Unknowns remain on what will shape SEC’s disclosure mandates

The Securities and Exchange Commission is working on a rule to mandate that public companies disclose climate-related risk, but what exactly those disclosures will entail remains to be seen.

Over the past few weeks, SEC Chairman Gary Gensler and Commissioner Hester M. Peirce have outlined vastly different viewpoints.

Mr. Gensler, who was sworn in as chairman in April, has asked SEC staff to unveil a proposal by the end of the year in order to bring greater clarity to climate-risk disclosures by making them consistent and comparable, he said July 28 at a virtual event hosted by the Principles for Responsible Investing.

Democrats, including Mr. Gensler, have a 3-2 majority on the five-member commission and have indicated a strong desire to require more prescriptive disclosure from public companies, especially with respect to climate risks.

"Today, investors increasingly want to understand the climate risks of the companies whose stock they own or might buy," Mr. Gensler said at the Principles for Responsible Investing event. "Large and small investors alike, representing literally tens of trillions of dollars, are looking for this information to determine whether to invest, sell or make a voting decision one way or another."

Ms. Peirce, a Republican, looks at the issue differently. In a July 20 speech at a virtual event hosted by the Brookings Institution, she made the case against a prescriptive disclosure regime.

"The growing global concentration of capital in certain sectors or issuers deemed to be green could destabilize the financial system," she said. "Lots of money will be mandated to chase green investment opportunities. As with past regulatory efforts to drive investment toward particular sectors, current efforts to green the financial system could precipitate future financial instability."

In March, under Acting Chairwoman Allison Herren Lee, who is now once again solely a commissioner, the SEC put out a request for comment on climate disclosures and received more than 550 unique responses during a comment period that ended in June.

"The comments were just all over the map," said Miranda Lindl O'Connell, a San Francisco-based partner with law firm Morgan, Lewis & Bockius LLP and co-leader of its ESG and sustainability working group, adding that there was a variety in the types of commenters and the suggestions they had for the SEC.

One thing her Morgan Lewis colleague, Carl A. Valenstein, a Boston-based partner and fellow co-leader of the ESG and sustainability working group, noticed was a frustration with the current "lack of standardization" when it comes to climate disclosures.

Mr. Gensler, in his July 28 speech, shared that frustration, too. "When disclosures remain voluntary, it can lead to a wide range of disclosures, often inconsistent (and) hard to compare with one another," Mr. Gensler said.

However, according to Mr. Valenstein, "It's one thing to say, 'We're going to mandate disclosure,' it's another to say, 'We're going to mandate disclosure using the following rating systems.' There's a huge dividing line on that because there are different rating systems just on environmental issues, depending on what industry you're in. I think companies want that flexibility by and large."

Ms. Peirce made a similar point in her July 20 speech and said that figuring out how to deal with ESG from a disclosure standpoint is complicated by the great and growing number of unrelated items it encompasses. "Many rating firms exist now because people do not share uniform views of what good ESG practices are for issuers or good ESG portfolios are for asset managers," she said.

Evan Williams, Washington-based director of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, recognizes that the SEC is "likely going to move toward a prescriptive disclosure regime. But we want the SEC to maintain adequate flexibility, recognizing that different industries have different requirements, have different investor bases, have different circumstances that ought to be factored into this exercise, and a one-size-fits-all mandate isn't going to work for every industry, for every public company."

Mr. Valenstein said he'd be surprised if the SEC came out with a proposal that required the adoption of a particular rating system for every company, regardless of industry and size.

In crafting the proposed rule, Mr. Gensler said at the July 28 event that he has asked the SEC staff to consider a variety of qualitative and quantitative information about climate risk that investors either currently rely on or believe would help them make investment decisions going forward.

While qualitative disclosures could answer key questions, such as how the company's leadership manages climate-related risks and opportunities and how these factors feed into the company's strategy, quantitative disclosures could include metrics related to greenhouse gas emissions, financial impacts of climate change and progress toward climate-related goals, Mr. Gensler explained.

The SEC is also considering additional disclosures for fund managers, according to Mr. Gensler. "We've seen a growing number of funds market themselves as 'green,' 'sustainable,' 'low-carbon,' and so on," he said. "What information stands behind those claims? The basic idea is truth in advertising."

A survey from Schroders PLC, which was published July 6 and featured responses from 750 global institutional investors responsible for $26.8 trillion in assets, found that 53% of U.S. investors said they want to know how funds contribute to specific sustainability goals.

Moreover, 40% of U.S. investors said the potential for higher returns was motivating their sustainable investment focus, according to the survey.

Sarah Bratton Hughes, New York-based head of sustainability for North America at Schroders PLC, is in favor of mandated climate-risk disclosures that are aligned with initiatives across the globe, like the European Commission's Corporate Sustainability Reporting Directive. "Decision-reliable, decision-useful data is important for companies to disclose, particularly as sustainability issues are increasingly becoming financial issues for companies," she said.

At the July 28 event at which Mr. Gensler spoke, Fiona Reynolds, London-based CEO of Principles for Responsible Investing, said, "There's no way to disentangle the climate crisis from our financial markets, but there are ways to acknowledge this fact and take action: incorporate it into our investment decisions and our overall investment objectives."

In a June speech at a US SIF: The Forum for Sustainable and Responsible Investment event, Ms. Lee, a Democrat, said the new SEC rule should look beyond climate. "Top of mind for me is how do we ensure that we don't lose sight of other ESG topics?" she said, citing issues such as human capital, board and workforce diversity and inclusion and disclosure of political spending activity.

But Ms. Peirce and other stakeholders have raised doubts as to whether the SEC even has the authority to mandate climate and other ESG disclosures. "To date, Congress has not granted authority to the SEC to address ESG issues for the purpose of promoting goals unrelated to the federal securities laws," Ms. Peirce said in her speech. "Serious democratic legitimacy concerns arise when an independent agency expands its own authority."

Mr. Valenstein said a disclosure rule could face a legal challenge. "I think if they go too prescriptive, I absolutely do see members of the industry challenging the authority of the SEC to do that," he said.