The following was adapted from a presentation March 15 by Allison Herren Lee, acting chair of the U.S. Securities and Exchange Commission. The entire presentation, "A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC," which includes more than 30 footnotes, can be found here.
I’ve had the honor of serving as acting chair of the SEC for nearly two months now, and I appreciate the opportunity to reflect on the enhanced focus the SEC has brought to climate and ESG during that time, and on the significant work that remains. Along with shepherding the agency through the transition and supporting the work of the SEC staff, no single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system and our economy.
Today, I want to map out the ways in which we have brought investors’ voices to the forefront on these issues in recent months. There is really no historical precedent for the magnitude of the shift in investor focus that we’ve witnessed over the last decade toward the analysis and use of climate and other ESG risks and impacts in investment decision-making. For a long time, so-called impact or socially responsible investing was perceived or characterized as a niche personal interest — the pursuit of ideals unconnected to financial or investment fundamentals, or even at odds with maximizing portfolio performance.
That supposed distinction — between what’s "good" and what’s profitable, between what’s sustainable environmentally and what’s sustainable economically, between acting in pursuit of the public interest and acting to maximize the bottom line — is increasingly diminished. Not only have we seen a tremendous shift in capital towards ESG and sustainable investment strategies, but ESG risks and metrics underpin many traditional investment analyses on investments of all types — a dynamic sometimes referred to as "ESG integration."
In other words, ESG factors often represent a core risk management strategy for portfolio construction. That’s because investors, asset managers responsible for trillions in investments, issuers, lenders, credit rating agencies, analysts, index providers and other financial market participants have observed their significance in terms of enterprise value. They have embraced sustainability factors and metrics as significant drivers in decision-making, capital allocation and pricing.
Human capital, human rights, climate change — these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues.
Human capital, human rights, climate change — these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues. We see that unmistakably in shifts in capital toward ESG investing, we see it in investor demands for disclosure on these issues, we see it increasingly reflected on corporate proxy ballots, and we see it in corporate recognition that consumers and investors alike are watching corporate responses to these issues more closely than ever.
That’s why climate and ESG are front and center for the SEC. We understand these issues are key to investors — and therefore key to our core mission. And just as we recognize that these issues do not observe artificial distinctions between society and financial markets, we recognize that climate and ESG transcend other boundaries as well. Geographical boundaries for one. These are global challenges for global markets that demand global solutions. Regulatory boundaries for another. Climate, for instance, is not just a [U.S. Environmental Protection Agency], Treasury or SEC issue — it’s a challenge for our entire financial system and economy.
At the agency, we are taking a holistic look at all of the ways climate and ESG intersect with our regulatory framework and moving ahead with efforts across our offices and divisions to account for that. In the last couple of months, we’ve taken important steps forward. And we are actively laying the groundwork for more progress to come.
Informing the markets. The most fundamental role that the SEC must play with respect to climate and ESG is the provision of information — helping to ensure material information gets into the markets in a timely manner. 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. Investors also aren’t getting the benefits of comparability that would come with standardization. And there are real questions about reliability and level of assurance for the disclosures that do exist.
As an important near-term step, earlier this month I asked the Division of Corporation Finance to enhance its focus on climate-related disclosures. In 2010, under the leadership of [former SEC Chair] Mary Schapiro, the commission for the first time provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters. Part of what the staff will do now is review the extent to which public companies address the topics identified in the 2010 guidance and comply with current requirements.
Much has changed in the last decade — in terms of market practices for gauging ESG-related risks, in terms of the science of climate change, and, unfortunately, in terms of the urgent nature of climate-related risks. And we need to assess how these risks are being analyzed and disclosed by companies to inform an update to the 2010 guidance — and to inform our policymaking going forward.
Request for comment on climate disclosure. To further inform our policymaking, today I am issuing a statement requesting public comment on climate disclosure. Of course, we already have an extensive public record demonstrating investor desire for the SEC to ensure better disclosure in this space. But, it’s time to move from the question of "if" to the more difficult question of "how" we obtain disclosure on climate.
There are important questions to be answered here — what data and metrics are most useful and cut across industries, to what extent should we have an industry-specific approach, what can we learn from existing voluntary frameworks, how do we devise a climate disclosure regime that is sufficiently flexible to keep up with the latest market and scientific developments? Finally, how should we address the significant gap with respect to disclosure presented by the increasingly consequential private markets?
Today’s request gets at these and other important questions. I encourage all market participants to weigh in and help us with this important work.
Beyond climate. As we further our engagement with the market on developing a disclosure framework for climate, we should also consider the broader array of ESG disclosure issues. As I’ve discussed at length before, climate is unique in the potentially systemic nature of the risks it presents. But we must also make progress on standardized ESG disclosure more broadly. That means working toward a comprehensive ESG disclosure framework. In the near term, it should also include considering where we can advance initiatives on a standalone basis now, such as offering guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity and considering more specific guidance or rulemaking on board diversity.
Another significant ESG issue that deserves attention is political spending disclosure. The SEC is currently prevented from finalizing a rule in this area, but political spending disclosure is inextricably linked to ESG issues.
Much has changed in the last decade — in terms of market practices for gauging ESG-related risks, in terms of the science of climate change, and, unfortunately, in terms of the urgent nature of climate-related risks.
Consider, for instance, research showing that many companies that have made carbon-neutral pledges, or otherwise state they support climate-friendly initiatives, have donated substantial sums to candidates with climate voting records inconsistent with such assertions. Consider also companies that made noteworthy pledges to alter their political spending practices in response to racial justice protests, and whether, without political spending disclosure requirements, investors can adequately test these claims or would have held corporate managers accountable for those risks before they materialized. Political spending disclosure is key to any discussion of sustainability.
All of the steps I’ve discussed so far will increase corporate accountability to investors through enhanced transparency and through supporting the exercise of shareholder rights. But our Divisions of Examinations and Enforcement provide critical support in fostering corporate accountability. That’s why I’ve taken important steps to leverage the staff’s expertise in those divisions.
Division of Examination’s climate and ESG priorities. This year’s annual examination priorities included an enhanced focus on climate and ESG, including by examining ESG fund proxy voting policies and practices to ensure alignment with investors’ best interests and expectations, as well as examining firms’ business continuity plans in light of intensifying physical and other relevant risks associated with climate change.
Division of Enforcement’s Climate and ESG Task Force. In addition, two weeks ago, we announced the formation of the first-ever Climate and ESG Task Force within the Division of Enforcement. The task force will work to proactively detect climate and ESG-related misconduct, including identifying any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules and analyzing disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
Engaging across boundaries
Finally, I want to highlight the importance of engagement and cooperation on these issues. As I mentioned, ESG — and climate risks in particular — do not observe jurisdictional boundaries. That is why I am committed to close regulatory cooperation, both domestically with Treasury and other financial regulators, and internationally through bilateral cooperation and through supporting the important multilateral work being done through the [International Organization of Securities Commissions] and the [Financial Stability Board].
International sustainability standard setter. I was particularly pleased to support IOSCO’s recent statement regarding the creation of a Sustainability Standards Board. The SSB represents a promising approach toward the development of an international baseline for sustainability reporting upon which individual jurisdictions could build consistent with their own unique consideration.
Domestic sustainability standard setter. This also raises the question of a similar standard setter domestically. One of the most challenging questions for the SEC is how to devise a climate and ESG disclosure framework that is flexible and can efficiently evolve as needed. One potential path that we should consider is the development of a dedicated standard setter for ESG (similar to FASB) under SEC oversight to devise an ESG reporting framework that would complement our financial reporting framework.
Precisely because the risks and opportunities related to climate and ESG cut across all manner of boundaries, the SEC must do its part, in concert with market participants and regulators around the globe, to address these issues. The lack of common benchmarks and standardized language will continue to inhibit to some degree competitive dynamics around managing climate and other ESG risks.
(Even) more work ahead
Having covered a lot of ground today, I still haven’t reached all the places climate and ESG intersect with the SEC’s regulatory mission. Consider for example, ESG funds. We recently issued an investor bulletin to help investors understand the different potential ESG strategies funds may pursue. We are working towards enhanced transparency around proxy voting. But we should consider additional steps such as, for example, an ESG-specific policies and procedures requirement.
In other areas, what steps should we take to enhance the reliability around existing climate and ESG disclosures, including potentially requiring auditor attestation of current voluntary sustainability reporting? And should the [Public Company Accounting Oversight Board] establish better standards or guidance for how auditors currently address companies’ climate and ESG-related financial statement disclosures? How also do we encourage enhanced transparency by credit rating agencies regarding how they consider ESG factors? This is by no means an exhaustive list. These and other challenges remain.