Potential New Corporate Disclosure Requirements of ESG Activities

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

[co-author: Jordan Zornes]

The United States Securities and Exchange Commission (“SEC”) has proposed enhancing the rules that require corporate disclosures of Environmental, Social and Governance (“ESG”) related activities as part of its Annual Regulatory Agenda. SEC Commissioner Allison Herren Lee has spoken at least twice on this topic in the last two months, indicating that it is only a matter of time until the SEC requires heightened ESG disclosures.[1]

Historically, SEC disclosure requirements have been based on the “materiality” of the disclosure as it relates to “reasonable investors.”[2] Commissioner Lee appears to favor a broad definition of materiality, for which SEC Chair Gary Gensler has also signaled support.[3] Commissioner Lee suggests that SEC disclosure requirements need not be strictly limited to material information.[4] She references related party transactions, environmental proceedings, and share buybacks as disclosures that are required without reference to their materiality. Commissioner Lee also cites an overwhelming interest that investors have shown in ESG topics through shareholder support for climate proposals during the recent proxy season.[5] Chair Gensler said that he has received over 400 comment letters on ESG issues.[6]

In March, the SEC announced the creation of the ESG Task Force within the Division of Enforcement, which will attempt to identify ESG-related misconduct. Although the SEC already requires human capital disclosures, many companies did not provide this information on their most recent annual reports.[7] As such, the SEC likely will push for increased human capital reporting, in addition to other ESG-related disclosures. Chair Gensler and Commissioner Lee have voiced their desires for more consistent and standard ESG disclosures that would apply to a wider range of companies.[8]

On July 7, 2021, Chair Gensler, speaking before the Asset Management Advisory Committee, said that “investors should be able to drill down to see what’s under the hood” of asset management funds.[9] Chair Gensler alluded to a “holistic” approach to funds’ naming conventions and the sustainability terms used, like “green” and “sustainable.” This parallels Commissioner Lee’s February 2021 directive, citing investor interest in the matter, for “the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings.”[10] Along with these likely focus points, Commissioner Lee has mentioned the concept of tying corporate executives’ compensation to ESG metrics.[11]

Chair Gensler’s July 7th remarks emphasized diversity and inclusion, and focused on the underrepresentation of diverse candidates at the board and senior management levels within asset management firms. To effect change in this arena, Chair Gensler discussed requiring “disclosure of aggregated demographic information about an adviser’s employees and owners,” as well as the funds’ “inclusion practices” in selecting other advisers.

Increased corporate disclosures relating to ESG are a matter of “when” not “if.” Nelson Mullins is here to aid companies and executives in navigating this increasingly important and changing environment.

[1] Infra notes 4-5.

[2] See Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988) (quoting TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).

[3] Chris Matthews, Gary Gensler signals support for climate, workforce diversity disclosure requirements in confirmation hearings, MarketWatch (Mar. 2, 2021, 2:21 PM), https://www.marketwatch.com/story/gary-gensler-signals-support-for-climate-workforce-diversity-disclosure-requirements-in-confirmation-hearings-11614703374.

[4] Allison Herren Lee, Commissioner, Sec. & Exch. Comm’n, Living in a Material World: Myths and Misconceptions about “Materiality” (May 24, 2021), https://www.sec.gov/news/speech/lee-living-material-world-052421 (Myth 3: SEC disclosure requirements must be strictly limited to material information.).

[5] Allison Herren Lee, Commissioner, Sec. & Exch. Comm’n, Climate, ESG, and the Board of Directors: “You Cannot Direct the Wind, But You Can Adjust Your Sails” (Jun. 28, 2021), https://www.sec.gov/news/speech/lee-climate-esg-board-of-directors (citing that “98 percent of General Electric shareholders approved a resolution asking the company to explain how it intends to achieve net zero emissions in accordance with the Paris Agreement. At ConocoPhillips, further 58 percent of shareholders approved a measure requesting Scope 3 emissions reductions. Sixty-five percent of shareholders at United Airlines voted in favor of a resolution seeking more information on how the company’s corporate lobbying aligns with the goals of the Paris Agreement.”).

[6] Bob Pisani, SEC Chair Gensler is taking a deeper look at ESG investing issues, CNBC (Jun. 23, 2021), https://www.msn.com/en-us/money/markets/sec-chair-gensler-is-taking-a-deeper-look-at-esg-investing-issues/ar-AALm23M?ocid=uxbndlbing

[7] PricewaterhouseCoopers, New human capital disclosure rules: Getting your company ready, Viewpoint, https://viewpoint.pwc.com/dt/us/en/pwc/in_the_loop/in_the_loop_US/New-human-capital-disclosure-rules-Getting-your-company-ready.html (last visited Jul. 14, 2021).

[8] Celia Soehner & G. Jeffrey Boujoukos, ESG disclosures and traps for the unwary – what’s workable?, Reuters, (Jun. 30, 2021 11:57 AM), https://www.reuters.com/legal/legalindustry/esg-disclosures-traps-unwary-whats-workable-2021-06-30/.

[9] Gary Gensler, Chairman, Sec. & Exch. Comm’n, Prepared Remarks Before the Asset Management Advisory Committee (Jul. 7, 2021), https://www.sec.gov/news/public-statement/gensler-amac-2021-07-07.

[10] Allison Herren Lee, Acting Chairwoman, Sec. & Exch. Comm’n, Statement on the Review of Climate-Related Disclosure (Feb. 24, 2021), https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-disclosure.

[11] Al Barbarino, SEC Commissioner Says Exec. Comp Should Be Tied to ESG, Law 360 (Jun 29, 2021 8:45 PM), https://www.law360.com/assetmanagement/articles/1398383?utm_source=shared-articles&utm_medium=email&utm_campaign=shared-articles.

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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