During his Senate confirmation hearing for chair of the Securities and Exchange Commission (SEC), Gary Gensler said he would adhere to the U.S. Supreme Court’s view of materiality: Information is material (and should therefore be disclosed) if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment or voting decision. He then noted that many shareholders are calling for disclosures on climate risk, human capital and political spending, suggesting that they may be material.
Since the start of the Biden administration, then-Acting Chair Allison Herren Lee and the SEC staff have clearly focused on environmental, social and governance (ESG) in all facets of the SEC’s operations. Highlights include:
The level of voluntary ESG disclosure has grown exponentially over the past few years, primarily driven by private ordering and companies responding to investor demand. Based on the initiatives already underway, in the near term we are likely to see a combination of SEC interpretative guidance, SEC staff guidance, comment letters and/or enforcement activity focused on three areas:
In addition, the SEC is likely to propose more prescriptive rules that expand SEC disclosure requirements for material ESG topics. The SEC will have to tackle numerous questions in any proposed rulemaking, such as whether the proposed rules would be limited to climate change risks or cover ESG broadly, and the extent to which they would leverage existing voluntary disclosure frameworks that companies already use. Any proposal could generate hundreds if not thousands of public comments, suggesting that final rules may not be adopted before 2022.
In the meantime, separate and apart from potential SEC actions, companies will continue to engage with investors and other stakeholders regarding ESG matters and likely expand and refine their voluntary ESG disclosures. In the course of doing so, companies should consider their processes and controls relating to their voluntary ESG disclosures to ensure their disclosures are accurate and reliable.