SEC seeks public comment on climate risk disclosures

The SEC is seeking public input on its effort to expand requirements for corporate disclosure of ESG issues and climate risk.

Securities and Exchange Commission Acting Chair Allison Herren Lee announced the release of the request for comment on Monday. She said the agency is updating 2010 guidance in light of developments over the last decade including market practices for gauging environmental social and governance risks, advances in climate-change science and the dangers posed by the phenomenon.

“Of course, we already have an extensive public record demonstrating investor desire for the SEC to ensure better disclosure in this space,” Lee said in remarks during an online appearance at an event hosted by the Center for American Progress. “But, it’s time to move from the question of ‘if’ to the more difficult question of ‘how’ we obtain disclosure on climate.”

She said the SEC is posing questions about data and metrics that cut across industries, the extent to industry-specific approach should be used, the existing voluntary climate disclosure and how a disclosure framework can be flexible enough to keep up with the latest market and scientific developments.

“The limitations of a largely voluntary [climate disclosure] framework are apparent for everyone — for investors seeking consistency, comparability, reliability and [for] issuers [who] need certainty and boundaries around what they need to disclose. It’s time to move forward with this project,” Lee said during the Q&A portion of her appearance.

The request for comment is the latest in a flurry of SEC activity in recent weeks related to oversight of climate disclosure and ESG investing. Lee has directed SEC staff to ramp up reviews of corporate ESG disclosures and announced the formation of a climate and ESG enforcement task force. In addition, the SEC elevated climate risk and ESG in its examination priorities.

In other moves, the agency recently issued an investor bulletin on ESG funds, and it’s working on enhancing transparency around proxy voting, Lee said. She also hinted at new ESG regulations that would affect investment advisers.

“We should consider additional steps, such as, for example, possible policies and procedures for investment advisers that are specific to how they handle ESG,” Lee said.

The SEC’s intensity on these issues is likely to continue under the Biden administration’s nominee to chair the agency, Gary Gensler. He indicated at his Senate confirmation hearing earlier this month his support for strengthening corporate disclosures related to climate change and other ESG factors.

President Joe Biden has launched a government-wide emphasis on climate policy. The SEC is taking a “holistic look” at all the ways climate and ESG intersect with regulatory efforts across its divisions, Lee said.

The “perceived barrier between social and market value is breaking down,” Lee said. ESG factors, such as human rights, human capital and climate change, are increasingly important to investors and have become central to portfolio construction.

“That’s why climate and ESG are front and center for the SEC,” she said. “We understand these issues are key to investors — and therefore key to our core mission.”

She added during the Q&A: “It’s all hands on deck at the SEC.”

It’s clear that the issue will be at the top of the agenda for what will be a 3-2 Democratic majority on the SEC after the Senate confirms Gensler.

But the ESG push has generated some resistance from the SEC’s Republican members, Hester Peirce and Elad Roisman. In an appearance at an online Investment Adviser Association conference earlier in the month, Peirce said the entire commission should be involved in policy changes related to ESG and climate risk.

Promulgating new rules could entail a long regulatory slog.

“We see no way for the SEC to act quickly on increased climate change and ESG disclosures,” Jaret Seiberg, managing director at Cowen Washington Research Group, wrote in an analysis. “Lee outlined a process that we believe will be measured in years rather than months. To us, this could easily extend into 2023 before the SEC finalizes rules, and it maybe until 2024 before public companies must comply.”