SEC Commissioner Elad L. Roisman raised questions as to "materiality" in the context of the agency's legislative mandate, the lack of SEC expertise in environmental, social and governance ("ESG") matters, and the potential of a third-party standard setter in the development of an ESG disclosure framework.

At the 2021 Conference of the National Investor Relations Institute, Mr. Roisman asserted that the SEC's legislative mandate does not include rules for the U.S. financial markets that further societal objectives, such as climate-focused goals. He stated that ESG disclosure must focus on information that a "'reasonable investor,' [meaning] someone whose interest is in a financial return on an investment," would consider material. To the extent that an investor's objectives are unrelated to risk or return, Mr. Roisman said, the SEC's regulatory role should be to ensure those investment products comply with existing rules.

Mr. Roisman explained that if it were to adopt ESG-related disclosure rules, the SEC would have to determine that the ESG information it would "enshrine" in new requirements would be both appropriate and relevant for years to come. To that end, Mr. Roisman stated, it must be clear what information is currently missing from already-provided ESG disclosure, and whether the problem is one of standardization or content.

Additionally, Mr. Roisman pointed out that the SEC's current staff does not have the climate, environmental or social expertise necessary to determine which ESG information is material, requiring the SEC to consider how it should acquire such expertise before developing a disclosure regime. In light of the SEC's limited expertise on these subjects, Mr. Roisman suggested that the SEC use the Financial Accounting Foundation and the Financial Accounting Standards Board as comparison points when considering a third-party standard setter for ESG disclosure. In particular, the SEC should evaluate (i) how such an entity should be "governed, funded, and staffed," (ii) how to strike a balance between SEC oversight and the standard-setter's independence from political pressures, (iii) how the various participants can "be calibrated to best serve the Commission's objectives and (iv) how the SEC would access resources to carry out its monitoring and enforcement responsibilities.

Regarding investor demand for ESG data, Mr. Roisman argued that the interests of advisers who want ESG information from issuers are not necessarily relevant to U.S. investors. Advisers may want ESG information from U.S. issuers so that they can comply with European regulatory requirements that are not applicable to U.S. investors.

Commentary Steven Lofchie

There are two debates taking place between the Commissioners as to ESG-related disclosures. One debate is as to what such disclosures would be and whether they are necessary or useful. The other debate is as to the SEC's authority. Proponents of more ESG disclosure, such as Commissioner Crenshaw and Commissioner Lee, argue that the SEC can mandate ESG disclosure on the basis of investor demand, even if the reasons for that demand are not limited to matters of economic importance. Skeptics as to ESG disclosure argue that investor demand justifies ESG disclosure only if that demand is related to a need for information on the potential profitability of an investment. See, e.g., State Attorneys General Challenge SEC's Authority to Mandate Climate Disclosures.

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