On Thursday, January 21, President Biden announced that Democratic SEC Commissioner Allison Herren Lee will serve as acting chair of the Securities and Exchange Commission (the “SEC” or the “Commission”). As a reminder, Acting Chair Lee was sworn in as an SEC Commissioner in July 2019. Only three women have held the permanent role of SEC chair: Mary Schapiro, Elisse Walter and Mary Jo White, all of whom served during the Obama administration. Upon her appointment as acting SEC chair, Lee stated that during her time as a Commissioner, “I have focused on climate and sustainability, and those issues will continue to be a priority for me.”
To say that climate and sustainability have been a focus for Acting Chair Lee during her time as a Commissioner is a bit of an understatement. Acting Chair Lee has arguably shown herself to be the most pro-ESG Commissioner the SEC has seen in recent years. In response to the Commission’s January 2020 announcement that it proposed amendments to modernize Regulation S-K requirements, then Commissioner Lee stated that “[t]oday’s proposal is most notable for what it does not do: make any attempt to address investors’ need for standardized disclosure on climate change risk.” In August 2020, in response to the SEC’s adoption of certain amendments to modernize Regulation S-K requirements, then Commission Lee stated that “[t]he final rule the majority adopts today . . . is silent on two critical subjects: diversity and climate risk disclosures.” In September 2020, then Commissioner Lee published an opinion in The New York Times stating that “[b]oth investors and the broader public need clear information about how businesses are contributing to greenhouse gas emissions, and how they are managing — or not managing — climate risks internally. Realistically, that can happen only through mandatory public disclosure.” (emphasis added). Also in September 2020, then Commissioner Lee spoke before the Council of Institutional Investors and stated that:
In recent months, we’ve heard the topic of diversity and inclusion referred to as “timely.” Although there is truth in that, I balk a bit at the description because it suggests that somehow its importance is new or trendy. Unfortunately, it is almost an evergreen topic. . . . What should the SEC do? To start with we could consider re-visiting our amendments to Regulation S-K to require disclosure of workforce diversity data at all levels of seniority. We could likewise strengthen our 2018 guidance on disclosure of board candidate diversity characteristics. But there are broader considerations than just corporate diversity disclosures. . . . The challenges associated with diversity are broader than just corporate disclosures; our solutions should be broader as well. We should reflect on how the SEC could more systematically consider gender, racial, and other representation disparities in its policymaking.
As we mentioned in our November 2020 blog post, in November 2020, then Commissioner Lee built on her prior statements to stress her view that the SEC needs to address climate change, calling for the SEC to quickly and thoughtfully solicit engagement from all market participants, and use the expertise of third parties, such as the Task Force on Climate-Related Financial Disclosure, to move forward with climate change rulemaking and related initiatives.
What does all this mean for public companies in 2021?
- ESG disclosure requirements are coming. As we have mentioned in prior posts, mandatory ESG disclosure requirements are coming. Acting Chair Lee’s appointment may accelerate this sea change, but whether or not she is the impetus for this change, ESG matters will be the new disclosure topics for U.S. companies over the next decade, and ESG also is likely to continue to be an increasingly important factor in the decision-making of investors and credit providers. We expect that many companies will continue to increase their voluntary ESG disclosures on their websites and in their public filings, and companies that do not are likely to fall behind their peers quickly.
- Consider board oversight of ESG matters. If your board of directors has not started thinking about ESG matters and how the board oversees those matters, the time to do so is ripe. The concepts underlying ESG are not new. ESG concepts have always been relevant to effective risk oversight and strategic planning. ESG is merely a new framework for considering nonfinancial risk and opportunities. To the extent that companies are struggling to approach ESG considerations, we recommend utilizing outside experts. Investors and other marketplace participants will be particularly focused on board oversight of ESG matters and their impact on strategic decisions going forward.
- The time to start thinking about ESG data is now. In our experience, many public companies find that it can take a year or two to collect ESG data that is of sufficient quality for voluntary reporting, depending on the complexity and breadth of the reporting. While the reporting of accurate data is important in the voluntary context, complete and accurate data will be even more essential to mandatory ESG disclosures. Companies that are already collecting data on their key ESG metrics will be better positioned to make the transition to mandatory ESG reporting and will also be better positioned to participate in the SEC’s rulemaking process when amendments to Regulation S-K are proposed. In addition, companies that have already begun crafting their ESG story are better positioned to address investors’ and credit providers’ growing ESG expectations.
Think about integration. It is likely that very soon it will not be enough for companies to make ESG policy statements on their websites. Companies will need to actually integrate ESG considerations in their internal controls, compliance efforts, risk enterprise management considerations, and reporting controls. ESG integration is a complex undertaking, and companies that begin the process early are more likely to be prepared to address any new disclosure requirements coming out of the new administration and its appointments.
As a reminder, V&E’s ESG Taskforce is a uniquely cross-functional team dedicated to helping companies proactively understand, manage, and, where appropriate, disclose their ESG risks and opportunities. Covering a broad range of topics and issues, including climate change, clean and sustainable energy, human rights, cybersecurity, and investor relations, the Taskforce draws upon significant capabilities in our governance, environmental, and labor and employment teams.
Below are a selection of the ESG Taskforce’s recent thought pieces and presentations on ESG developments and trends.
- Blizzard, Winter or Ice Age: How COVID-19 Is Changing the ESG Conversation
- Navigating the Emerging Challenges of Technology and Labor
- Accessing Capital and Credit in the New Climate
- Tackling ESG Due Diligence and Strategic Transaction Preparation and Integration
- Preparing for the Future of ESG