Today, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted to propose amendments to certain financial disclosure requirements under Regulation S-K, specifically those requirements related to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). In addition to these proposed amendments, the SEC issued guidance for registrants to consider when using metrics and key performance indicators in their MD&A disclosures. The press release announcing these developments explains that the proposals are part of an overarching effort by the SEC to improve and “modernize” the disclosure regime for the benefit of both investors and issuers.
SEC Chairman Jay Clayton issued a statement in support of the proposed amendments and related guidance, a statement that largely focuses on a topic that the Chairman himself notes is “not the particular focus of today’s Commission action” – environmental and climate-related disclosures.
Chairman Clayton’s Discussion of Environmental and Climate-Related Matters
Chairman Clayton’s statement shifts from applauding the efforts of the SEC staff and discussing the importance of today’s actions to offering a summary of prior discussions of the Commission’s work concerning environmental and climate-related disclosures. He offers this summary, according to the statement, “to ensure that interested market participants have efficient access” to the information.
The summary is framed around five “threshold issues” characterizing environmental and climate-related matters that Chairman Clayton identifies as both interrelated and important to recognize in a review of securities law disclosures. These issues are as follows:
- The landscape surrounding environmental and climate-related matters is and will likely continue to be complex, uncertain, dynamic and operating in a multi-national/jurisdictional manner.
- Capital allocation decisions facing both issuers and investors that are either based on or materially influenced by climate-related factors are “substantially forward-looking” and tend to involve both estimates and assumptions about complex matters. These matters are both issuer and industry specific.
- The Commission’s disclosure-based regulatory regime is generally structured around issuers providing “verifiable and largely historic issuer-specific information”. Under this framework, forward-looking disclosure mandates are limited and in many cases where this type of information is required or provided on a voluntary basis, safe-harbor protection is afforded.
- Standard setters, a group to which he includes himself, must be mindful to not substitute their own operational and capital allocation judgments for those judgments of issuers and investors and all standard setters should be careful to stay within the bounds of their regulatory mandate.
- In coordinating with other regulators (particularly those outside the U.S.), it is important to recognize that the Commission’s regulatory regime stands apart from other regimes and that “facially analogous disclosure mandates” should not be assumed to create the same effects in different jurisdictions.
SEC Activity Regarding Environmental and Climate-Related Matters
Having outlined these issues, the Chairman proceeds to provide an account of prior SEC activity concerning environmental and climate-related matters. In this account, he mentions the 2010 Commission guidance on climate-related disclosure and the Division of Corporation Finance’s review of annual and periodic company filings in light of this guidance. He also notes that the SEC Office of Compliance Inspections and Examinations is working to review the disclosures of investment advisers and other issuers regarding those funds with environmental or climate-related investment goals.
In addition to describing Commission efforts to consider environmental and climate-related issues as part of filing reviews, Chairman Clayton highlights the efforts made to engage with both issuers and investors regarding these matters. Such efforts have focused on, according to the Chairman’s remarks, endeavoring to:
- Better understand how investors use environmental and climate-related information to make investment decisions and how issuers identify, assess and manage risks related to these topics for their particular business and industry; and
- Remind market participants of the ways in which the SEC’s principles-based approach to disclosure requirements apply to environmental and climate-related matters.
Finally, Chairman Clayton describes the SEC’s collaborative efforts with various non-U.S. regulators in this space, including membership in IOSCO’s Sustainable Finance Network Steering Group as well as in the Financial Stability Board (FSB), which formed the Task Force on Climate-related Financial Disclosures (TCFD) in 2015. Other collaborative efforts mentioned in Chairman Clayton’s remarks are engagements with senior official from the Bank of England, the UK Financial Conduct Authority, the European Securities and Markets Authority and the European Commission. Notably absent from the statement were any references to the Sustainability Accounting Standards Board (known as SASB), which since 2011 has been pushing for more sustainability disclosures in the MD&As of publicly-traded companies.
Continuing SEC Efforts and Chairman Clayton’s Areas of Interest
Chairman Clayton concludes his statement by noting that the Commission will continue its work in the area of environmental and climate-related disclosures and by encouraging market participant engagement. In particular, the Chairman emphasizes that he is interested in discussing with both issuers and asset managers their experience with environmental and climate-related models and metrics.
Additional Commissioner Statements
SEC Commissioners Allison Herren Lee and Hester M. Peirce also issued their own statements regarding the SEC’s proposed rule amendments and issued guidance. Commissioner Lee was critical of the Commission’s actions, for, as she puts it, the lack of “any attempt to address investors’ need for standardized disclosure on climate change risk,” in the proposed amendments. Commissioner Peirce, on the other hand, offered support for both the proposed amendments and the companion guidance, noting in her statement the effectiveness of a principles-based disclosure framework that focuses on materiality, particularly in light of increasing calls to expand the disclosure framework “to require ESG and sustainability disclosures regardless of materiality.”
The proposed amendments will be open for public comment for 60 days following publication in the Federal Register. The guidance becomes effective upon its publication in the Federal Register.
Legal assistant Sarah Foster contributed to this post.