SEC Commissioner Elad Roisman recommended tailoring disclosure requirements as a way to address the "inevitable costs" inherent in any new environmental, social and governance ("ESG") rulemaking.
In an address at a Corporate Board Member ESG Forum, the Commissioner raised issues that the agency should consider prior to promulgating new ESG disclosure requirements. Mr. Roisman urged the SEC to be cautious in imposing any disclosure requirements as the assumptions underlying ESG factors may be uncertain or difficult to calculate. He said that an ESG framework should ensure that (i) investors are aware of the limitations of such disclosures and (ii) companies are able to actually produce any required disclosures without undue costs and burdens.
Mr. Roisman raised several questions:
- Which specific types of "E," "S" and "G" information that is material to informed investment decision-making are investors not receiving?
- Why is the SEC, as opposed to another federal government agency, such as the Environmental Protection Agency, the appropriate authority to impose such disclosure requirements?
- By what means, presently and in the future, will the SEC produce "E" and "S" disclosure requirements?
- How will the SEC continually supervise external standard-setters, with respect to a "governance, funding and substantive work product"?
- How should the SEC tailor its requirements to take into equal consideration the costs of imposing such requirements with the benefits of imposing them?
Additionally, Mr. Roisman cautioned that, in any regulatory undertakings, the SEC must take into account expected costs and burdens. He emphasized that the "potential scope and novelty of the 'E' and certain 'S' categories" may render the costs associated with such standardized disclosures much greater.
Mr. Roisman suggested the following methods for tailoring any ESG disclosure requirements:
- scaling disclosures for public issuers so that less mature companies are not as burdened as companies with substantially greater resources;
- enabling issuers to be flexible in the sources they use for their disclosures and how they present them, considering that "a good amount of 'E' information is difficult to calculate and sources are not always reliable";
- considering a safe harbor so that companies are not excessively burdened with the "inevitable litigation risk that will come with such sweeping new disclosure requirements";
- determining whether such disclosure requirements should be furnished to, rather than filed with, the SEC, considering that disclosures in ESG areas continue to evolve; and
- extending or phasing in the implementation period of a new disclosure period to allow the SEC to provide guidance to firms and give them a "good amount of time" to develop compliance measures.
Commentary Steven Lofchie
"Climate change" is not a hypothetical; it is the basis for a hypothetical.
If the risk is a rise in temperature, by how much and what environmental or social changes are caused by the rise in temperature? Without some specification of the hypothetical, issuers' risk disclosures will inevitably be based on radically different assumptions, all of which may be entirely reasonable. If the risk to be disclosed is a change in law, what laws?
These are two very different risks. Take, for example, the case of a company that sells air conditioners. A rise in temperatures might be great for the company, while a change in laws might be bad. This example serves to illustrate the problem that any requirement of disclosure based on a hypothetical set of facts must set out the hypothetical.
The SEC should consider what is the risk as to which disclosure should be required? Is it (i) the risk that temperatures will rise or (ii) the risk that laws will be changed in a manner that will prevent temperatures from rising?
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