SEC Acting Chair Allison Herren Lee requested public comment on environmental, social and governance ("ESG") disclosure requirements in Regulation S-K, Regulation S-X and Form 20-F. In a speech before the Center for American Progress, she also reaffirmed her commitment to the development of an effective ESG disclosure framework.

Ms. Lee asserted that investor demand for ESG disclosure "is not being met by the current voluntary framework." She described the prioritization of ESG for the agency as resulting from the "magnitude of the shift in investor focus" toward ESG risks in investment decision-making and the diminishing distinction between "what's 'good' and what's profitable."

Ms. Lee highlighted shareholder proposals and proxy voting as effective mechanisms to exercise oversight, and directed SEC staff to:

  • develop proposals that revisit the no-action process and consider revising SEA Rule 14a-8 (shareholder proposals). Ms. Lee stated that this may include "reversing last year's mistaken decision to bar proponents from working together and restricting their ability to act through experienced agents." (See amended Rule  14a-8(b)(1)(vi) and  (c) and previous coverage on the adopted amendments);
  • revisit (i) the SEC's August 2019 guidance regarding proxy voting responsibilities of investment advisers, (ii) Form N-PX and (iii) the 2016 universal proxy rule proposal; and
  • consider, alongside enhanced transparency around proxy voting, whether additional steps, such as "ESG-specific policies," should be required.

To address one of the challenging regulatory questions for the SEC, Ms. Lee recommended that the SEC develop a dedicated standard setter for ESG under SEC oversight. The intent is to devise a reporting framework complementary to the SEC financial reporting framework, that would be flexible and capable of evolving as necessary.

Ms. Lee noted another significant ESG issue: the interconnection between political spending disclosures and ESG; for example, a company may have carbon-neutral pledges but donate to candidates with voting records inconsistent with such assertions. She noted that this is an area in which the SEC cannot currently finalize a rule.

Ms. Lee added that ESG issues are "fundamentally about protecting everyday investors," likening the focus to Regulation Best Interest, a core retail investor protection issue on which "the SEC should bring significant resources to bear."

In the request for public comment, Ms. Lee posed questions for consideration, including:

  • how should the SEC "craft" climate-related disclosure within a broader ESG disclosure standard?
  • how should the SEC handle private companies' climate disclosures, such as exempt offerings or oversight of certain investment advisors and funds?
  • how can the SEC "elicit meaningful discussion" of a registrant's views on climate-related risks and opportunities?
  • should the SEC implement a "comply or explain framework?"
  • should the SEC require an ESG certification by the CEO, CFO, or other corporate officers?
  • what are the advantages and disadvantages of disclosure concerning the connection between executive or employee compensation and climate change risks?
  • what characteristics should a standard-setter have?
  • what are the advantages and disadvantages of different climate change standards for different industries?
  • should disclosures be tiered based on a registrant's size?

Commentary Steven Lofchie

Acting Chair Lee has made clear that ESG disclosure will be a central focus of the SEC during her tenure. See, e.g., SEC Acting Director Emphasizes Need to Both Adapt and Innovate for Effective ESG Disclosure; SEC Establishes Enforcement Task Force Focused on Climate Risks and ESG; SEC to Update Guidance on Climate Change-Related Disclosure. This focus is consistent with her remarks before she assumed her current status as Acting Chair. See, e.g., SEC Commissioners Issue Divergent Opinions on Proposed Changes to Issuer Disclosure Requirements.

A number of the actions that she has taken (e.g., the establishment of an ESG Enforcement Task Force in the absence of evidence of systemic violations) and proposals made in this statement (e.g., to impose an ESG disclosure requirement on private placement transactions) are certainly "outside the box." Given the state of the U.S. economy emerging from the pandemic, an action by the SEC to make it more expensive to raise capital privately by imposing ESG disclosure requirements on such transactions (assuming that the SEC has authority to do so in light of Section 4(a)(2) of the Securities Act) is not one that should be undertaken lightly.

There is one element of Ms. Lee's ESG strategy that seems particularly outside the box. Ms. Lee apparently would find it a violation of an issuer's disclosure obligations if the issuer were to indicate that it supported "climate-friendly initiatives [but] donated substantial sums to candidates with climate voting records inconsistent with such assertions." Taking this concern to its logical conclusion, Ms. Lee would have the SEC determine which elected officials passed the SEC's "climate-friendly" litmus test. This is not a task for which the SEC is suited. Beyond that, it is not the job of any government agency to be giving pass-fail grades to elected officials; nor is it the job of a government agency to be declaring it a crime (the making of a false disclosure) for an issuer to make a political contribution to an elected official who fails the SEC's test. This is not the first time that Acting Chair Lee has indicated she believes that the SEC has extraordinary power to involve itself with matters of politics and speech. In a September 2020 speech on disclosure issues, she indicated that the SEC might take actions that would discourage issuers from advertising on television shows with political views that she believed were unpopular, singling out Tucker Carlson (at fn. 14). Just as it is not the job of the SEC to evaluate elected officials, it is not the role of the SEC to assess the views of television hosts.

The authority that Ms. Lee asserts raises questions that go beyond the proper role of the SEC. If the SEC threatens enforcement action against issuers that contribute to a disfavored candidate or advertise on a disfavored television program, first amendment issues are involved.

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