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By Scott M. Tayne
In-house counsel at many U.S. companies are preparing for intensified federal regulatory activity under the Biden administration compared to their experience in recent years. One federal agency that has already signaled its intention to be more active is the Securities and Exchange Commission (SEC).
A significant issue on the SEC’s radar right now is environmental, social and corporate governance (ESG) disclosures by public companies. The Biden administration has already telegraphed an increased focus on ESG issues, and the SEC created a Climate and ESG Task Force this spring to focus on the enforcement of climate-related disclosures by U.S. public companies.
Additionally, in June 2021, the U.S. House of Representatives narrowly approved a bill that would require the SEC to issue new rules mandating that every public company disclose specific metrics in their financial statements that are tied to climate change impacts of their operations. And, while observers generally expect this legislation to fall short of the votes needed to overcome a filibuster in the Senate, the SEC has made it clear that ESG disclosure regulation will be a central focus in the near term and is now “working toward a comprehensive ESG disclosure framework” to be unveiled soon.
Based on our review of speeches by SEC commissioners and staff—and published insights from securities regulation experts—the following are specific disclosure areas that appear to be on the SEC rulemaking radar.
For many public companies, disclosure of ESG matters may already be required under existing SEC rules. For example, public companies “are required to disclose material risks to their businesses and known trends or uncertainties that may materially impact their financial results,” according to the article Key ESG Disclosure Considerations for Public Companies by Morrison & Foerster LLP attorneys Alfredo Silva and Will Carter on the Lexis+™ service. This obligation often includes climate and regulatory risks that fall under the broader ESG umbrella.
In-house counsel should prepare for anticipated expanded SEC disclosure requirements covering environmental-related metrics, including greenhouse gas emissions, fossil fuel assets and other direct impacts of their business operations on and from climate change. Internal work that is completed to document corporate sustainability and other environmental reporting initiatives may be a good starting point for many corporate attorneys.
It is safe to assume that social justice issues—including diversity, equality and inclusion—will also be addressed in the SEC’s new ESG disclosure rules. We may have even received a preview of this increased focus this summer when an SEC advisory panel adopted several recommendations to increase diversity and inclusion in the asset management industry in the United States.
In-house counsel should review or begin preparing, as applicable, policies and procedures that document their organization’s approach to environmental justice, human rights, indigenous rights, racial justice and climate justice. They also should review and revise, as necessary, their disclosure controls and procedures to ensure accurate and complete disclosure of these matters in response to any new SEC requirements. The recent and widespread Me Too and Black Lives Matter movements likely activated internal discussions and kicked off many corporate initiatives focused on social justice issues. The SEC may require public companies to disclose what they do or don’t do regarding social justice issues.
Corporate Governance is a component of ESG with a long history of SEC regulation, including major expansions of governance and related disclosure requirements stemming from the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010. This historical focus tended to be driven by financial considerations—principally because:
New SEC disclosure rules may be coming soon, though, that address “human capital” concerns, which, some may argue, don’t fall directly within those objectives.
In-house counsel should prepare for possible SEC rulemaking that requires disclosure of metrics such as workforce turnover, skills and development training, compensation, benefits, workforce demographics, and health and safety considerations. This sort of data may seem like it belongs in a human resources management report more than in an SEC periodic report, so it’s time to get internal teams prepared now for what may be coming soon.
Observers note that other potential SEC rulemaking is in the works related to ESG-type disclosures that doesn’t fit neatly into the three categories above. For example, mutual funds and ETFs may be required to disclose the criteria and underlying data used in marketing funds as “green,” “sustainable” and “low carbon” offerings. And Chair Gary Gensler appears to be focused on making changes to the Rule 10b5-1 affirmative defense provisions for insider trading plans, which could have a material impact on the ability of corporate executives to sell shares of their companies.
What seems clear, however, is that it is not a matter of if the SEC will issue new ESG disclosure rules, but rather when it will happen and what the rules will be. The prudent thing for in-house counsel to do is begin preparing for ESG disclosure metrics now.
LexisNexis® has created an Environmental, Social and Governance Resource Kit comprising practice notes, articles, checklists and templates to provide guidance for in-house counsel. This resource kit will be updated as further SEC guidance is provided in the days ahead.