SEC Commissioner Elad Roisman gave a speech to a bunch of board members yesterday that addressed “various costs and difficulties that would inevitably come from new line-item disclosure requirements in the areas of ESG and how the SEC might address them to make the regime workable for companies and to benefit investors.”
At the outset, Commissioner Roisman made clear that when it comes to mandatory ESG disclosures, his view differs from what has been expressed by SEC Chair Gary Gensler and in recent comments by Commissioner Allison Herren Lee. Roisman said that the SEC’s
… disclosure framework already requires public issuers to provide information that is material to investors, including information one might categorize as “E,” “S,” or “G.” The Commission has explicitly interpreted our rules to require disclosure of the material effects of climate change on a business. We also amended Regulation S-K last year to require disclosures regarding human capital. To the extent that other material risks to a company can be categorized as “E,” “S,” or “G,” I do not see a legal justification for failing to disclose that information under our existing rules.
Even so, he offered five specific ideas on how the SEC could provide options for making any required reporting more palatable and less costly:
- Scaled disclosures. A standardized ESG disclosure template applicable to all companies would place proportionally greater data gathering and reporting burdens on developing and smaller companies than large ones. Even for voluntary reporting frameworks, companies are expected to assess data availability, relevance and materiality in what becomes – in reality – an iterative process. Roisman’s suggestion of creating a regulatory scaled approach could tailor cost and effort more appropriately to a company’s available resources.
- Flexibility in expectations for information sources and methodologies. I find this point of particular interest. Roisman argues “a good amount of ‘E’ information is difficult to calculate, and sources for it are not always reliable” and the companies will need to pay “outside vendors” for the information. He points to Scope 3 greenhouse gas emissions as an example. While that is an appropriate example, my experience is that a great deal – if not most – of the environmental information likely to be disclosed is already gathered by companies using internal resources. I do tend to agree with Roisman’s implied statement that at present, the data is not “disclosure ready”. As I have written previously, companies do not commonly apply the same internal controls to environmental data as they do financial data.
- Safe harbors. Litigation risk is a real concern in just about every aspect of today’s business world. It is reasonable to expect any additional disclosure is likely to increase liability exposure. I wrote yesterday about the potential for product liability litigation to expand to ESG matters. A PSLRA-type safe harbor would protect companies that are earnestly trying to provide new information.
- Allowing disclosures to be furnished rather than filed. Without a legislative requirement for “filing” ESG disclosures, the SEC has discretion to make disclosures furnished. Doing so would establish “uniformity and comparability that SEC-required disclosures would provide … without imposing the level of liability that filing with the SEC presents.” This could be an attractive option for many parties.
- Extended implementation period. Roisman expressed that time will be needed for the “natural process” of reporting maturation to take place. He also stated his desire to “allow a good amount of time for the compliance measures to develop before we bring any enforcement actions.”
What This Means for You
Even though many companies and investors have expressed general support for the concept of mandated ESG disclosure, Commissioner Roisman’s remarks – and some of the public comments submitted to-date – show that there are different ways to arrive at that destination, especially absent a legislative directive. If & when rules are adopted, these regulatory nuances will have a practical impact on disclosure controls & procedures, the level of effort and resources needed to make disclosures, and the usefulness of information.
