SEC Commissioners Robert J. Jackson Jr. and Allison Herren Lee expressed concern over recently proposed amendments to reporting requirements ("Regulation S-K") that (i) would shift the agency's approach towards principles-based disclosure and (ii) fail to address climate risk.

As previously covered, the SEC proposed amendments to Regulation S-K that would revise the description of business, legal proceedings and risk factor disclosures that registrants are required to make. The proposed amendments are intended to (i) improve disclosures for investors, (ii) simplify compliance for registrants, (iii) decrease repetition in disclosure documents, and (iv) not require the disclosure of information that is immaterial.

First, Mr. Jackson and Ms. Lee stated that the principles-based disclosure approach may not be in the interests of investors, given that it:

  • allows company executives discretion over what information is provided to investors; and

  • could lead to inconsistent information, which is more difficult and expensive for investors to compare and analyze.

Second, Mr. Jackson and Ms. Lee stated that it is hard for investors to obtain "critical" climate-related information without better disclosure. The Commissioners refuted the argument that it is too difficult to assess and measure climate risk, saying that "we are long past the point of being unable to . . . measure a company's sustainability profile." The Commissioners stated that recent research shows that some sustainability measures reveal material information to the market.

Commentary

Steven Lofchie

While the Commissioners assert that "sustainability" measures are well accepted, such measures remain subjective and often include a large number of factors having no direct correlation to climate change. For example, the Sustainability Accounting Standards Board (SASB), which the Commissioners cite in their remarks, outlines "sustainability" topics as including, in addition to environmental issues, "social capital," "human capital," "business model and innovation," and "leadership and governance." Each of these issues includes various sub-issues, for example, "business model and innovation" encompasses "business model resilience." The topic of "Human Capital" includes "Employee Engagement, Diversity, and Inclusion." The notion that such a diverse group of factors produces some objective measure on which there will be broad agreement seems optimistic. Further, the relationship between an issuer's "employee engagement," and its vulnerability to increases in temperature is not apparent.

What is the push for "sustainability" report disclosure really intending to accomplish? Are the Commissioners trying to provide useful information to investors? Or are they hoping that disclosure of "sustainability" issues will embarrass or motivate companies to act in ways that they view as politically correct?

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