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The Public Weighs In On How the SEC Should Regulate ESG Disclosures

The past several years has seen growing attention on climate change disclosures and other environmental, social, and governance (“ESG”) issues.  In 2016, a variety of universities faced pressure as student bodies demanded endowment funds remove their investments in the fossil fuel industry.  In August 2019, Business Roundtable issued a Statement on the Purpose of a Corporation, redefining the purpose of a business from purely maximizing shareholder value to include a commitment to “[s]upport the communities in which we work [by] respect[ing] the people in our communities and protect[ing] the environment by embracing sustainable practices across our businesses.”  The following year, law students from around the country protested various law firms’ representations of oil and gas suppliers.  Within days of President Joe Biden’s inauguration, he made his focus on ESG issues clear in asking the Office of Management and Budget to work with other government agencies to provide concrete suggestions on a variety of topics, including climate change.  As one of his first acts in office, President Biden signed an executive order to have the United States rejoin the Paris Climate Accord.  In April 2021, President Biden hosted a 2-day climate summit, in which he announced new targets for the United States to reduce greenhouse gases by 2030.  Moreover, just last month, President Biden issued an executive order on Climate Related Financial Risk, which inter alia, seeks input from the Financial Stability Oversight Council to weigh in on “the necessity of any actions to enhance climate-related disclosures by regulated entities . . . .”  Congress also appears to be focused on ESG issues.  On June 16, 2021, the House narrowly passed the Corporate Governance Improvement and Investor Protection Act, H.R. 1187, which would require publicly traded companies to disclose ESG metrics.

Reflecting these societal trends, in early March 2021, the U.S. Securities and Exchange Commission (the “SEC”  or the “Commission”) also announced that it had created a new task force within the Division of Enforcement to focus on climate and environmental, social, and governance issues.  According to then-Acting Chair, Allison Herren Lee, “[t]he task force . . . 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.”[1]

With its enhanced focus on ESG issues, on March 15, 2021, Commissioner Lee asked for public input from investors, registrants, and other market participants to assist the SEC with shaping ESG disclosures.[2] The request noted that in the past decade, “investor demand for, and company disclosure of information about, climate change risks, impacts, and opportunities has grown dramatically.” Id.  Commissioner Lee indicated that the SEC is evaluating disclosure rules “with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change.” Id.  As is typical with the adoption of any new rules or regulations, the SEC sought comment from the public on a variety of issues.  Here, the SEC encouraged input regarding, inter alia, how best the SEC can regulate, monitor, review, and guide climate change disclosures, whether different industries should have different reporting standards, and what information public companies should be required to disclose. Id.

The SEC gave the public 90 days to provide feedback. Id.  This 90-day period came to a close on June 14, 2021.  Over the course of this three-month period, the SEC held more than 40 meetings with a variety of market participants, ranging from Fortune 500 companies to representatives of the Business Roundtable and representatives of the Sustainability Accounting Standards Board (SASB), as well as the U.S. Chamber of Commerce, all seeking to discuss the request for input with the SEC.  In addition to the meetings, more than 400 individuals or entities submitted comments.  Comments were submitted on behalf of individual investors, large institutional investors, consultants, public companies, and international bodies, among others.  The SEC’s deadline for comment comes on the tail of SEC Chairman Gary Gensler’s June 11, 2021 published annual regulatory agenda, which included a line item for climate change disclosure, noting that “[t]he Division [of Corporation Finance] is considering recommending that the Commission propose rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities.”  Notably, a deadline for such proposal appears to tentatively be set for October 2021, indicating that this is one of his top priorities as the new SEC Chairman.

The majority of the comments submitted were supportive of the SEC’s mandating disclosures relating to climate change risks, impacts and opportunities.  Many noted that climate change is a global challenge that poses a substantial risk to the U.S. economy if it remains unchecked.  Some Fortune 500 companies, such as Walmart and FedEx, noted that they already voluntarily make climate-related disclosures.  Some comments highlighted that investors themselves have been increasingly asking for enhanced climate change disclosures, as the current system does not consistently provide investors with objective, relevant, and timely climate information.  Large investors PIMCO and CalSTRS reiterated the utility of climate change disclosures from their perspective. 

Notably, Senator Elizabeth Warren, together with Congressman Sean Casten, submitted a comment highlighting that a bill, the Climate Risk Disclosure Act, S. 1217/H.R. 2570, was recently introduced that would require public companies to disclose more information about climate-related risks and directing the SEC, in consultation with climate experts at other federal agencies, to issue rules within two years of the bill’s enactment to establish climate risk disclosure rules that are, inter alia, industry-specific and that include emissions disaggregated by greenhouse gas.  As noted above, the House already seems in favor of enhanced ESG disclosures, as evidenced by its passing the Corporate Governance Improvement and Investor Protection Act, H.R. 1187, which incorporates in part the Climate Risk Disclosure Act.

Many comments focused on how the SEC could best set reporting standards that would be effective, while not imposing an undue burden on public companies.  For example, many comments encouraged the SEC to avoid a “one-size-fits-all” approach and to issue climate change disclosure rules that are industry specific.  For instance, the Edison Electric Institute and the American Gas Association urged the SEC to require disclosures that are “flexible, sector-specific, and principles-based” as opposed to standards that are “rules-based.”  Others, however, called for a standardized approach to make it easier for investors to incorporate climate criteria in their own investment decisions.  At least a couple of commenters believe that private companies should not be excluded from mandatory ESG disclosures.

In addition, many encouraged the SEC to incorporate or draw from pre-existing frameworks, including the frameworks developed by the Task Force on Climate-Related Financial Disclosures (TCFD) and SASB, as well as harmonize its standards with emergent global standards.  For example, KPMG advocated that the SEC should incorporate, endorse or otherwise support a globally accepted ESG reporting system, noting that without a global framework, disclosures will be less consistent and comparable.  SASB itself submitted a comment, noting that investors are increasingly coalescing around the recommendations of the TCFD and SASB as foundational tools for investor-focused sustainability disclosures.  SASB encouraged the SEC to take an “industry” specific approach and noted that its own framework provides a complete set of globally applicable and industry-specific standards. 

While many comments encouraged a “global framework,” some pointed out that leveraging global standards could bring the SEC beyond its statutory mandate, as the current European Union standards for ESG disclosures explicitly go beyond American concepts of investor protection.  Several members of Congress, led by Rep. French Hill of Arkansas, also wrote to warn against aligning climate and ESG reporting standards with international standard setters due to the risk of stifling innovation and the concern that converging standards would be antithetical to the SEC’s existing disclosure framework.

Further, while many comments were supportive of climate change disclosures, there was some disagreement surrounding certain logistics of these disclosures. For example, commenters disagreed over whether to require public companies to incorporate climate-risk disclosures into their existing filings, such as in the annual Form 10-K, or whether to require a separate filing, with a greater number of comments recommending that the SEC make these disclosures a part of the Form 10-K.  There was also disagreement about whether new regulations are needed (within or outside Regulation S-K) or whether the current Regulation S-K rules sufficiently mandate disclosures pertaining to materially significant climate change metrics.  It seems that the majority of commenters who discussed this issue encouraged incorporating additional climate change-specific disclosure rules into Regulation S-K.  Some comments also expressed a desire for the SEC to establish a “comprehensive” ESG disclosure framework that included more than just climate-risk disclosures, such as greenhouse gases, but also included disclosures pertaining to human capital and diversity disclosures, equity and inclusion disclosures, and governance disclosures.  A handful also hoped the new disclosures would cover political spending and related activity.

Although most comments were supportive of mandatory ESG disclosures, some commenters submitted letters speaking out against climate change disclosures.  Some comments expressed a concern that efforts to mandate climate-risk disclosures would be an overreach by the SEC.  For example, the U.S. Senate Committee on Banking, Housing, and Urban Affairs submitted a comment that federal securities regulations are not the appropriate vehicle to advance climate change policy goals.  The same members of Congress led by Rep. French Hill also noted in their comment that they were writing “to remind the Commission of the continued importance of the materiality standard for corporate disclosure,” as well as “the importance of the SEC’s reputation as an expert regulator that operates independently of political agendas.”  The Attorney General of West Virginia, Patrick Morrisey, likewise stated he believed that these disclosures raised First Amendment concerns and noted that “the Commission should stick to its core mission of requiring statements on matters that are material to future financial performance—not statements on issues that drive a political agenda.”  Similarly, Professor Paul G. Mahoney at the University of Virginia wrote that “ESG disclosure mandates risk eroding the Commission's reputation as an effective and respected nonpartisan regulator” and that such public policy focused mandates “appear to prioritize the social and political views of the largest Wall Street asset management firms over the financial wellbeing of the households whose savings they manage.”  Professor Paul Rose at Ohio State University’s Moritz College of Law also expressed concern that any proxy advisory firms voting in favor of such “socially oriented” proposals would violate their fiduciary duties.

Some public companies and organizations noted that the climate-change disclosures will result in burdensome reporting requirements that could potentially misinform investors and impose excessive costs on public companies.  For example, U-Haul noted that the prescriptive ESG standards proposed by the SEC would transgress the Supreme Court’s interpretation of “materiality” in TSC Industries v. Northway, 426 U.S. 438 (1976) and would be “arbitrary and capricious.”  The National Mining Association expressed concern that mandatory disclosure rules—particularly related to non-material climate-related risks—could negatively impact certain energy-intensive companies and sectors in particular.

Along a similar vein, some commenters, including various law professors, highlighted the increased legal risk that mandatory ESG disclosures could bring.  For example, Professor Amanda Rose at Vanderbilt University Law School submitted an article noting that ESG disclosures in SEC filings could heighten the private liability risk faced by companies and directors and officers.  Thus, some public companies and organizations pointed to safe harbor provisions as a way to combat potential litigation risk arising from mandatory climate change disclosures, requesting that the SEC either reaffirm that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 would apply to these disclosures, or provide enhanced safe harbor provisions, or other limitations on liability, applicable to climate-risk disclosures.  Other comments noted that because climate-risk information is often based upon projections and assumptions, the appropriate liability standard for any new climate-risk disclosures should be the standard of liability applicable to “furnished” information rather than “filed.” 

Mintz will continue to monitor the development of ESG disclosures, as this is an important topic that affects many entities, including the public companies that will need to comply with such disclosures, as well as the investors who will likely rely on these disclosures.

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Jacob H. Hupart is Co-Chair of the ESG Practice Group and a Member in the firm’s Litigation Section. He has a multifaceted litigation practice that encompasses complex commercial litigation, securities litigation — including class action claims — as well as white collar criminal defense and regulatory investigations. His clients sit in a variety of industries, including energy, financial services, education, health care, and the media.

Ellen Shapiro


Ellen Shapiro focuses her practice on complex commercial litigation and securities litigation, including shareholder class actions and opt-outs. She represents companies in the life sciences and in other industries and also maintains an active pro bono practice.