A growing interest in funds focused on Environmental, Social, and Governance (ESG) assets has prompted the U.S. Securities and Exchange Commission (SEC) to see that investors are better informed regarding ESG-related risks. There just happens to be a difference in opinion among SEC commissioners on the best way to go about it.
In a speech on June 22, 2021, SEC Commissioner Elad Roisman said he supported a bottom-up approach. “The question of what ESG information is missing in our markets is first and foremost a question for investors,” he said.
The next day, SEC Chair Gary Gensler favored a top-down strategy. “Today, investors increasingly want to understand the climate risks of issuers,” he said. “Investors representing literally tens of trillions of dollars of assets under management are looking for consistent, comparable, decision-useful information to determine whether to invest, sell, or make a proxy vote one way or another.”
What ESG Information is Material?
At issue are SEC rules and regulations that require firms to disclose information considered material to investors. In practice, the SEC follows Supreme Court Justice Thurgood Marshall’s opinion in a seminal securities law case that defines information as material “if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.”
Roisman believes investors, rather than regulators, are best suited to make those determinations. His concern is that any rules proposed by the SEC may ignore the fact that investors have “different objectives and uses for the information” and those objectives and uses may change over time.
Gensler favors the path outlined in House bill H.R. 1187, passed in June.
H.R. 1187 gives the SEC two years to establish rules and regulations for climate-risk disclosure. Under these rules, companies must identify and evaluate their physical and transition risks; report on any established standards that apply for identifying, assessing, and managing such risks; disclose any current mitigation actions; discuss the resilience of their current strategy under different climate change scenarios, and describe how climate risk is incorporated into their overall risk management strategy.
Thousands of Voices
A study by the US SIF Foundation found that ESG-invested assets grew 18-fold between 1995 and 2018. Data from independent rating agency Morningstar indicate inflows into ESG-focused funds reached a record $51 billion in 2020.
While it has welcomed discussion of related topics for years, the SEC has yet to propose or adopt guidelines for ESG disclosure. The SEC received thousands of responses during a recently closed 90-day period when the public was asked to comment on whether and how the regulator should require stricter climate risk disclosures from the businesses it regulates.
In its written comments to the SEC, one of the nation’s largest asset managers said investors and companies alike would benefit from additional guidance from regulators. It said despite “significant progress in expanding climate-related disclosure over the last decade, at present the sustainability disclosure landscape is hampered by inconsistent frameworks across and within industries and jurisdictions, we believe it is essential to work towards a single, globally applicable, mandatory disclosure framework and set of standards.”
California is among the states whose attorneys general responded to the SEC’s request for public comment by voicing their concern that regulatory intervention is “essential not only to the SEC’s mandate to protect investors but also to ensure efficient capital formation and allocation.”
Gensler has said the SEC plans to propose climate change risk disclosure requirements in October. Meanwhile, investment managers and public companies must successfully meet investor demand for material ESG disclosure in the absence of specific regulatory guidelines.
To help navigate the inherent risk involved, Core Compliance & Legal Services suggests your firm remain proactive when it comes to ESG disclosure. You should review internal policies and procedures and revise them, as necessary, to ensure all ESG-related disclosure is timely, relevant, accurate, and complete.
Every company’s situation is unique. We know the task of reporting ESG disclosure is complicated by the fact no regulatory standard or benchmark exists. We also know that investor interest in ESG disclosure will intensify as the result of a summer that has seen record-breaking temperatures across most of the western U.S.
To schedule a consultation, please contact us at (619) 278-0020 or visit us online at corecls.com.