23 März 2021 Doug Davison  -  Patrick Ashby  -  Mary Han BusinessCrimeLinks

Is the grass greener on the ESG-focused side? SEC increases focus on climate-related issues

The U.S. Securities and Exchange Commission (“SEC”) has recently announced a host of new initiatives that will significantly ramp up its attention to Environmental, Social and Governance (“ESG”)-related issues, which could result in an increased number of SEC enforcement actions and related lawsuits filed by private plaintiffs in this area.

First, and perhaps most notably, on March 4, 2021, the SEC announced the launch of a Climate and ESG Task Force. The Task Force will principally focus on:

  • identifying “material gaps or misstatements in issuers’ disclosures of climate risks under existing rules”
  • analyzing “disclosure and compliance issues related to investment advisers’ and funds’ ESG strategies”
  • evaluating “tips, referrals, and whistleblower complaints on ESG-related issues.” 

There will be 22 members serving on the Task Force, led by the Acting Deputy Director of Enforcement, Kelly L. Gibson.

Second, the SEC’s Division of Examinations recently issued its 2021 Examination Priorities Report (“2021 Priorities Report”), indicating that it will “prioritize emerging risks, including those relating to climate and ESG.”  Among other things, the Division will: 

  • examine whether companies’ business continuity and disaster recovery plans, “particularly those of systemically important registrants, account for the growing physical and other relevant risks associated with climate change;” and 
  • with respect to registered investment advisers and investment companies, who are increasingly offering investment strategies that focus on ESG factors: (a) review “the consistency and adequacy” of their disclosures relating to those strategies; (b) determine whether the firms’ processes and practices are consistent with their disclosures; (c) analyze fund advertising materials for any false or misleading statements; and (d) examine “proxy voting policies and procedures and votes to assess whether they align with the strategies.”

The 2021 Priorities Report further explained that “[a]s climate-related events become more frequent and more intense, we will review whether systemically important registrants are considering effective practices to help improve responses to large-scale events.”

Third, the current Acting Chair of the SEC, Allison Herren Lee, in late February directed the Division of Corporation Finance to “enhance its focus on climate-related disclosure in public company filings,” and to use what it learns from doing so to begin updating guidance published by the SEC in 2010 regarding disclosure requirements relating to climate change issues.

Building on this idea, in a subsequent speech at an industry conference, Acting Chair Lee also said that the SEC would like to develop a “global” framework for ESG disclosures. Although she conceded that this is a project of “staggering complexity,” Acting Chair Lee indicated that the SEC will be coordinating with and drawing lessons from key partners, including the Financial Stability Board and the International Organization of Securities Commissions. 

Fourth, the SEC recently appointed Satyam Khanna to serve as Senior Policy Advisor for Climate and ESG, where he will advise the SEC on ESG matters and “advance related new initiatives across its offices and divisions.” 

And finally, President Biden’s nominee to serve as SEC Chair, Gary Gensler, also made comments during his recent nomination hearing recognizing that investors want increased climate-related disclosures. Thus, he is likely to continue the SEC’s focus on ESG issues, including the initiatives recently announced by Acting Chair Lee, if and when confirmed, as he is expected to be.

What to expect going forward, and what to do now

The two Republican Commissioners (representing half of the total number of Commissioners at the SEC, who will soon be outnumbered by Democrats, once the Chair is confirmed), questioned whether the recent ESG developments announced by the Acting Chair amount to little more than “continuing ongoing efforts with a little extra fanfare.” While it remains to be seen what precise actions the SEC ends up taking, it is clear that market participants are going to experience significantly increased focus from the SEC on ESG-related issues, including potentially increased enforcement actions by both the SEC as well as private litigants. Accordingly, companies should carefully consider together with their legal counsel the substance and adequacy of any existing disclosures, and the potential need for enhanced disclosures.