As we anticipate, with some trepidation, this week’s final climate change disclosure rules from the Securities and Exchange Commission, it’s important to remember that those rules will remain only a part of the agency’s ESG agenda. There are several pending proposed rules that touch on ESG issues—mostly in the funds area. Likely it will be easier for the SEC to finalize these once the climate change disclosure rules have been completed. Also, the SEC’s rulemaking agenda includes proposing rules related to additional (and one can presume) more prescriptive human capital related disclosures, as well as additional board diversity disclosures. But, disclosures are not even the end of it. The head of the SEC’s Division of Enforcement in recent public remarks addressed the Division’s focus on ESG related matters. Director Grewal noted that there has been “an explosion in public companies disclosing ESG-related information to investors.” Similarly, he pointed to “tremendous growth in investment firms offering ESG-branded products and strategies over the last several years.” These trends have given rise, according to the Director, to the possibility that “companies have more incentives to exaggerate or make misleading statements about their perceived positive ESG activities or products.” And the corollary that “investor focus on these issues may make it more tempting for companies to downplay or omit disclosures about negative ESG-related information. For example, they may make misleading statements about these events, or may omit them from their disclosures altogether, making the disclosures materially misleading.” The Director noted various examples of recent enforcement actions brought by the SEC addressing ESG related disclosure issues. He also flagged corporate governance as another aspect of ESG and cited it as an area in which “companies downplay or fail to disclose material information to investors that may draw unflattering attention.”
Director Grewal had a takeaway: “It is therefore crucial that when companies speak about the host of issues that may fall under the rubric of ESG – whether climate, social, corporate governance or others – they do so in a way that’s not materially false or misleading.” Calling for more, and for more detailed, climate related disclosure will only increase the stakes for public companies from an enforcement perspective.
See the full text of his remarks here.
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