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Article | Executive Pay Memo North America

SEC lays groundwork for new disclosures on ESG

Environmental|Governance Advisory Services |Executive Compensation

By Steve Seelig and Gary Chase | March 17, 2021

Climate and ESG Task Force’s focus on prior ESG disclosures is a first step toward commission action

Sometimes our government officials release a statement so coherent and to the point that all we need to do is report it. A great example is the March 11 statement by the new acting director of the Securities and Exchange Commission’s Division of Corporation Finance, John Coates, titled ESG Disclosure — Keeping Pace with Developments Affecting Investors, Public Companies and the Capital Markets. As with all statements from government employees, this one expresses Coates’ views only, but because it is forward looking and raises questions that he suggests the SEC should take a role in answering, it is a great synopsis of how the ESG disclosure system may be updated going forward. It is concise, so our recommendation is to click over to it and then return here as we put his statement into context.

As we’ve noted in the past, our focus is on the human capital disclosure aspects that are a subset of the entire ESG disclosure regime, with our expectation being that as the SEC answers the questions posed by Coates (i.e., mandatory versus voluntary; principles-based versus required metrics; develop new versus use existing disclosure standards), companies should expect their disclosure burdens to increase in the coming years.

How the process is shaping up

Whether increased disclosure will be required for your next Form 10-K will become a matter of how deliberate the SEC intends to be. As the following items indicate, it looks like the SEC intends to dot its I’s and cross its T’s, which seems to suggest a more measured pace toward change.

In his Senate confirmation hearing on March 2, Gary Gensler, President Biden’s nominee to head the SEC, indicated he would push for beefed-up climate disclosures if confirmed but noted that getting good economic analyses and feedback from the public would be interim steps before new rules are finalized. Gensler was also supportive of more workforce-related disclosures, stating, “I think human capital is a very important part of the value proposition in so many companies.”

In three separate recent announcements, the SEC has indicated its intention to focus on companies’ compliance with its 2010 Interpretive Release on the impacts of climate change:

  • On February 24, SEC Acting Chair Allison Herren Lee directed the Division of Corporation Finance to review company filings for how they addressed climate disclosures in response to the 2010 guidance.
  • On March 3, the Division of Examinations announced that as part of its 2021 examination priorities, it would include a greater focus on how companies disclosed their climate and ESG-related business risks.
  • On March 4, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement, with a broad remit to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules, and also to analyze disclosure and compliance issues relating to investment advisors’ and funds’ ESG strategies.

These moves come after the February 1 announcement that Satyam Khanna will serve as senior policy advisor to the chair for climate and ESG, to advise on ESG-related matters and advance related new initiatives across its offices and divisions.

Clearly, ESG disclosure reform is going to be top of mind for the SEC during the coming year, and we should expect to read more and more about its progress. It also appears that the Gensler-led SEC will return to a less frenetic approach to rulemaking compared with the Jay Clayton-led SEC under former President Trump and will focus first on fact gathering and economic analysis before it moves toward any new Interpretive Releases or Proposed Rulemaking. Already, we have seen a statement by the two Republican commissioners questioning whether an updated 2010 Interpretive Release could require more disclosure without a commission vote, signaling their desire for a more drawn-out process.

But this apparent measured pace should be balanced against the fact that President Biden has placed climate change at the top of his list of critical issues to confront as a top priority, right behind addressing COVID-19. We’ll have to wait and see how this plays out.


Senior Director, Executive Compensation (Arlington)

Director, Retirement and Executive Compensation

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