In remarks yesterday before the ESG Board Forum, Putting the Electric Cart before the Horse: Addressing Inevitable Costs of a New ESG Disclosure Regime, SEC Commissioner Elad Roisman weighed in with his views on mandatory prescriptive ESG requirements and the likely associated costs. As he has indicated before, he’s not really keen on the idea, particularly the environmental and social components of potential requirements. As a general matter, while investors want to see comparable standardized environmental data, in his view, standardization of that type of information is really hard to do; some of it “is inherently imprecise, relies on underlying assumptions that continually evolve, and can be reasonably calculated in different ways. And ultimately, unless this information can meaningfully inform an investment decision, it is at best not useful and at worst misleading.” But, if a new regulatory regime requiring ESG disclosure is adopted—and it certainly looks that way— he has some ideas for ways to make it less costly for companies to comply.
In contrast to Commissioner Allison Lee, Roisman believes that more disclosure requirements are practically superfluous because the SEC’s disclosure framework already requires companies to disclose information that is material to investors, and that includes ESG information. More specifically, he noted that the SEC issued guidance in 2010 on the application of existing SEC rules to the material effects of climate (see this PubCo post) and amended Reg S-K to expressly require disclosure about human capital (see this PubCo post). What’s more, he sees no basis for omitting disclosure of any other material risks. So why is more regulation requiring ESG disclosure even necessary?
In keynote remarks to the 2021 ESG Disclosure Priorities Event, Lee viewed the concept that ESG matters material to investors are already required to be disclosed under the securities laws as a myth, and one of the most prevalent myths about materiality at that. The idea that the securities disclosure system already imposes an affirmative duty to disclose all material information, she contended, “is simply not true, and reflects a fundamental misunderstanding of the securities laws….Rather, disclosure is only required when a specific duty to disclose exists.” And, she observes, an affirmative duty arises only under specific circumstances, among them, an SEC regulatory requirement, a sale or purchase by the issuer of its own stock, when leaks or rumors in the marketplace are attributable to the issuer or when the issuer is already speaking on an issue and information is necessary to make the issuer’s statements accurate or not misleading. For example, in Basic v. Levinson, Lee notes, the duty to disclose pre-merger negotiations arose out of public statements the company made asserting that it was unaware of any developments that might explain high trading volumes and price fluctuations in its shares. Her prime example is political spending, an issue that can be extremely important to reasonable investors, particularly because shareholders want to be able to assess the use by companies of shareholder funds for political influence. But, despite rulemaking petitions and other efforts, there are no SEC requirements to disclose political spending and, as a result, it’s rarely disclosed in SEC reports. In the end, she said, “absent a duty to disclose, the importance or materiality of information alone simply does not mandate its disclosure.” (See this PubCo post.)
Nevertheless, given that the new the SEC Chair has placed ESG disclosure on the agenda—not that Roisman is in favor if it—he identifies a number of questions about these initiatives:
His remarks focus on the last question above: the potential costs of prescriptive line-item ESG disclosure requirements and ways to mitigate them. In Roisman’s view, the costs are fairly obvious: the costs of collecting (and in some cases, calculating) and preparing the information as well as the costs of increased liability for making the disclosures, both from potential Enforcement actions as well as civil litigation. Although these types of costs are prevalent with most disclosure requirements, he suggests that the scope and novelty of ESG disclosure may increase them. To try to reduce these costs, he offer several ways to tailor ESG disclosure requirements.