Climate Change is Rapidly Becoming an SEC Priority

By Daniel L. Goelzer

The SEC is signaling that disclosure concerning climate change, and ESG issues broadly, will be a priority in 2021. Public company managements and audit committees should start preparing now.

New SEC Chair Gary Gensler was sworn in on April 17. On May 6, in testimony before the House Financial Services Committee, he said that he expected to propose new rules on climate risk disclosures in the second half of 2021. This follows up on a statement during his confirmation hearings that investors want climate risk disclosure and that more detailed SEC guidance on such disclosure would be beneficial. However, even prior to Chair Gensler’s arrival, Acting SEC Chair Allison Lee took a series of steps to ramp up the SEC’s focus on climate:

• Statement on the Review of Climate Related Disclosure. On February 24, Acting Chair Lee issued a statement directing the Division of Corporation Finance to review climate-related disclosure in public company filings. In 2010, the SEC issued guidance to public companies on how its disclosure requirements apply to climate change matters. Chair Lee asked the staff to 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.”
• 2021 Examination Priorities. On March 3, the SEC’s Division of Examinations announced that ESG would be one of its priorities in examinations of broker-dealers, investment advisers, mutual funds, and other SEC-regulated entities. Its 2021 Examination Priorities publication explains that advisers and investment companies increasingly offer ESG investment strategies. The Division “will review the consistency and adequacy of the disclosures advisers and fund complexes provide to clients regarding these strategies, determine whether the firms’ processes and practices match their disclosures, review fund advertising for false or misleading statements, and review proxy voting policies and procedures and votes to assess whether they align with the strategies.”
• Enforcement Task Force Focused on Climate and ESG Issues. On March 4, the SEC announced the formation of a task force in the Division of Enforcement “to proactively identify ESG-related misconduct.” The initial focus of this enforcement group “will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” The task force will also analyze disclosure and compliance issues relating to investment advisers and investment funds that claim to apply ESG strategies.
• Request for Comment on Climate Change Disclosure. On March 15, Chair Lee issued a statement inviting public comment on the Commission’s disclosure rules and guidance applicable to climate change disclosures, and whether and how the rules and guidance should be modified. The request for comment includes 15 specific questions. One of the questions notes that the SEC staff is evaluating a range of ESG disclosure issues and asks whether climate-related requirements should be one component of a broader ESG disclosure framework.

Climate change and other ESG issues will almost certainly be at the top of the SEC’s agenda in 2021 and beyond. It is likely that the SEC will adopt some form of new disclosure requirements, at least as to climate. In the meantime, audit committees should understand what climate and ESG disclosures their company is making and how those disclosures align with the existing SEC guidance. It would also be prudent to ask management to compare the company’s disclosures with those of others in the same industry and to describe the controls and procedures that are in place to assure the accuracy of these disclosures. It appears that the SEC staff, including the Division of Enforcement, may be asking some companies these same questions.