Commentary: Expect Big Pivot from SEC to Require Climate, ESG Disclosures in Investor Filings

by Richard Morrison


The biggest decision the Securities and Exchange Commission (SEC) is likely to make this year will be on mandated disclosure of information related to climate change and corporate environmental, social, and governance (ESG) goals. The Commission has been working on the issue since early last year, and notice of the new proposed rule posted on Monday. The contents of that rule will likely determine the future direction of “responsible” investing in the United States.

In March of last year, then-Acting Chair Allison Herren Lee issued a request for information on the matter, consisting of 15 questions and described as a response to the “demand for climate change information and questions about whether current disclosures adequately inform investors.” The questions covered a wide range of topics, from how to measure greenhouse gas emissions to how climate disclosures “would complement a broader ESG disclosure standard.”

When the SEC first issued guidance on climate change-related disclosures for public companies in 2010, the standards were fairly general and advisory, but the questions from last year’s request-for-information suggests that the agency’s leadership is considering a more aggressive and prescriptive framework.

For example, rather than simply reporting on the volume of greenhouse gases emitted by a corporation’s operations, the 15 questions raise the possibility of requiring firms to report on “internal governance and oversight” related to climate, establishing different reporting standard for different industries, and extending the agency’s oversight to private as well as publicly traded companies. These and other possibilities suggested by the March 2021 document would be a dramatic expansion of what the SEC has previously required.

Such an expanded portfolio of mandates would be controversial within the corporate world, of course, as it would increase compliance costs and expose firms — and potentially individual CFOs and CEOs — to new legal risks.

A new SEC framework could also preempt and conflict with current voluntary systems developed jointly by nonprofit organizations and industry players, such as the Task Force on Climate-Related Financial Disclosures, Sustainability Accounting Standards Board, and Climate Disclosure Standards Board. The agency floated the idea that the SEC could simply adopt the rules already developed by one of those organizations, but endorsing one would leave the others out in the cold and likely derail the ongoing international effort to harmonize the multiple voluntary systems.

A more pressing question — generally overlooked by climate disclosure advocates — is whether the SEC has the authority to pursue this rulemaking in the first place. It is far from clear that it does. Andrew Vollmer of the Mercatus Center at George Mason University makes a compelling case that new regulations targeted at climate change and other non-financial ESG priorities are inconsistent with the SEC’s statutory authorization. That means ESG proponents at the SEC might be doing themselves a disservice by pushing for rules that will be overturned by a federal court rather than lobbying Congress to grant them the necessary additional authority to enact them secure from legal challenge.

The possibility of such a challenge is high. Commissioner Lee’s 15 questions and other recent public statements by commissioners and staff have given observers a good idea of what to expect. In an analysis published last August, two attorneys with the prominent law firm Winston & Strawn list several potential strategies for challenging the expected rules, including constitutional, statutory, and procedural claims. Other similar policies are already being litigated. A diversity mandate on corporate boards for Nasdaq-listed companies approved by the SEC last year is currently being challenged in the Fifth Circuit by several free market policy organizations, while 17 state attorneys general have filed an amicus brief supporting the challenge.

If Chairman Gary Gensler and his colleagues are concerned about the consequences of getting too far out in front of the agency’s established jurisdiction, they have an alternative. Last year, the SEC created its Climate and ESG Task Force in the Division of Enforcement to “proactively identify ESG-related misconduct.” Part of the misconduct, as Gensler recently noted, is so-called “greenwashing” — when a company attempts to mislead investors or the public about the seriousness of its environmental commitments.

To the extent that firms provide false or misleading claims about climate and ESG policies — or any matter — the SEC has a clear role to play in protecting investors. It can double down on that important police work without trampling existing voluntary reporting systems or triggering a new wave of federal litigation. Given these two possible paths, regulated firms and policy advocates across the political spectrum are eagerly awaiting the contents of the SEC’s new climate disclosure rule.

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Richard Morrison is a research fellow at the Competitive Enterprise Institute.


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