

Two SEC commissioners vocally oppose Gensler’s philosophy. Hester Peirce issued a public statement in July urging the International Financial Reporting Standards Foundation “not to wade into sustainability standard-setting”. 

Doing so, she said, would “improperly equate sustainability standards with financial reporting standards” and pose the risk of misleading investors because “sustainability standard-setting is an inherently more subjective, less precise, less focused, more open-ended activity than financial accounting standard-setting”. 

The other commissioner is Elad Roisman who, speaking in June, emphasised the SEC’s challenges of “keeping focused on materiality” in ESG rule-making and acquiring and maintaining “the expertise to develop and oversee a disclosure regime that includes specifically ‘E’ and ‘S’ information”.

However, Commissioner Allison Herren Lee welcomed this year’s annual proxy season with its unprecedented support for climate-related proposals, as well as for racial equity, political spending and other ESG shareholder initiatives. She sees this as a trend that places greater responsibility on boards “to integrate climate and ESG into their decision-making, risk management, compensation, and corporate transparency initiatives”. Lee said this at the end of June in her keynote address at the 2021 Society for Corporate Governance National Conference.

Besides the SEC, other US institutions are busy working in the ESG regulatory space. Gwendolyn Williamson, partner at the law firm Perkins Coie, writing in the blog The Asset Management ADVocate, notes that the Department of Labor is implementing President Joe Biden’s executive order instructing the department “to protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk”. 

On Capitol Hill, legislators have before them a bill that would permit ERISA fiduciaries to consider ESG factors in managing retirement plans.