Time is running out to provide input on climate risk disclosures.
There are several key dates that businesses interested in tracking Environmental, Social, and Governance (ESG) regulatory updates should note in the coming months, and one of those will occur on June 14, 2021. This marks the end of the period during which the US Securities and Exchange Commission (SEC) will be accepting comments on potential changes to disclosure requirements relating to climate risk and, more generally, ESG issues.
The SEC has repeatedly indicated climate risk and ESG will be a priority going forward. In March 2021, the SEC commissioned a Climate and ESG Task Force to take the lead in investigating inadequate disclosures of climate risk under the current disclosure rules. It also launched a new webpage dedicated to all the agency’s efforts and actions on ESG issues. In April, the SEC’s Division of Examinations issued a risk alert detailing observations from recent exams of investment advisors, registered investment companies, and private funds offering ESG products and services, including both internal control weaknesses, potentially misleading statements regarding ESG investing processes, as well as practices it considered effective approaches to ESG investing.
The SEC also signaled that additional disclosure requirements may be coming. In March, the SEC requested public input from market participants regarding whether current disclosures are sufficient to adequately inform investors about material risks, uncertainties, impacts, and opportunities. The SEC specifically solicited comments regarding how disclosures can provide “consistent, comparable, and reliable information,” while at the same time providing clarity to registrants regarding what is expected of them. The SEC also sought input on the relative advantages and disadvantages of the wide range of available frameworks and standards available to measure climate-related risk, as well as other ESG factors.
The SEC will accept comments regarding the effectiveness of the current disclosure requirements for communicating climate risks on June 14. While companies already report material climate risk under the current framework, we may soon know whether the SEC will issue more specific obligations, for example, requiring companies to report physical and transition climate risks, in line with the recommendations from the Task Force on Climate-related Financial Disclosures as New Zealand and the UK have done. If this happens, companies that wish to avoid scrutiny from the current climate-focused SEC will have their work cut out for them making sure their reporting controls sufficiently account for climate risk.