The Investor Advisory Committee of the U.S. Securities and Exchange Commission ("SEC") recently recommended that the SEC promulgate specific disclosure policies regarding environmental, social, and governance ("ESG") topics and incorporate them into the integrated disclosure regime for SEC-registered issuers. Under current SEC regulations and guidance, the disclosure of ESG issues is required only if "material"―meaning that information regarding an ESG issue is required to be disclosed only if it would be viewed as significantly altering the "total mix" of information available for investors―which offers flexibility to issuers but has resulted in disparate ESG disclosures that may frustrate comparison among issuers and confound investors. Because some investors and other parties are seeking increased information and disclosure on ESG topics, certain stakeholders have pressed the SEC in recent years to adopt regulations or interpretations to harmonize ESG disclosure. To date, the SEC has not adopted ESG-specific guidelines.
Non-U.S. regulators have been quicker to integrate ESG into their legal reporting regimes, with the European Union and its Member States being particularly active in the area. However, issuers in the United States have resorted to a market-based approach, often referencing disclosure frameworks established by non-governmental entities to establish their ESG disclosure frameworks. While lauded by some, the competing ESG standards that have been developed are inconsistent, offer no legally mandated guidance or safe harbors to issuers, and may encourage greenwashing.
Notwithstanding its policy to regulate ESG disclosure through existing standards, the SEC has launched an initiative to scrutinize investment products' ESG investing strategies. Of course, inconsistent ESG disclosure comes with significant risks, including potential liability under state and federal securities and consumer protection laws, books and records requests, agency investigations, and even breach of fiduciary claims against control persons for failure to exercise adequate oversight.
Regardless of the SEC's short-term response to the subcommittee's recommendation, we do not believe this is the end of the discussion. The SEC has for years invited and engaged in internal and external dialogue regarding ESG issues. And certain individuals at the highest levels of the SEC have participated directly in this exchange, including expressing publicly their differing views on the necessity, risks, and potential benefits or costs regarding ESG-specific disclosure guidance or regulation. The SEC and its staff have a variety of tools to respond to this most recent recommendation and ESG requirements generally. Jones Day will continue monitoring ESG-related developments at the SEC and communicate regarding these important issues.