SEC fault lines widen over ESG ‘materiality’

Disagreement over disclosure rules at the financial regulator comes as Fed head wades in on climate

The tug of war over ‘double materiality’ in the US continued yesterday, with Elad Roisman, a Commissioner at the Securities and Exchange Commission (SEC), saying the financial regulator should focus only on information that is “material to an investment decision” when developing ESG disclosure requirements.

In remarks at an event organised by the National Investor Relations Institute, Roisman said the SEC should stick to its existing approach, claiming: “Even disclosure requirements that, on their face, do not appear to have materiality qualifiers, were crafted by the Commission with materiality as a guiding principle. I believe, as the Commission continues to consider new potential disclosure requirements, we should continue to use materiality as our touchstone.”

The comments suggest a schism among the SEC’s five Commissioners. Roisman is one of two Republican commissioners at the regulator, and his views on the topic are in sharp contrast to that of Democrat Commissioner Allison Herren Lee, who recently argued that the SEC is not bound by materiality when creating corporate disclosure rules.

“The idea that the SEC must establish the materiality of each specific piece of information required to be disclosed in our rules is legally incorrect, historically unsupported, and inconsistent with the needs of modern investors, especially when it comes to climate and ESG,” she said at the time.

The rift between the two commissioners are indicative of the scale of the task at hand for the SEC, which is currently drafting new rules on ESG disclosure for a tentative October release. A call for feedback ended last week with more than 250 submissions.

One of the central points of disagreement in the marketplace is whether a ‘double materiality’ approach should be adopted by the regulator when mandating ESG disclosures. Double materiality refers to the inclusion of information about how an entity impacts social and environmental issues, as well as how such issues may impact financial performance. Europe has embraced the approach, but there is concern in some corners that it will overburden companies and investors and undermine some interpretations of fiduciary duty. 

San Francisco Federal Reserve President Mary Daly also argued this week that climate change falls under the purview of the Fed, due to its potential impact on key policy goals of employment and inflation – known collectively as the Fed’s ‘dual mandate’. In addition, climate change can also affect savings behaviour, labor productivity and capital investment, she said – all of which could further limit the ability of the Fed to fight economic downturns in the future.

The comments, which were made during a Peterson Institute for International Economics webinar, come soon after Fed Chairman Jerome Powell said that climate change was not a main consideration for the setting of US monetary policy. 

Elsewhere, the Bank of International Settlements (BIS), which represents central banks and regulators from 62 jurisdictions, has announced four projects to improve the quality of ESG disclosure and data using tech. BIS will explore technologies that can aid the collection and reporting of ESG data by financial institutions, enhance the quality and comparability of sustainability disclosures, improve impact reporting, and measure greenhouse emissions and other ESG-related metrics.

The projects will be coordinated by BIS’s Innovation Hub which was established in 2019 to foster international collaboration and digital innovation, Hub chief Benoît Cœuré said yesterday.