A timeline of what's happening with corporate ESG disclosure requirements in the U.S.

Steven Rothstein stated that he expects the SEC’s climate rule to be delayed by several months while speaking at The Future of ESG Data Americas conference.  Rothstein, a managing director at Ceres, cited the record number of responses to the SEC’s request for comments and the numerous controversial areas of the proposed rule, including the reporting of Scope 3 emissions. The most recent guidance from the SEC indicated that the rule was expected in April 2023, more than a year after the proposed rule was released for comment.

“We are all waiting with bated breath for the SEC regulations… We don’t know where it will land.”

– Alice Hill, senior fellow for energy and the environment at the Council on Foreign Relations

After several delays in releasing the draft climate rule, the SEC seems likely to remove some of the more controversial aspects of the rule. While analyses of the approximately 15,000 public comments on the rule have found them to be mostly supportive, there has been pushback on the proposed requirement for companies to disclose scope 3 GHG emissions.

Officials at the SEC have not provided an indication on the organization’s final decision. The SEC has indicated on a recent federal notice that the final rule is expected to be released in April, 2023.

Many of the comments submitted in response to the SEC’s draft objected to what companies would have to disclose about their indirect effects on the climate — such as the emissions released by their suppliers — and whether their climate-related risks are material to investors.

The SEC voted 3 to 1 to move forward with the agency’s proposed climate rule, which aims to give investors a clearer view of the risks that climate change might pose to a company. Importantly, the proposed rule would require companies to disclose their Scope 1, 2, and 3 emissions after an initial phase-in period.

The draft climate disclosure requirement borrows heavily from existing, globally recognized reporting frameworks including the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. The SEC will accept comments on the proposed rule for 60 days.

“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do.”

The SEC’s Office of the Chief Accountants (“OCA”) released a statement reiterating their role in financial reporting, and summarizing their priorities from the past year. Importantly, the OCA plays a key role in supporting rulemaking activities, oversight of accounting standard setting, and efforts to promote effective implementation and application of those standards. Among other updates, Acting Chief Accountant Paul Munter reiterated the SEC’s focus on implementing climate risk disclosures and highlighted recent international developments such as the formation of the ISSB.

“As stated in the sample comment letter, depending on the particular facts and circumstances, these disclosures may be required as part of a company’s description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations.”

Released in response to President Biden’s executive order in May, the FSOC released a report that identified climate risk as a threat to US financial stability for the first time. The report also details actions of several federal agencies and recommendations for future action.

“Climate change is an emerging and increasing threat to America’s financial system that requires action,” Secretary of the Treasury Janet L. Yellen said. “FSOC’s report and recommendations represent an important first step towards making our financial system more resilient to the threat of climate change. These measures will support the Administration’s urgent, whole-of-government effort on climate change and help the financial system support an orderly, economy-wide transition toward the goal of net-zero emissions.”

Commissioner Lee emphasized that ESG issues that are decision useful for investors, and that the SEC’s challenge is identifying which metrics are most important and how best to regularly update disclosure requirements.

“While climate is unique in its pressing and potentially systemic nature, there is a much wider array of ESG topics that are decision-useful for investors.”

Speaking at The Future of ESG Data conference, Commissioner Lee discussed the possible impacts of public disclosure requirements on private companies. Lee also suggested that the US may need a domestic standard setter to maintain and update disclosure standards.

“It’s important to remember that the biggest driver for this public company disclosure effort has been investor demand. So, that investor demand is also going to exist in the private space.”

In testimony before the House Financial Services Committee, Chair Gensler stated that the SEC is considering a range of possible types of disclosures, as well as phasing in climate rules to mitigate potential impacts on smaller companies.

“I think implicit in what you’re saying is some reporting will be easier to do sooner. I’ve asked staff to do a look at qualitative disclosure about governance and strategy, but also quantitative disclosure to make sure that the disclosures people are making, particularly around greenhouse gas emissions, have consistency, but how to potentially even phase the implementation amongst large and small issuers and also amongst the different types of disclosures.”

SEC staff released a sample letter containing illustrative examples of requests for additional disclosure that may be issued to companies that disclose insufficient information related to climate change. The comments are in line with the 2010 guidance, and maintains the requirement that risks and opportunities be material to warrant disclosure.

“Companies also must disclose, in addition to the information expressly required by Commission regulation, “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”

In a congressional update on the Commission’s ongoing work, Chair Gensler again emphasized that climate disclosure would benefit investors, and that mandating ESG disclosure requirements would be in line with disclosure requirements added in the past.

“Over the years, we’ve added disclosure requirements related to management discussion and analysis, risk factors, executive compensation, and much more. Today’s investors are looking for consistent, comparable, and decision-useful disclosures around climate risk, human capital, and cybersecurity. I’ve asked staff to develop proposals for the Commission’s consideration on these potential disclosures.”

Speaking at a webinar titled “Climate and Global Financial Markets,” Chair Gary Gensler spoke to the benefit of having mandatory, decision useful climate disclosure rules, as opposed to previous voluntary disclosure guidelines. He also emphasized the high level of public support for these requirements.

“Companies and investors alike would benefit from clear rules of the road.”

SEC Commissioner Elad L. Roisman, while speaking to the National Investor Relations Institute, raised his concerns about the Commission’s plan to propose new disclosure requirements focused on climate change and human capital. Among other concerns, his speech touched on the difficulty in identifying which ESG items are material for investors to make informed investment decisions.

“We have to look at the issue through our own three-part mission and assess how the types of information other standards require companies to report, such as greenhouse gas emissions, are material to investors. If such information is relevant primarily for purposes of a climate-focused goal, then I question how the SEC is the appropriate agency to undertake requiring its disclosure.”

President Biden signed an executive order focused on climate related risks to the financial system which set out an overarching policy for his administration, ordered the creation of a comprehensive government-wide strategy, and several specific requirements for federal agencies to report financial risks. This not only reinforced previous actions that the federal government had undertaken related to climate, it also recognized that the government will not be immune to the physical and transition risks related to climate change.

“It is therefore the policy of my Administration to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk, including both physical and transition risks…”

In order to better aggregate all of the SEC initiatives and announcements related to climate and ESG risks and opportunities, the SEC released a summary website.

“As investor demand for climate and other environmental, social and governance (ESG) information soars, the SEC is responding with an all-agency approach.”

As announced in her public speech to the Center for American Progress, acting Chair Allison Herren Lee requested public comments on the specifics of how to best obtain mandatory disclosure on climate-related risks.

“How can the Commission best regulate, monitor, review, and guide climate change disclosures in order to provide more consistent, comparable, and reliable information for investors while also providing greater clarity to registrants as to what is expected of them?”

Acting Chair Allison Herren Lee spoke to the Center for American Progress on active climate initiatives at the SEC and possible next steps, including the recent climate disclosure directive to staff, request for comment on climate disclosure, and initiatives focused on broader ESG disclosure.

“There is really no historical precedent for the magnitude of the shift in investor focus that we’ve witnessed over the last decade toward the analysis and use of climate and other ESG risks and impacts in investment decision-making.”

One day after announcing the SEC Division of Examination’s enhanced focus on climate-related risks, the Commission announced a task force in the Division of Enforcement focused specifically on climate and ESG issues. Initial enforcement is focused on analyzing disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.

“Climate risks and sustainability are critical issues for the investing public and our capital markets,” said Acting Chair Allison Herren Lee. “The task force announced today will play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.”

Integration of climate and ESG considerations into the SEC’s existing regulatory framework is explicitly stated as a key priority for 2021.

“This year, the Division 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.”

Acting Chair Lee directed the SEC Division of Corporate Finance to ensure that companies are compliant with the 2010 guidance on disclosing climate-related risks and opportunities, and to engage with stakeholders to update the guidance.

“Now more than ever, investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future.”

By creating this new advisor position dedicated to Climate and ESG, the SEC signaled the importance of the topic and the high level of continued effort being invested in climate change disclosure.

“Having a dedicated advisor on these issues will allow us to look broadly at how they intersect with our regulatory framework across our offices and divisions. Satyam’s experience, insight, and resourcefulness will help ensure our efforts in this space are thoughtful and effective.”

President Biden signed an executive order focused on putting the climate crisis at the center of United States policy and formalizing the government-wide approach to the climate crisis.

The Federal Government must drive assessment, disclosure, and mitigation of climate pollution and climate-related risks in every sector of our economy, marshaling the creativity, courage, and capital necessary to make our Nation resilient in the face of this threat.

Another ESG subcommittee recommends selecting key material metrics to require, although they emphasize the need to limit the level of prescriptiveness of the guidance to ensure a reasonable lift for reporters.

“The impact of the current approach could be poor transparency with the potential to mislead investors in investment products, as well as poor disclosure of material risks to investors in issuers’ securities. We do not recommend the highly prescriptive approach that is used, for example, in Europe, as that may result in the production of metrics that are not needed to assess an issuer’s material risks, and unnecessary cost.”

The SEC voted to implement changes to the description of business (item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) which are required by Regulation S-K. Importantly, the new rule requires companies to disclose a description of human capital resources to the extent that such disclosure would be material to an understanding of the registrants business.

“Building on our time-tested, principles-based disclosure framework, the rules we adopt today are rooted in materiality and seek to elicit information that will allow today’s investors to make more informed investment decisions. I am particularly supportive of the increased focus on human capital disclosures, which for various industries and companies can be an important driver of long-term value.”

An SEC advisory committee recommends that ESG disclosure is mandated by the SEC.

“The message that we have heard consistently is that investors consider certain ESG information material to their investment and voting decisions, regardless of whether their investment mandates include an “ESG-specific” strategy…today we are recommending that the Commission begin in earnest an effort to update the reporting requirements of Issuers to include material, decision-useful, ESG factors”

In a joint statement about the proposed changes to form S-K, SEC Commissioners signaled the value to investors, and therefore the importance of establishing detailed climate risk disclosures. Both Commissioners applauded the proposed changes (which added disclosures related to human capital development to the description of business), but noted that certain sustainability metrics which reveal material information to the market should be mandated by the SEC.

“Despite early skepticism about the utility of those measures, recent efforts to refine them through engagement with issuers and investors have borne real fruit.”

As opposed to amending any legal requirements, the SEC’s interpretative guidance provided clarity related to the ways that companies should disclose climate change impacts on their operations within the longstanding rules.

Specifically, the guidance emphasized that material impacts of legislation & regulation, international accords, indirect consequences of regulation or business trends, and the physical impacts of climate change.

“We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics,” said SEC Chairman Mary Schapiro. “Today’s guidance will help to ensure that our disclosure rules are consistently applied.”