Potential Federal Regulation of ESG Disclosure: A Whirlwind of Activity

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While we have seen an increased focus on environmental, social and governance (ESG) disclosure the last few years, there has been a whirlwind of activity during the last six months by President Biden, Congress and the Securities and Exchange Commission (SEC) in this regard.

In March 2021, the SEC’s 2021 Examination Priorities Report included ESG-related matters. The same month the SEC also announced the creation of the Climate and ESG Task Force within the Division of Enforcement to focus on climate-related disclosure by U.S. public companies under existing rules and issued a public statement considering far-reaching changes to the SEC’s existing disclosure rules regarding climate change (public comments were due by June 13, 2021).

In April, President Biden announced a new target for the United States to achieve a 50-52% reduction from 2005 levels in economy-wide net greenhouse gas pollution in 2030 to help “tackle the climate crisis.” In May 2021, SEC Chairman Gensler confirmed the Staff was working on recommendations for proposed rules regarding issuer disclosure of climate-related risks and human capital alongside President Biden’s May 2021 Executive Order on Climate-Related Financial Risk.  Among other things, the Executive Order contemplates a government-wide strategy to mitigate climate-related financial risk and calls for assessment of risks that climate change presents to the financial system.

Details of the ESG Bill

Most recently, on June 16, 2021, the U.S. House of Representatives voted (215-214) to pass the ESG Disclosure Simplification Act of 2021 (H. R. 1187) (ESG Bill).  If ultimately signed into law, the ESG Bill would, among other matters:

  • Direct the SEC to establish the Sustainable Finance Advisory Committee and within 180 days of its first meeting, recommend to the SEC which “ESG metrics” issuers should be required to disclose in their public filings.
  • Require the SEC to define “ESG metrics” within the federal securities laws to guide registrants in required corporate ESG disclosures.
  • Require issuers to disclose these ESG metrics within their audited financial statements.
  • Require issuers to disclose within their proxy and consent solicitation materials (1) “a clear description of the views of the issuer about the link between ESG metrics and the long-term business strategy of the issuer; and (2) a description of any process the issuer uses to determine the impact of ESG metrics on the long-term business strategy of the issuer.”
  • Permit the SEC to incorporate internationally recognized, independent, multi-stakeholder ESG disclosure standards.
  • Permit the SEC to implement a phased approach for implementing the ESG disclosure requirements for “small issuers” (criteria to be determined by the SEC).

It is uncertain whether the Senate will approve the ESG Bill.  If ultimately signed into law, the ESG Bill will represent significant legislation in the ESG space and help provide clarity for required ESG disclosure by registrants.

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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