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The U.S. Securities and Exchange Commission (SEC) has in recent years prioritized environmental, social, and governance (ESG) disclosures by public companies and the fight against “green washing” as key policy initiatives. This includes the creation of a Climate and ESG Task Force in 2021, whereby the SEC planted a flag in the ground and made it clear that ESG disclosure regulation will be a fixture of their capital markets oversight.
Many publicly traded U.S. companies have in recent years voluntarily increased their ESG disclosures. One study by the Center for Audit Quality found that 95% of the S&P 500 companies now make detailed ESG information publicly available. This includes annual ESG reports on their corporate websites, social media campaigns to promote their ESG initiatives, and direct communications to customers and investors regarding their ESG performance.
But recent developments at the SEC could advance ESG disclosures toward establishing a formal regulatory regime.
Last March, the SEC released proposed rule amendments that would require public companies to include various climate-related information in their registration statements and other periodic reports.
“These proposed rules require registrants to disclose extensive climate-related information in SEC filings, with a multi-year phase-in based on the company’s filing status,” said Ashley Yoon, an associate in the New York office of Debevoise & Plimpton. “The SEC has received a significant amount of feedback on these proposed rules, nearly 15,000 comments to date. The final version, which is expected later this year, will likely be watered down from the original proposal.”
Then last May, the SEC released proposed amendments requiring certain registered investment advisers and funds to provide additional information regarding their ESG investment practices.
“The purpose of this proposal is to provide consistent standards for ESG disclosures, allowing investors to make more informed decisions as they compare ESG investments,” said Ulysses Smith, ESG senior adviser in the New York office of Debevoise & Plimpton. “This proposal has been met with far fewer comments and is generally perceived to be less onerous in terms of compliance. The final rule should arrive from the SEC in October.”
To be sure, the increased focus on ESG disclosures by public companies is not unique to the U.S. SEC. The EU has introduced a significant Corporate Sustainability Reporting Directive (CSRD), which mandates detailed reporting standards for public companies. The CSRD applies to EU and non-EU companies, albeit with different standards and different timing.
“The EU is the first jurisdiction worldwide to mandate sustainability reporting by companies,” said John Young, international counsel in the London office of Debevoise & Plimpton.
But in light of the looming rollout of new SEC regulations regarding ESG disclosures in capital markets, it is important for attorneys to advise public companies on setting up adequate processes and procedures for compliance with these new rules in 2023. Paul Rodel, a New York-based corporate partner and co-chair of Debevoise & Plimpton’s Capital Markets Group, identified three suggested next steps for companies to take:
While formal SEC rules are likely coming later this year, it is important for companies to continue vetting their current ESG-related disclosures based on materiality, even before any new rules are applied. Rodel notes the need for caution related to “greenwashing” and “green-hushing” allegations in particular.
There are some things we know about the pending SEC rules and other things we don’t know. For example, we know the SEC is targeting April 2023 for finalizing the new requirements and we also know there will be long lead times put in place so that companies are able to gather the necessary data and corporate governance expertise, according to Rodel. But on the other hand, we really don’t know yet what the final rules will look like as it seems clear there will be changes made to the original SEC proposals — and there will likely be constitutional challenges brought to block the imposition of the rules.
Rodel advises there are a few key basics that public companies will need to put in place in order to establish compliance with ESG-related disclosure requirements over the long haul: (1) Make sure you have the right data in front of you prior to drafting the required disclosures; (2) Understand the company’s disclosure profile, including future disclosure requirements and non-U.S. disclosure requirements; and (3) Understand the company’s governance profile, including ensuring appropriate oversight by qualified directors.
Rodel, Smith, Young and Yoon shared their insights during a recent Emerging Issues webinar hosted by LexisNexis. Watch a recorded playback of the webinar, “ESG in ’23: Key Capital Markets Trends & Developments,” to learn more about the implications of emerging regulations pertaining to ESG disclosures in the capital markets.
For attorneys who provide counsel in this developing area of law, the Lexis Practical Guidance team has published an Environmental, Social, and Governance Resource Kit, a comprehensive collection of resources from LexisNexis that provides legal professionals with timely news, information and guidance on how to ensure compliance with emerging ESG disclosure requirements.