At the 18th Annual Institute on Securities Regulation in Europe last week, SEC Director Bill Hinman spoke about the benefits of the SEC’s current, flexible approach to environmental, social and governance (ESG) disclosure for public companies. He noted that current disclosure requirements are largely principles-based and “apply in areas where the disclosure topics may be complex, associated with uncertain risks and rapidly evolving.” Such an adaptable principles-based disclosure regime, Director Hinman posited, is well suited for addressing often complex, risk-laden and rapidly evolving ESG topics, including how companies consider climate change risks, labor practices or board diversity in their decision-making.
Despite pressure from various investors for the SEC to require specific ESG disclosure requirements, Director Hinman argued that doing so at this juncture may be unwise. The market, according to Director Hinman, is still evaluating what, if any, additional ESG disclosure is needed. During this wait-and-see period, Director Hinman noted that the SEC is keenly monitoring and analyzing corporate ESG disclosure, actively comparing information that companies voluntarily provide–often outside of SEC filings–with their SEC disclosure.
Director Hinman’s speech, however, was most revelatory insofar as it suggested that the SEC’s 2018 guidance on cybersecurity disclosure might serve as analogous guidance in the ESG space particularly with respect to preparing disclosures about the ways in which a company’s board manages sustainability risks to allow investors to better assess how the board is discharging its risk oversight responsibilities in connection with Item 407(h) of Regulation S-K and Item 7 of Schedule 14A. Companies currently preparing disclosures for their 2019 proxy statements should take heed.