Winds of change now blowing at the SEC:

Climate and ESG enforcement clearly on the radar!

By Alan Willis, FCPA, FCA

Recent statements and press releases from 100 F Street, NE in Washington, DC indicate unmistakably that the winds of change are blowing at the SEC, in several ways.

The latest sign of this is a March 4, 2021 Press Release by the SEC, “SEC Announces Enforcement Task Force Focused on Climate and ESG Issues”:

“Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct….The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies….”

“Climate risks and sustainability are critical issues for the investing public and our capital markets,” said Acting Chair Allison Herren Lee. “The task force announced today will play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.”

This should not come as much of a surprise for anyone who has tracked the pronouncements of Acting Chair Allison Herren Lee over the last year.

On March 3, 2021, commenting on a press release about the SEC’ Examinations Division “Enhanced Focus on Climate Related Risks,” she said “This year, the Division is enhancing its focus on climate and ESG-related risks….Through these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework.”

On February 24, in an SEC Public Statement, Lee said “Today, I am directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. The Commission in 2010 provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters. As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks….Now more than ever, investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future.”

Now look back a little further to November 5, two days after the U.S. federal election, when (then) Commissioner Allison Herren Lee gave the keynote remarks to the 52nd Annual Institute on Securities Regulation convened (virtually) by the Practising Law Institute. Her speech was titled “Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation.” In my view, this was a landmark speech in terms of the importance and the breadth of scope of the topics she addressed, the clarity with which the reasoning was expressed, the quality of supporting research (and footnote references provided) and the stature and credibility of the speaker – one who had made several other key statements earlier last year about the SEC’s role regarding ESG and climate change in financial markets.

Interestingly, on March 4, 2021, two Republican SEC Commissioners (Peirce and Roisman) issued a public statement questioning the meaning of, and immediate need for, this “enhanced focus on climate-related matters,” and urging (predictably!) a more measured approach by the SEC in this space. Perhaps to blur the focus, or simply (and politically) to downplay the urgency of focusing on climate change?

Meanwhile, from Madrid on February 24, 2021, there emanated a media release by the Board of the International Organization of Securities Commissions (IOSCO) proclaiming “IOSCO sees an urgent need for globally consistent, comparable, and reliable sustainability disclosure standards and announces its priorities and vision for a Sustainability Standards Board under the IFRS Foundation.” This is a direct reference to the IFRS Foundation’s September 2020 proposals, reviewed in my December 2020 and February 2021 blogs (“IFRS Foundation – Next Steps Towards Global Standards for Sustainability Reporting”).

The IOSCO release indicates clear support for the IFRS Foundation’s establishment of a new Sustainability Standards Board within its existing governance structure, building on and leveraging existing work by other sustainability reporting organizations, prioritizing climate related disclosures but moving forward quickly to standards for other sustainability reporting (“ESG”) topics, and focusing on disclosure relevant to enterprise value creation – all in an international, collaborative building block approach. As IOSCO said in its response to the IFRS Foundation consultation last December, “IOSCO believes that robust sustainability reporting standards, interconnected with financial reporting standards, would also support audit and assurance – enhancing the market’s trust in sustainability disclosures, and laying the foundations for mandatory corporate reporting on sustainability internationally.”

In the US, the SEC looks to FASB, not the IFRS Foundation’s IASB and IFRS, for public company financial statement accounting standards, but is it now possible to believe that SEC requirements for climate change and sustainability reporting could be those issued by the IFRS Foundation’s new sustainability standards board (SSB), endorsed and promoted for global regulators’ use by IOSCO? After all, it is noteworthy and encouraging that Acting SEC Commission Chair Allison Herren Lee serves on the international Board of IOSCO. If FASB were ever to adopt the IASB’s IFRS along with most other jurisdictions worldwide, then anything would be possible!

An alternative, “made in America” path for the SEC to consider to enhance US issuers’ ESG disclosures would be to adopt, reference or endorse the ESG reporting standards developed by the Sustainability Accounting Standards Board (established in 2011 as a US non-profit) and issued in 2018. These voluntary standards were developed to guide companies in providing in their regular 10K filings disclosures about ESG matters that would be material to investors in their decision making and evaluation of a company’s future financial performance. The SASB’s prestigious Foundation Board includes (as Chair Emeritus) Michael Bloomberg, chair of the FSB’s Task Force on Climate-related Disclosures, and Mary Schapiro, a former SEC chair, who would be a valuable strategic asset and advisor for any dialogue with the SEC. SASB standards are now among those that would be considered by the IFRS Foundation’s proposed Sustainability Standards Board, along with those of the GRI, IIRC and others, to build on in creating its global sustainability reporting standards.

It’s noteworthy that voluntary guidance for Canadian companies about material climate change-related disclosures to include in their MD&As was issued by the CICA in 2008, subsequently re-released by CPA Canada.

Clearly, the SEC is now a must-watch agency in 2021 and beyond for investors, financial institutions and businesses to monitor and engage with on matters of climate change and ESG reporting. A quote in a recent Bloomberg article said “At a time when many are questioning whether capitalism can really work for everyone and address huge societal challenges like racial justice and climate change, the importance of the SEC becomes enormous: it sets the rules for companies and their investors.” (Tyler Gellasch, a former SEC aide).

Watch where these winds of change are blowing! Canada’s securities regulators will be watching too. So will I.