SEC Division of Corporation Finance Acting Director John Coates issued a statement on the need to develop both adaptive and innovative environmental, social and governance ("ESG") disclosure requirements.
In his statement, Mr. Coates outlined a number of considerations that should be addressed in order to establish an effective ESG disclosure system. These include identifying (i) useful disclosures, (ii) the appropriate balance between principles and metrics, (iii) the degree to which standardization can be established across industries, (iv) how and when standards should be updated, (v) the best method for verifying disclosures, (vi) disclosures that would be globally comparable and (vii) where disclosures can be aligned with information that is already used by companies.
In response to concerns that the costs associated with ESG disclosure requirements are burdensome, Mr. Coates asserted that a lack of available "consistent, comparable and reliable" ESG information forces companies to deal with "numerous, conflicting and frequently redundant" ESG-related information requests. Mr. Coates said that such a burden is elevated for smaller and more financially constrained companies. Additionally, Mr. Coates stated that an ESG disclosure system does not need to be wholly mandatory or wholly voluntary, explaining that, as evidenced by other SEC disclosure regimes, the SEC is capable of spearheading and promoting a discussion of how to establish an ESG disclosure system that would advance "decision-useful, reliable and, where appropriate, globally comparable ESG information."
Mr. Coates acknowledged the difficulty of creating a global ESG disclosure framework, noting that several matters must be taken into consideration, including (i) the reliability and adequacy of funding and (ii) ensuring the independence and credibility of anyone tasked with setting ESG disclosure standards.
Commentary
Before the SEC launches into the creation of a full-fledged ESG disclosure regime, it ought first to explain (i) the statutory basis for creating such a regime and (ii) the purpose of such a regime. Once those two questions are answered, the SEC can then move on to the scope of the regime and the methodology. Once a regime is in place, with established rules, the SEC might consider how to bring enforcement actions for violations.
The SEC appears to be reversing the ordinary course of actions. First, the SEC has established an "Enforcement Task Force" focused on ESG issues, although it is not just unclear that there has been any widespread rule-breaking - it is not even clear what rules are at issue. With the enforcement group now at work, the SEC now appears poised to establish rules that may eventually be broken. At some point, perhaps the SEC will turn its attention to the actual statute and to the purpose of such rules.
In support of his position that more ESG disclosure is required, Mr. Coates reaches for the analogy that at one point the SEC had begun to mandate disclosure as to issuers' exposure to asbestos. The analogy is inapt. Asbestos liability was a very specific risk that was borne by specific companies, and that had potentially very significant direct financial consequences. Mr. Coates does not attempt to define what is "ESG," and what about it must be disclosed.
Primary Sources
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
