The SEC’s Rulemaking Agenda: ESG
On June 11, 2021, the Securities and Exchange Commission (“SEC”) released its Spring 2021 Rule List. Among the proposed rulemaking topics are various environmental, social and governance (“ESG”) disclosures. Although companies are facing increased pressure from shareholders to incorporate ESG policies and disclosures, currently, the SEC mostly leaves it to companies to determine whether their ESG risks, initiatives, and policies, if any, rise to a level of materiality for disclosure. However, that may change in the near future.
Recent Indicators of Changes to ESG Reporting
The SEC’s rulemaking focus on ESG disclosures joins a groundswell of U.S. government interest in climate change and other ESG issues that have come with the Biden administration. This March, then Acting Chair of the SEC, Allison Herren Lee, requested public input on 15 questions about whether current disclosures on climate change specifically, and ESG generally, are providing enough information to investors. Subsequently, President Biden issued an Executive Order on Climate-Related Financial Risk in May. While the Executive Order focused primarily on the risks of climate change to the federal government, it also called for greater disclosure of the climate-related financial risks to public companies. Congress has also been stirred to action having introduced the Climate Risk Disclosure Act, which would require the SEC to issue rules requiring an array of climate disclosures, including emissions, fossil fuel-related assets, impact of climate change on company valuation, and risk management strategies related to climate change.
Prior to the Spring 2021 Rule List, the SEC appears to have taken several actions to prepare for its increased focus on ESG, including appointing its first Senior Policy Advisor for Climate and ESG, Satyam Khanna, in February 2021, announcing a new Climate and ESG Task Force in its Division of Enforcement in March 2021, and creating a dedicated webpage to ESG. The SEC’s Spring 2021 Rule List continues this increased focus on ESG disclosure areas by highlighting the following ESG areas as potential rulemaking items:
- Climate Change,
- Corporate Board Diversity,
- Human Capital Management,
- Cybersecurity Risk Governance,
- ESG Considerations for Investment Companies and Investment Advisers,
- Rule 13q-1 Resource Extraction Payments Rule, and
- Rule 14a-8 Amendments and Proxy Voting Advice Proposals and Universal Proxy Final Rule, including potentially altering rules and interpretative guidance issued in 2019 and 2020.
This rulemaking agenda is not without its detractors. Commissioners Peirce and Roisman issued a joint statement lamenting the focus on Rule 13q-1, Rule 14a-8 and other recently-adopted SEC rules and interpretations. Obviously, the formal rulemaking process could take some time to run its course, but issuers should nevertheless prepare themselves for a world where ESG plays a more prominent role in the reporting and disclosure process. Given that institutional shareholders and investors are already demanding greater accountability from companies both as to the companies’ own actions touching on ESG issues, including climate change, and as to the risks climate change and other ESG issues pose to the issuer, companies should consider, if they have not already, incorporating a greater review of ESG risks, initiatives, and policies into their annual disclosure process