Last week, Allison Lee, Acting Chair of the SEC, directed the staff of Corp Fin to "enhance its focus on climate-related disclosure in public company filings." Yesterday, the SEC announced that the new climate focus would not be limited to Corp Fin—the SEC has created a new Climate and ESG Task Force in the Division of Enforcement. According to the press release, the initial focus of the Task Force will be to identify any material gaps or misstatements in issuers' disclosure of climate risks under existing rules, giving us all another reason to excavate the staff's 2010 interpretive guidance regarding climate change. (You may recall that the guidance addressed in some detail how existing disclosure obligations, such as the Reg S-K requirements for business narrative and risk factors, could apply to climate change. See this PubCo post.) Apparently, however, the remit of the Task Force goes beyond climate to address other ESG issues. Lee said that the Task Force is designed to bolster the efforts of the SEC as a whole in addressing climate risk and sustainability, which "are critical issues for the investing public and our capital markets."
The press release indicates that the Task Force "will develop initiatives to proactively identify ESG-related misconduct," and "coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations." In addition, the Task Force "will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues, and provide expertise and insight to teams working on ESG-related matters across the Division." The Task Force will also analyze disclosure and compliance issues relating to investment advisers' and funds' ESG strategies.
Enforcement has used data analytics in the past to identify a variety of misconduct. In a 2016 speech, then-SEC Chair Mary Jo White touted the SEC's "vastly increased use of data and data analytics to detect and investigate misconduct" as a "transformative" approach to securities enforcement, leading to charges in over 100 cases and nine insider trading cases. And in a 2019 speech, then-SEC Chair Jay Clayton discussed the importance of the SEC's data analytics effort in several cases, including trading pattern recognition to identify an alleged scheme to misuse confidential information and another insider trading case involving careful analysis of trading in the window between when the material nonpublic information was extracted and when it was disseminated to the public. More recently, Enforcement has used data analytics to identify an alleged failure to disclose perks (see this PubCo post) and to detect fraud red flags in loan applications under the PPP program (see this PubCo post).
The Task Force will be composed of 22 members from the SEC's headquarters, regional offices and Enforcement specialized units and led by the Deputy Director of Enforcement. The Task Force's efforts are intended to complement the SEC's other initiatives in this area, and its members will work closely with other Divisions and Offices of the SEC.
In response to the recent flurry of climate-related announcements, Commissioners Hester Peirce and Elad Roisman issued a statement indicating that they weren't quite sure how to interpret "this 'enhanced focus' on climate-related matters.... Do these announcements represent a change from current Commission practices or a continuation of the status quo with a new public relations twist? Time will tell." Notwithstanding the announcements by Lee, the two Commissioners contend that this is really nothing new: "The staff of our Corporation Finance Division has been reviewing companies' disclosures, assessing their compliance with disclosure requirements under the federal securities laws, and engaging with them on climate change and a variety of issues that fall under the ESG umbrella, for decades.... All of the Division's work has been rooted in materiality, the touchstone we use in assessing issuer disclosure on all topics, including climate." (However, this new report from the Institute for Policy Integrity at NYU and the Environmental Defense Fund contends that Corp Fin has failed to use the review process to elicit more disclosure. In 2010, according to the report, Corp Fin sent 49 letters to companies that included comments regarding their climate risk disclosure, but sent only three in 2012 and none in 2013. Since 2016, the report could identify only six comment letters with comments on climate risk disclosure. See this PubCo post.) At this point, they contend, there aren't any new standards. While Lee indicated that Corp Fin would be updating the 2010 guidance on climate, "the new announcement cannot foreshadow a plan for the staff to issue guidance that would elicit more specific line items or otherwise convert the Commission's generally principles-based approach to a prescriptive one. Such a change, of course, would require a new Commission vote." Similarly, the new announcement related to the Enforcement Task Force on climate and ESG may identify violators that have made false or misleading climate- or ESG-related statements, but again, "such actions would not be based on any new standard; we have always pursued violations of our antifraud provisions." The two Commissioners seem to view all the announcements as a bit premature:
"Wouldn't it be more prudent for us to await the results of the Corporation Finance staff's latest review of climate change-related disclosure and the Examinations staff's climate- or ESG-related findings in this new exam cycle before allocating resources to an ESG-specific Enforcement initiative? Better yet, shouldn't we wait for our Corporation Finance staff to complete its assessment of our existing rules relating to ESG disclosures to find out if they are unclear or in need of updating before we announce an initiative aimed at bringing enforcement actions in this area? But then maybe the Enforcement Division is merely continuing ongoing efforts with a little extra fanfare. Either way, we must continue to review any alleged securities violations in light of the regulations and guidance in existence at the time of the conduct in question."
In their view, all the new announcements "raise more questions than they answer."
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