During Biden Administration, SEC Will Require Climate Change Risk And ESG Disclosure – Corporate/Commercial Law


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During Biden Administration, SEC Will Require Climate Change Risk And ESG Disclosure


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Public companies will be required to disclose climate risks and
greenhouse gas emissions under President-elect Biden’s
administration. The Securities and Exchange Commission (SEC) will
institute rulemaking and guidance on the federal monitoring of
environmental, social and governance (ESG) issues. The Biden
administration’s decision to require climate report disclosures
follows complaints from investor advocacy groups about inconsistent disclosure practices due to voluntary
reporting frameworks
.

Under the outgoing Trump administration, SEC Chairman Jay
Clayton relied on a “principles-based approach” to climate
disclosure. Through this approach, the SEC loosened certain requirements for companies under
Regulation S-K
and relaxed conflict-of-interest rules for independent
auditors under Regulation S-X
. Requirements were eased this
past August and October in a pair of highly controversial split
decisions.

Commissioner Allen Herren Lee, one of two Democrats who would
join Biden’s three-member majority, strongly opposed the
SEC’s decision to make changes to regulation S-K. Lee indicated
that the SEC should instead be demanding more ESG disclosures from
companies. In her dissent, she wrote, “Shareholders are
beginning to accomplish on climate change what they have
accomplished on numerous other significant issues crucial to good
governance and long-term value-focus management attention and drive
valuable and needed change. The Commission should be encouraging
this type of engagement, not stifling it.”

In closing, Commissioner Lee stated, “In the end,
these amendments will restrict shareholders’ ability to oversee
and engage with management of the companies they own. They do not
properly value shareholder proposals or shareholder rights. And
they will restrain shareholder efforts on issue that are of
pressing importance to them and the broader economy.”

In recent years, Congressional Democrats have promoted
legislation that would require companies to disclose ESG-related
risks. In 2019, Senator Elizabeth Warren submitted S.2075, the “Climate Risk Disclosure Act of
2019,”
which directs the SEC to “require an issuer of
securities to annually disclose information regarding
climate-change related risks posed to the issuer, including an in
issuer’s strategies and mitigate these risks. Among other
things, issuers must report their direct and indirect
greenhouse-gas emissions, disclose their fossil-fuel related
assets, and establish standards regarding the social cost of
carbon.”

Representative Juan Vargas also introduced a bill which would
require public companies to disclose ESG metrics. H.R.4329, or the, “ESG Disclosure
Simplification Act of 2019
,” would establish a Sustainable
Finance Advisory Committee within the SEC that would “submit to the Commission recommendations
about what ESG metrics the Commission should require issuers to
disclose.”

Both bills are unlikely to be recommended out of committee under
the current administration, but the priority change is likely to happen once president-elect Biden
assumes office. This legislation, in combination with Commissioner
Lee’s statements in support of mandatory climate disclosure, is
part of a wider national call for increased regulations. In its
latest Financial Stability Report, the U.S. Federal Reserve
released a statement in support of climate risk disclosure. It anticipates that banks “have systems
in place that appropriately identify, measure, control and monitor
all of their material risks, which for many banks are likely to
extend to climate risks.”

Should President-elect Biden successfully institute a regulatory
framework for corporate ESG disclosures, investment funds will be
well-positioned to deliver trillions of dollars of
investment capital
into the U.S. economy to meet climate goals.
This past December, members of the Investment Company Institute,
which manages more than $34 trillion in assets, formally called upon US public companies to
provide ESG disclosure consistent with standards set by the Task
Force on Climate-Related Financial Disclosure (TCFD) and
Sustainability Accounting Standards Board (SASB). These recent
actions suggest that mandatory ESG and climate risk disclosure is
likely to be met with widespread investor support.

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.

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