CRS Examines SEC's Regulatory Posture On Climate Risk

In a new report by the Congressional Research Service ("CRS"), CRS provides an in-depth analysis of the approach the SEC is taking towards climate-related financial risk disclosure criteria. The CRS report provides an overview of existing securities laws that are already impacting the environmental, social and governance ("ESG") disclosure practices of investment funds and investment managers, including recent developments from the Division of Examinations.

The report includes:

1. an overview of the current disclosure regime for climate-related financial risk disclosures;
2. the application of the federal securities law "materiality" standard in the context of climate-related financial risks, discussing recent case law;
3. a discussion of whether companies should provide more fulsome disclosures regarding supply chain risks arising from climate change; and
4. an overview of the SEC's regulatory approach to ESG funds and investment management companies regarding climate change.

As outlined in the CRS report, climate-related financial risks to the U.S. financial system have garnered increased public attention and raised questions about how financial regulators like the SEC are addressing them. CRS states that the two central questions in assessing the SEC's overarching goal of protecting investors are "whether, and to what degree, emergent climate change risks are of material importance to investors, and to what degree current disclosures of climate change risks have been useful to investors."

In the report, CRS highlighted steps the SEC has taken to address shortcomings from the 2010 Guidance, and reviewed the following recent measures:

1. SEC Chair Gary Gensler instructed SEC staff to develop a mandatory climate risk disclosure rule proposal for the Commission's consideration;
2. the SEC created an ESG Task Force to reexamine disclosures by ESG funds and analyze compliance issues relating to ESG strategies; and
3. the Division of Corporate Finance issued sample letters to public companies to serve as guidance in climate-related corporate disclosures.

The CRS concluded that pressure is "mounting" for the SEC to set out more explicit guidelines for companies to disclose material risks related to climate change, which includes "standards for disclosures" and "specificity and consistency."

Commentary

Issuers can soon expect the SEC to issue a proposed new rule on climate risk disclosures, and can further expect that it will follow a more prescriptive approach to disclosure than the 2010 Guidance.  It is still unclear whether the new prescriptive approach will leverage existing disclosure frameworks from standards-setting organizations such as the Task Force on Climate-Related Financial Disclosures (TCFD) or the Sustainability Accounting Standards Board (SASB), and to what extent the SEC's proposed new rule will adopt an approach similar to the EU's Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation. No matter what form the proposed rule takes, issuers can be certain that compliance costs will likely increase.

Primary Sources

1. Climate Change Risk Disclosures and the Securities and Exchange Commission

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