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Climate disclosure and ‘No Action’ process under review by SEC as regulator asks market for input on ESG

Herren Lee says investor demand for information ‘not being met by the current voluntary framework’ and floats creation of ESG standard setting body

The head of the US Securities and Exchange Commission (SEC) has hinted that mandatory climate disclosure by corporates is needed to provide investors with the information they need. 

In another sign that the world’s biggest financial market will move to introduce reporting requirements, the SEC’s Acting-Chair, Allison Herren Lee, said yesterday: “Investors are demanding more and better information on climate and ESG, and that demand is not being met by the current voluntary framework. Not all companies do or will disclose without a mandatory framework, raising the cost, or resulting in the misallocation, of capital”.

In the speech, given at the Center for American Progress, she also announced that the regulator is calling on the market for input on whether its current disclosure regime is fit for purpose on climate. 

‘It’s time to move from the question of ‘if’ to the more difficult question of ‘how’ we obtain disclosure on climate’ – Herren Lee

US president Joe Biden appointed Herren Lee as Acting Chair of the regulator in January. According to a statement accompanying the launch of the consultation yesterday, she tasked staff with evaluating the SEC’s current disclosure rules earlier this month, “with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change”.

As part of the outreach, market participants are invited to comment on whether the SEC should introduce new disclosure requirements or, potentially, even a new framework in line with existing disclosure frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB) and the Climate Disclosure Standards Board (CDSB).

The consultation is the latest indicator that the SEC has shifted substantially on sustainability since President Biden took office. In her speech, Herren Lee described climate and ESG as “front and centre for the SEC” and added that the time had come to “move from the question of ‘if’ to the more difficult question of ‘how’ we obtain disclosure on climate”. 

She also floated the idea of creating a domestically focused “dedicated standard setter for ESG” – similar to the Financial Accounting Standards Board. Such a body, she said, would be overseen by the SEC and charged with devising “an ESG reporting framework that would complement our [the SEC’s] financial reporting framework”. 

It was also revealed in the speech that SEC staff are looking at the guidance used to assess ‘no-action’ requests, through which companies seek assurances that the regulator won’t take action if they exclude a shareholder proposal from the ballot at annual meetings. The mechanism was used successfully by companies during the Trump presidency to strike sustainability and climate-related votes off the ballot.  

Herren Lee said that work on the ‘no-action’ process “could also involve reaffirming that proposals cannot be excluded if they concern socially significant issues, such as climate change, just because they may include components that could otherwise be viewed as ‘ordinary business’”. 

It was also revealed that the SEC’s Division of Examinations will this year take a closer look at ESG fund proxy voting policies and practices to “ensure alignment with investors’ best interests and expectations”. 

Earlier this month, the regulator announced the formation of a Climate and ESG Task Force to identify what it calls “ESG-related misconduct”. 

The SEC last issued guidance on climate change in 2010, under the leadership of Mary Schapiro. Since then, “investor demand for, and company disclosure of information about, climate change risks, impacts, and opportunities has grown dramatically”, Herren Lee wrote. 

In May, the SEC’s Investor Advisory Committee approved recommendations urging the regulator to start to update reporting requirements for issuers around material ESG factors. 

Then in December, the ESG Subcommittee of the SEC’s Asset Management Advisory Committee issued a “preliminary recommendation” that the SEC require the adoption of disclosure standards for corporate issuers on material ESG risks. 

The SEC’s new consultation asks the market to respond to a comprehensive set of questions grouped around 15 areas. Questions range from how climate disclosures can be made more consistent to how the absence of a “robust carbon market” impacts a firms’ analysis of climate risk.

Respondents are encouraged to “submit empirical data” in support of their comments. The deadline for participation is in 90 days.