The U.S. Securities and Exchange Commission has indicated that ESG disclosure regulation will be a central focus of recently confirmed SEC Chair Gary Gensler’s tenure. At the top of the agenda is climate change disclosure, and the Commission is taking steps toward broader reform. Then-Acting Chair Allison Herren Lee announced in March that the SEC will be “working toward a comprehensive ESG disclosure framework” and pursuing initiatives such as “offering guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity, and considering more specific guidance or rule making on board diversity.” Acting Chair Lee also appointed Satyam Khanna as senior policy advisor for climate and ESG to oversee and coordinate the SEC’s efforts: “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.” And earlier this month, Bloomberg reported that John Coates, the SEC’s Acting Director of the Division of Corporation Finance, indicated that new disclosure requirements would focus on three areas: diversity, equity and inclusion; climate change; and human capital management. The SEC appears to view its invitation for public input on climate change disclosure, which remains open until the middle of June, as the beginning of a potentially significant reconfiguration of corporate reporting on ESG matters in the near future.
While the SEC traditionally has required disclosure of financially material information, its new leaders are clearly considering requiring reporting of ESG-related information whether or not it is financially material. In Acting Chair Lee’s statement requesting public input, she did not use the terms “financial” or “material” as qualifiers in describing the objective of possible new climate change disclosure requirements: “to provide more consistent, comparable, and reliable information for investors.” This notable omission has led observers to speculate as to the SEC’s goal in overhauling ESG disclosure, which has raised important questions: Should the SEC use ESG reporting requirements to drive societal or environmental reform or, more narrowly, to help investors create value in a rapidly evolving landscape of ESG risks and opportunities? Should the SEC maintain its traditional focus on requiring issuer reporting of financially material information, and, if not, should there be safe harbors for any financially immaterial information that ultimately may be required? As a trusted independent regulator, the SEC has the opportunity to encourage robust investor and issuer engagement on the future of ESG regulation, whether or not it proceeds with broad ESG disclosure reform. It may well be that the answers to the challenging ESG policy questions facing corporate America can best be achieved through the legislative process, with the SEC playing a prominent role in the national debate.