SEC's emphasis on ESG creates friction between members

Strengthening environmental social and governance disclosures will be a top priority for a Democratic-majority Securities and Exchange Commission, but Republican members are continuing to push back.

In remarks Friday before a meeting of the SEC’s Asset Management Advisory Committee, Republican SEC member Hester Peirce asserted that ESG risks are not relevant for every company.

“To get to broad ESG disclosure mandates for issuers, we have to reimagine materiality,” Peirce said. “Materiality has served us well, and undermining it to accommodate ESG will harm investors. ESG standards continue to be talked of in broad strokes that obfuscate the immaterial nature of many of the specific underlying disclosures.”

[More: Hester Peirce pushes for personal liberty as an SEC voice of dissent]

The other Republican commissioner, Elad Roisman, expressed concern that the debate is being dominated by those who are in favor of more disclosure.

“If the only people who feel safe to comment are those who want the agency to join the fight against climate change and those whose business models would benefit from new regulation, we will miss hearing from those voices who can alert us to the hidden costs and unintended consequences of our actions," Roisman told the advisory committee.

Those sentiments, which echo a recent joint statement by Peirce and Roisman, contrast sharply with a flurry of recent actions by SEC Acting Chair Allison Herren Lee, a Democrat.

The SEC has ramped up reviews of corporate climate disclosures, elevated climate and ESG in its examination priorities and formed an enforcement task force on climate and ESG issues. It also has requested public comment on expanding climate-risk and ESG disclosures.

In a speech earlier this week, Lee said investors are demanding more detailed climate risk information and that the SEC must strengthen disclosures.

“What we should be working toward is a clear disclosure regime that yields consistent, comparable, reliable and understandable ESG disclosures to investors,” Caroline Crenshaw, another Democratic SEC member, said at the advisory committee meeting.

The Asset Management Advisory Committee has drafted a recommendation that the SEC require disclosure of material ESG risks.

The SEC’s intensity about ESG policy is likely to continue under Gary Gensler, the Biden administration’s nominee for SEC chair who will give Democrats a 3-2 edge on the commission. He voiced support for ESG disclosures at his Senate confirmation hearing earlier this month. The Senate is expected to vote soon on his nomination.

The heightened political tension at the SEC surrounding ESG is likely to continue as the agency does its part in the overall Biden administration emphasis on climate policy.

“There’s not likely to be consensus,” said Carlo di Florio, global chief services officer at ASG Group, a governance, risk and compliance consulting firm.

One of the first actions President Joe Biden took after being inaugurated in January was to bring the United States back into the Paris Climate Agreement. That will create more work for the SEC.

“I think it’s likely some new regulations around ESG will be introduced to conform to our commitment to the Paris Climate Agreement,” said Di Florio, a former director of the SEC examinations office and a former chief risk and strategy officer at the Financial Industry Regulatory Authority Inc.

In 2010, the agency released guidance on climate risk reporting. But the directive from Lee to increase scrutiny of those disclosures adds heft to the issue.

“What’s new is the formality of it,” said Celia Soehner, a partner at Morgan Lewis and a former attorney in the SEC’s Division of Corporation Finance. “It’s fairly rare to see these mandates called out from on high. This seems like a top-down mandate.”

The climate emphasis spans SEC divisions. For instance, the agency devoted only one paragraph to ESG in its 2019 examination priorities report. This year, it is woven into several examination areas.

“What’s different is that they’re putting ESG as the key risk and focus area in each of these traditional processes,” Di Florio said.