As reported by Bloomberg, Acting Corp Fin Director John Coates told a webinar audience that mandatory ESG disclosures were "overdue," and that the SEC was moving quickly on related rulemaking. In the webinar, sponsored by NYU's Institute of Accounting Research and the Institute for Corporate Governance & Finance, Coates said that he expects the SEC to soon be in a position to review and consider staff proposals for prescriptive rules on ESG addressing both general and industry-specific requirements. These actions are expected to be the SEC's most significant action on climate since the 2010 guidance. (See this PubCo post.)
According to Bloomberg, Coates confirmed that, based on his conversations with the new SEC Chair, Gary Gensler, he expects that Gensler will continue the focus on ESG that was initiated by former Acting Chair Allison Lee.
SideBar
In February, Lee directed the staff of Corp Fin to "enhance its focus on climate-related disclosure in public company filings." According to her statement, the staff will be reviewing the extent to which public companies address the topics identified in the interpretive guidance the staff issued regarding climate change in 2010. But that was hardly the end of the story: "[e]nsuring compliance with the rules on the books and updating existing guidance are immediate steps the agency can take on the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures." (See this PubCo post.) Then, in March, in remarks to the Center for American Progress, entitled A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC, Lee provided important insights into where the SEC was headed with regard to ESG issues. As Lee confirmed in the introduction to her speech, "no single issue has been more pressing for [her] than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy." Investors are not getting the information they need, and that's why the SEC has "begun to take critical steps toward a comprehensive ESG disclosure framework." Because these issues are important for investors, "climate and ESG are front and center for the SEC." Accordingly, the SEC has "begun to take critical steps toward a comprehensive ESG disclosure framework aimed at producing the consistent, comparable, and reliable data that investors need." (See this PubCo post.)
Bloomberg reports that, according to Coates, the new disclosure requirements will focus on three topics: diversity, equity and inclusion; climate change; and human capital management. To be effective, he said, new SEC rules "must produce results that are useful, consistent, and comparable." He noted that, contrary to prior suggestions from Lee that the staff would likely update the 2010 guidance (see this PubCo post), he expected the SEC to instead just move forward with rulemaking.
Coates acknowledged the enormous challenge that the SEC faces in undertaking a rulemaking project of this size and complexity, noting that, as an academic, he had not quite appreciated the cost to the agency of this type of rulemaking in terms of personnel and other resources. In addition, he recognized that the compliance effort required on the part of companies and the potential for liability could trigger substantial pushback from companies affected. However, he believed that new ESG rules have been expected and are already "priced in." In addition, many companies—over 90% of the 250 largest companies—already provide voluntary sustainability reports, which are subject to the antifraud provisions of the securities laws even if they are not filed with the SEC. In response to an audience question, Coates downplayed as not a "first-order determinant" the concern that mandatory ESG reporting would deter companies from going public. In addition, he observed that private companies are also facing market demands for ESG disclosures.
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Note that, at a recent meeting of the SEC's Asset Management Advisory Committee, two representatives of asset managers on a panel to discuss ESG agreed that some ESG disclosure should be required of private companies, one commenting that the absence of any disclosure requirement for private companies could lead all carbon-intensive companies to remain private. (See this PubCo post.)
Coates said that, in crafting new rules, he expected to seek input from issuers, trade groups, investors and standard-setters. In observations regarding the request for public comment that Lee had issued in March, Coates focused on questions regarding potential use of an independent standard-setter, such as who should serve as the standard-setter (including any existing standard-setters) and the role of the SEC in selecting, overseeing and funding the standard-setter. He noted that, as an example, the SEC has relied on the FASB to set accounting standards. Coates reported that the SEC had received about 30 comment letters so far, but that the June 13 comment deadline was a soft one and he expected additional comments to come in.
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Lee described her request for public comment on ESG disclosure as a way to shift the discussion from "if" to "how"—that is, what is the best approach to obtaining climate disclosure: "what data and metrics are most useful and cut across industries, to what extent should we have an industry-specific approach, what can we learn from existing voluntary frameworks, how do we devise a climate disclosure regime that is sufficiently flexible to keep up with the latest market and scientific developments? Finally, how should we address the significant gap with respect to disclosure presented by the increasingly consequential private markets?" She hoped to hear responses reflecting a wide range of perspectives. (See this PubCo post.)
Former SEC Commissioner Robert Jackson conducted the interview with Coates, and he and Coates, both academics, had a discussion about the issue of materiality in the context of ESG. According to Bloomberg, one challenging issue was whether the same ESG issues are material across all industries. Coates indicated that he agreed with the position of SASB that some issues of sustainability may be material across the board, while others may differ among different industries. Jackson maintained that materiality must be considered from the perspective of the investor, not the issuer or its counsel. Coates noted in addition that "investor-focused materiality" is subject to change based on events, citing as an example the transformed perception over time of the materiality of asbestos. Importantly, both Jackson and Coates contended that the SEC has never limited its disclosure requirements to only material data, citing as an example the low threshold for disclosure of perks in the executive comp rules.
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The issue of "materiality" was a hot topic during Gensler's hearing and confirmation as SEC Chair. In particular, Senator Pat Toomey expressed concern that Gensler's view of materiality was divorced from Toomey's concept of "financial" materiality. For example, at the committee hearing for Gensler's nomination, Toomey asked, if a large public company reported revenues of hundreds of billions of dollars, and it spent a million dollars on political issue ads, should disclosure be required? Gensler responded that the question is what information reasonable investors are seeking to make voting or investment decisions, and last year, in their proxy votes on shareholder proposals, a large proportion of shareholders said that political spending information would be material. So, even though the amount of spending is completely insignificant, Toomey asked, did he think it could be appropriate to mandate that disclosure? Gensler replied that he would be grounded in economic analysis and the courts' views of materiality as the information reasonable investors want to see as part of the total mix of information. Why not leave it up to the companies to decide, Toomey asked? Gensler repeated that it's a really a question of investors making the choice about the information they want. He later reiterated that he considered the 80 shareholder proposals submitted last year on the topic and the 40% vote in favor as a strong indicator. In light of that level of investor interest, political spending disclosure was something he thought the SEC should consider. (See this PubCo post.)
There has also been a fair amount of discussion of the possibility of uniform global sustainability reporting standards. Coates seemed to put the kibosh on that idea as "not practical" due to political and legal difference among countries. But, he indicated, we could come close. To that end, he advocated consistency in all countries' requirements for "measuring and validating ESG data." For example, he suggested that methodology for calculating GHG emissions should be standardized, even if the disclosure requirements may differ.
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