Climate Clash at the Commission?

A flurry of recent climate-related announcements from the SEC forecasts an upcoming policy battle at the agency.  Acting Chair Allison Herren Lee has signaled that “ESG” will clearly be in focus across the SEC’s various divisions, including Examinations, Corporation Finance, and Enforcement.  Presumptive incoming SEC Chairman Gary Gensler also indicated during his March 2, 2021 Senate confirmation hearing that ESG considerations would be on his radar when setting his agenda.  But Commissioners Peirce and Roisman issued their own statement in which they question (in a rather sardonic manner) whether the announcements “raise more questions than they answer.”

One threshold question raised by these announcements is whether investors, corporate issuers, and SEC-regulated financial institutions will benefit, and in what ways and to what extent, from enhanced climate scrutiny.  Or will they instead be caught in the middle of a blistering storm of opposing policy views without clear rules or guidance?  One can infer from the Peirce/Roisman statement that the recent climate announcements could not possibly stand for anything more than a reiteration and “re-framing” of existing guidance and policy, “rather than the announcement of anything new.”  This hits at the epicenter of an oft-cited area of criticism of the SEC—“regulation by enforcement” without first adopting new rules or conveying clear guidance to the industry.

The recent climate announcements serve as an unmistakable warning that these issues are squarely on the SEC’s radar and will continue to be over the next few years.  Interestingly, when questioned on disclosures on this area during his confirmation hearing, SEC Chairman nominee Gary Gensler continually referred to decisions grounded on economic analysis and deference to what the courts have defined as material to a reasonable investor.  We will see if that holds true once he takes the helm.

Stay tuned for more as we continue to monitor for developments in this area.  In the meantime, click here to view a recent program from our Corporate Social Responsibility + ESG practice.

Here is a summary of the recent announcements

On February 1, 2021, Acting Chair Lee announced that Satyam Khanna would serve as Senior Policy Advisor for Climate and ESG, advising on related matters and advancing related new initiatives across the SEC’s offices and divisions.  This is a return to the SEC for Mr. Khanna, who previously served as Counsel to Commissioner Robert Jackson and later as a public member of the SEC’s Investor Advisory Committee.  This is the first time such a position has existed at the SEC.

On February 24, 2021, Acting Chair Lee announced she had directed Corporation Finance to enhance its focus on climate-related disclosure in public company filings. This seems designed to be a precursor to a refresh of the Commission’s 2010 guidance to public companies regarding existing disclosure requirements in relation to climate change considerations.  According to the announcement, “the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.”

On March 3, 2021, the annual SEC examinations priority letter, the first from the newly constituted Division of Examinations, prominently highlighted an enhanced focus on climate-related risks (albeit without much related content).  According to Acting Chair Lee, “this year, [Examinations] is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change.”  Lee also noted that “[t]hrough these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework.” Examinations Director Peter Driscoll added that “[o]ur priorities reflect the complicated, diverse, and evolving nature of the risks to investors and the markets, including climate and ESG” but that “the bedrock of [the] examination program remains unchanged.”

On March 4, 2021, the SEC announced the creation of an Enforcement task force focused on climate and ESG issues. According to the press release, the task force “will develop initiatives to proactively identify ESG-related misconduct” and “will also coordinate the effective use of [Enforcement’s] resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.”  The first areas of focus will be identifying “any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules”  and “analyz[ing] disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”

Finally, and also on March 4, 2021, Commissioners Peirce and Roisman issued a statement on the SEC’s enhanced focus on climate change efforts, calling into question what the actual effect of the aforementioned announcements mean for investors, issuers, and registrants.  They query whether the announcements “represent a change from current Commission practices or a continuation of the status quo with a new public relations twist.”  The statement highlights the decades of work Corporation Finance staff have performed in this area, regularly assessing whether climate-related disclosures comply with SEC rules.  The statement notes that “all of [Corporation Finance’s] work has been rooted in materiality, the touchstone we use in assessing issuer disclosure on all topics, including climate.”  Peirce and Roisman suggest (with a hint of sarcasm) that the new Corporation Finance initiative “is simply a continuation of the work the staff has been doing for more than a decade and not a program to assess public filers’ disclosure against any new standards or expectations.  After all, the Commission has not voted on any new standards or expectations relating to climate-related disclosure.”  Peirce and Roisman also discuss the Enforcement task force’s mission of “develop[ing] initiatives to proactively identify ESG-related misconduct,” and state their view that “[w]hat that means programmatically is unclear” and that any “such actions would not be based on any new standard; we have always pursued violations of our antifraud provisions.”