ESG, SEC and the World Around Us

Bass, Berry & Sims PLC

Bass, Berry & Sims PLC

We’ve seen the many efforts by the Securities and Exchange Commission (SEC) to regulate environmental, social and governance (ESG) disclosure on the domestic front (see here for our blog post that summarizes recent activity).  Alongside these efforts, the SEC has not overlooked support for global ESG standards to address this global matter.

Earlier this year, then-acting SEC Corporation Finance Director John Coates (and as of June 21, 2021, SEC General Counsel) expressed interest in developing global ESG disclosure standards, stating that the SEC “should help lead the creation of an effective ESG disclosure system.”

The rationale for a global standard was simple – in his words:

ESG issues are global issues. ESG problems are global problems that need global solutions for our global markets. It would be unhelpful for multiple standards to apply to the same risks faced by the same companies that happen to raise capital or operate in multiple markets.

In particular, Coates showed support for the work of the International Financial Reporting Standards (IFRS) Foundation to establish a sustainability standards board. The IFRS Foundation is an international nonprofit organization that has been steadily working on creating global sustainability reporting standards.

IOSCO’s Support

The International Organization of Securities Commissions (IOSCO) is also looking to IFRS to play this role.  In February 2021, IOSCO issued a public statement in support of IFRS’s work.  IOSCO’s members include 34 international securities regulators, including the SEC and the Commodity Futures Trading Commission (CFTC).  In its statement, IOSCO said that it “sees an urgent need for globally consistent, comparable, and reliable sustainability disclosure standards and announces its priorities and vision for a Sustainability Standards Board under the IFRS Foundation.”

Building Upon Existing Standard-Setters

The IFRS Foundation will take into consideration the work of existing standard-setters, including a prototype proposed last December by the alliance of five standard-setters as a potential basis for the new board to develop climate-related reporting standards. (See our blog post discussing the prototype by the five standard-setters here.)

Recent Progress

The IFRS trustees have been hard at work.  In April 2021, they published two documents related to this project.  The first is a Feedback Statement that summarizes important matters raised by respondents to the Consultation Paper on Sustainability Reporting. The second is an Exposure Draft that highlights proposed amendments to the IFRS Foundation Constitution.  The proposed amendments would facilitate an International Sustainability Standards Board (ISSB) to establish IFRS sustainability standards and are open for comment until July 29 of this year.

By September 2021, the IFRS Foundation plans to release its definitive proposal, with a roadmap and timeline regarding its decision to create a sustainable standards board alongside the International Accounting Standards Board, IFRS Foundation’s accounting standard-setting body. The trustees of IFRS Foundation intend to make a final decision about a new sustainable standards board in advance of the United Nations Climate Change COP26 conference in November 2021. In addition, the World Economic Forum (creators of the Stakeholder Capitalism Metrics), also formally submitted a letter of support for IFRS to play the role of standardization in the ESG space.

SEC’s Mandate versus International Standards

While support for an official globalized framework is clear, it is important to remember the distinction between the SEC’s mandate in this regard and that of international ESG disclosure frameworks.  As Commissioner Elad Roisman pointed out last month, the SEC does not necessarily have the legislative mandate to make rules for the U.S. financial markets to further the same societal objectives of international ESG disclosure frameworks.  If Congress wishes to follow this approach, it may.  In fact, in June 2021, the U.S. House of Representatives voted to pass the ESG Disclosure Simplification Act of 2021 (H. R. 1187) (ESG Bill).  If ultimately signed into law, the ESG Bill would permit the SEC to incorporate internationally recognized, independent, multi-stakeholder ESG disclosure standards (see here for our blog post that summarizes the ESG Bill).

However, Commissioner Roisman pointed out that as of now, the SEC should look at ESG disclosure matters through its three-part mission and assess how the types of information under thesedisclosure standards are material to investors.  He encourages a thoughtful approach when the SEC considers what to require in its own ESG rules – not just copying the requirements of the international standards, given the different mandates, without consideration about how those requirements would further its mission and mandate.

Alongside the focus of regulating ESG-related disclosure amongst public companies under U.S. federal securities law, much progress is underway to provide an official globalized framework.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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