In her Thursday, November 5 speech before PLI’s 52nd Annual Institute on Securities Regulation, Commissioner Allison Herren Lee built on her prior statements1 to clearly stress her view that the Securities and Exchange Commission (the “SEC”) needs to address climate change. The Commissioner called for the SEC to quickly and thoughtfully solicit engagement from all market participants, and use the expertise of third parties, such as the Task Force on Climate-Related Financial Disclosure (“TCFD”), to move forward with climate change rule-making and related initiatives. While Commissioner Lee has previously expressed her view that the SEC should engage on climate change, her November 5 speech is a fervent plea to address climate change as the threat of our age.
In summary, Commissioner Lee made the following points in her November 5 speech:
- The COVID-19 pandemic has taught us that serious risks that we can understand intellectually, but have not previously experienced, can actually result in events that impact our day-to-day lives.
- Climate change presents a systemic risk to the financial markets of a scope, magnitude, and complexity that is difficult — if not impossible — to fully comprehend. In part, this is because climate change risks are currently underpriced, which may result in shocks to the financial systems “triggered by massive climate-related events or significant changes in legal requirements that can render assets and even business models obsolete in a very short timeframe.”
- The risks climate change poses to the financial system present a potential “green swan” event — a colossal and potentially irreversible shock that is unpredictable because these risks are unique in their scope, breadth, and complexity.
- Policy requires reliable data, and reliable data in the environmental, social and governance (“ESG”) space requires uniform, consistent and reliable disclosure. Commissioner Lee stressed the need for disclosure by those who finance issuers, including, but not limited to, the banks that finance carbon-producing activities, and stated that the SEC “should work with market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks, including not just direct, but also indirect, greenhouse gas emissions associated with the financing they provide, referred to as Scope 3 emissions.”
- Beyond disclosures from companies and those who finance them, Commissioner Lee noted that funds and their advisers, credit rating agencies, and financial accounting firms also warrant the SEC’s attention with respect to climate and other ESG factors.
While the SEC has historically been reluctant to address ESG matters, including climate change, in regulation or prescriptive guidance, with regulators like Commissioner Lee taking a strong position, increasing pressure from market participants, and the examples of EU and UK regulation to lead the way, it is possibly only a matter of time before the SEC takes up the topic in a meaningful and substantive way.
That being said, there is clearly a split within the Commission — while Commissioner Lee has repeatedly called for the SEC to address climate change, Chairman Jay Clayton has expressed a willingness to engage on the topic, but a reluctance to issue climate change disclosure requirements, at least in the near term,2 and Commissioner Elad L. Roisman has expressed serious reservations about imposing prescriptive ESG requirements.3
As a reminder, the SEC Asset Management Advisory Committee’s ESG subcommittee announced in September 2020 that it would be meeting with investors and issuers in the fourth quarter to better understand the uses of issuer ESG disclosure and the costs of producing it. With Chairman Clayton announcing last week that he will step down at the end of the year, the Biden Administration will have the opportunity to appoint a new SEC Chairperson. This change raises the probability that the Commissioners will take up the recommendations of the ESG subcommittee and create new guidance or regulations that will govern ESG disclosures.
1 Other statements by Commissioner Lee include “‘Modernizing’ Regulation S-K: Ignoring the Elephant in the Room” (SEC Public Statement, Jan. 30, 2020) (avail. here); “Regulation S-K and ESG Disclosures: An Unsustainable Silence” (SEC Public Statement, Aug. 26, 2020) (avail. here); and “Big Business’s Undisclosed Climate Crisis Plans” (New York Times Opinion, Sept. 27, 2020) (avail. here).
2 “Modernization Initiatives; Impact of the Coronavirus; Environmental and Climate-Related Disclosure” (SEC Public Statement, Jan. 30, 2020) (avail. here).
3 “Keynote Speech at the Society for Corporate Governance National Conference” (SEC Speeches, July 7, 2020) (avail. here).
