The SEC Paves A Path To Formally Address ESG From All Sides – Corporate/Commercial Law – United States – Mondaq News Alerts


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Navigating an organization's environmental, social and
governance (“ESG”) risks and opportunities remains
somewhat of a frustrating mystery for organizations and investors
alike.  What is not a mystery is the clear (and vocal)
marketplace shift in investor requests for disclosure and
standardization in order to evaluate an organization's ESG
profile and risk management strategy.  There are a number of
voluntary disclosure frameworks established by third-party standard
setters and mandatory disclosures under international
regulations.  In the United States, the Securities and
Exchange Commission (“SEC”) has - for the most part -
stayed on the sidelines of the ESG disclosure debate, historically
leaving it to organizations to decide whether or not its ESG
initiatives, if any, rise to a level of materiality for disclosure.
Until now.

In the past few weeks, the SEC has announced a number of actions
that include, among others, a task force designed to harmonize the
efforts of the SEC's Divisions and Offices, consideration of
future comprehensive ESG disclosure guidance, ESG as an exam
priority, and addressing shareholder rights and creating
accountability in statements and conduct.   This alert
elaborates on the path the SEC has articulated for addressing

ESG as Risk Management

The investor community – domestically and globally –
is increasingly asking organizations for more robust and detailed
disclosure on a variety of ESG topics, such as climate risk, board
and workforce diversity, human capital and talent management and
human rights.  The view is that an organization's
assessment of these systemic risks have a real effect on long-term
shareholder value, and markets and businesses have a role to
play.  The supply chain disruptions triggered by the COVID-19
pandemic and the social justice events of 2020 with their impacts
on markets and businesses only have accelerated that focus. 
For an overview of ESG, including its origins, the actors shaping
the dialogue, and fiduciary duty and litigation risks, please see
, and
of our 4-part alert series.

Climate has historically dominated the ESG discussion, but the
2020 events have shown that climate, social and governance issues
are intertwined, as most recently seen in the winter storm impacts
in Texas.  These events also illustrate that climate, social
and governance risks are not far-off contingencies which
organizations can continue to afford to ignore or procrastinate, or
simply hedge.  The storm (informally dubbed Winter Storm Uri
after the naming conventions for tropical weather systems), an
uncharacteristic but neither unforeseen nor unprecedented extreme
winter weather phenomenon, knocked out power to most of Texas,
through a series of rolling blackouts. 1  The power
outages cascaded into food shortages, water system contamination,
damage to infrastructure and at least 70 deaths.  Total damage
was estimated at nearly $200 billion.

Current assessments and analyses point to the lack of
winterization and other deferred maintenance in power-generating
facilities as a cause for the failure of the power system. 
Public reporting noted that these issues had been identified as a
response to a similar extreme winter weather ten years
earlier. This appears to have been the assessment of the
public and Governor Greg Abbott-- within a month after the storm,
five members of the Electric Reliability Council of Texas (ERCOT)
had resigned 3, as well as ERCOT's CEO and
two successive chairpersons of the state agency overseeing the
energy industry.  Though the storm itself was not preventable
by ordinary means, this event illustrates the ever growing focus on
the role of governance in addressing systemic climate risks. 2 

Another systemic risk that the Texas incident illustrates is the
interaction between an extreme event and governance and management
structures unique to Texas.  Unlike many other states, Texas
power generation is heavily decentralized and exposed to market
pressures and forces (because power generating facilities are
largely insulated from the consumer and industrial purchasers of
electricity) in ways that public utilities in other states
are not.  What began as a climate event, was then multiplied
by overlapping governance decisions by private industry and public
entities alike that didn't seem to consider the impact of
changing systemic risks, and quickly turned into a social and human
rights crisis.

SEC Positions Itself to Address ESG from All Angles

The SEC has made several notable changes to position itself for
a holistic look at ESG.  These actions include:

  • On February 1, 2021, the SEC
    announced the appointment of its first Senior Policy Advisor for
    Climate and ESG, Satyam Khanna, dedicated to advising the SEC on ESG matters
    and initiatives
  • On March 4, 2021, the SEC announced
    its new Climate and ESG Task Force (“Task Force”) in
    its Division of Enforcement. This announcement came a day after the
    SEC's Division of Enforcement identified
    ESG among its exam priorities of registered investment advisors

The SEC is consolidating its information on climate and ESG with
a dedicated
that was launched last week.

These actions should not come as any real surprise as they align
with the Biden administration's priorities, particularly
climate, as evidenced by the administration's re-engagement
with the Paris Agreement.  The Biden administration's
focus on climate cuts across a number of agencies, including the
Department of Treasury and the Department of State, as reported by


But, it will come with many expected Republican
challenges.  Senator Pat Toomey, the top Republican on the
Senate Banking Committee, made headlines with a March 24, 2021
to Acting Chair Lee requesting the SEC to brief the
Committee on its ESG related plans. 

In the meantime, a number of organizations routinely make
statements and claims regarding their climate actions, which has
raised concerns of “greenwashing” where organizations
may overstate their sustainability actions.  The Task
Force's initial priority is to evaluate existing climate risk
disclosures under the SEC's existing guidance issued in 2010
for any material gaps or misstatements.  The Task Force will
similarly evaluate disclosure and compliance issues to assess
alignment between processes and disclosures made by investment
advisors and funds that offer ESG labeled funds and/or
strategies.  The Task Force will have a broader agenda that
includes working with the Divisions of Finance, Examinations and
Investment Management and evaluating and pursuing whistleblower

These actions by the SEC underscore the importance of
organizations carefully ensuring alignment between their statements
and actions on ESG matters.

 “It's the investor community that gets to
decide what's material to them.”

The investor community has been waiting to see if the SEC will
step more actively into the ESG conversation.  Responding to
the Republican Party's comments that securities laws are not
the place for discussions on matters related to climate and other
social inequities, Gary Gensler made it clear, at his confirmation
hearing, that the investor community decides what is material to
their community.  Echoing Larry Fink's 2019 Letter to
CEOs in which he stated that profit and purpose are inextricably
linked, Acting Chair Allison Lee stated, in a speech
to the Center for American Progress, that the 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.”

In her speech, Acting Chair Lee acknowledged that the ESG topics
are fundamental to the economic markets and elaborated on the path
that the SEC plans to take on meeting the investor demand.

  • ESG Disclosures. As
    noted above, the Task Force's starting point is to evaluate
    current climate disclosures in an effort to update the 2010
    guidance.  In addition, the SEC expects to advance on a
    broader, comprehensive ESG disclosure scheme with considerations
    for providing more specific guidance on human capital or board
    diversity.  When the current Regulation S-K human capital
    disclosure requirements were adopted by the SEC, then Commissioner
    Lee along with Commissioner Caroline Crenshaw dissented on the
    adoption primarily on the grounds of vagueness. See their
    dissenting comments
    . Issuers can likely expect more specificity on the
    disclosure, including the reporting of metrics like workforce
    diversity, in any additional guidance the SEC may promulgate.
  • Shareholder
    Recognizing the swath of ESG related issues
    present in shareholder proposals, Ms. Lee explained that she has
    asked the Division of Corporate Finance to develop proposals that
    revise the no-action process and, potentially, Rule 14a-8. 
    She articulated the goal is to “bring greater clarity to the
    no-action relief process, increase the number of proposals on the
    ballot that are well-designed for shareholder deliberation and
    votes, and reduce the number that are not.”  When faced
    with a potentially controversial shareholder resolution, companies
    can request from the SEC whether it would recommend an enforcement
    action if a proposal is left off the ballot.  According to
    research by the Sustainable Investments Institute, only 8% of
    climate change resolutions were omitted in 2016.  That number
    rose to 21% in 2020.  Now, under a new administration,
    shareholder resolutions on ESG issues are likely to find more
    support from SEC leadership. Indeed, companies that have previously
    ignored shareholder proposals may find themselves on the receiving
    end of an SEC enforcement action if they refuse to include and
    allow shareholder votes on ESG proposals.
  • Proxy Voting.
    Acknowledging that index funds are significant voters in annual
    company elections and that fund investors are demanding companies
    adopt ESG strategies and opportunities, the SEC will place more
    focus on fund and advisor voting duties and disclosures.
    Specifically, the SEC will require more transparency in how a fund
    casts its proxy votes on shareholders' behalf so that
    investors can be sure the votes support ESG initiatives.
  • Examinations. Not
    all the focus will be on an issuer's ESG disclosures. The
    Division of Enforcement will also be reviewing whether funds that
    “claim” to be ESG funds really are.  It expects to
    issue a ESG risk related alert in the upcoming weeks.

In moving forward, Acting Chair Lee recognized the need to work
collaboratively both domestically and internationally as ESG issues
do not recognize boundaries. 

 Preparing for What's Ahead

Although the formal rulemaking process could take years to play
out, issuers can position themselves well to meet the challenge of
mandatory ESG disclosures.  The marketplace has been very
vocal on the ESG issues that dominate their focus and the voluntary
disclosure frameworks, such as SASB, TCFD and GRI offer a guide to
both qualitative and quantitative ESG topics relevant to sectors
and industries.  See our
that describes these frameworks.  To prepare,
companies should:

  1. Develop a roadmap to assessing the
    material ESG issues for the organization.
  2. Engage with internal and external
    stakeholders to understand and synthesize the ESG issues.
  3. Create the pathways for dialogue on
    ESG issues with the board, senior management, general counsel, and
  4. Understand the commitments and
    statements currently being made by the organization and ensure
    consistency with actions and initiatives.
  5. Develop, revise and enhance practices
    and procedures for monitoring and following through with


1 It is
key to note here that Texas' power grid is largely
independent and disconnected from the other major power grids in
the continental United States.

2 It also
bears mentioning here that Texas experiences its own share of
extreme weather during the Atlantic hurricane season, but sound
governance processes accounting for changes in long-term climate
patterns anticipated by the scientific consensus should have
anticipated the possibility of extreme winter weather, resulting in
the kind of risks that Texas has not historically planned

3 None of
the resigning members were residents of Texas.  This may
illustrate both the need for local expertise and a sensitivity felt
by lawmakers and the public around the importance of shared
sacrifice.  The resigning members did not experience the power
outage, and so were not felt by many to have “skin in the

Originally Published by Seyfarth Shaw, March 2021

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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