Commissioner Speech Points to Concerns with ESG Disclosures

SEC Commissioner Elad Roisman in recent remarks expressed concerns about the agency’s ESG initiatives, noting that since further ESG disclosure is apparently an area that the agency will pursue, the Commission may need to grapple with the questions inherent in promulgating disclosure rules. Roisman cited the need for clarity in definitions, specifically, what precise items of “E,” “S,” and “G” information are investors not getting that are material to making informed investment decisions. He also questioned how the SEC would utilize the work of external standard setters. “How would the agency oversee them—in terms of governance, funding, and substantive work product—on an ongoing basis?  What kind of new infrastructure would be required inside the SEC and at the standard-setters themselves?” Roisman also raised concerns regarding the potential costs of regulation and of obtaining and presenting new disclosures and the impact on smaller companies with scarce resources. Roisman pointed out that if the SEC were to “add a slew of new disclosure requirements—especially requirements that are not based on a materiality standard—we would expose companies (and their investors), boards, and management to numerous costly lawsuits when they are merely trying to provide information to satisfy a regulatory requirement.”  He urged the SEC consider a safe harbor for companies that are earnestly trying to provide the required new information, along the lines of that which is available for companies’ forward-looking statements.  Meanwhile, lawyers from Simpson Thacher in a blog post suggest that recent inquiries by the SEC’s Division of Examinations’ are offering advisers a glimpse into the staff’s latest thinking in this area. The lawyers write that the staff’s key lines of inquiry have related to precision in the definition of ESG/SRI terms; how registrants use and adhere to industry metrics/standards; and insight into advisers’ reasoning for investment recommendation changes based on ESG/SRI criteria. The lawyers say they “ believe the recent requests from the Exam staff are the tip of the spear and that referrals to Enforcement staff of potential disclosure issues concerning ESG will likely soon follow.”