The Securities and Exchange Commission (the SEC or Commission) received more than 400 comment letters in response to then-SEC Acting Chairman Allison Herren Lee’s March 2021 request for public input on the Commission’s existing climate change disclosure requirements and potential future changes to those requirements.[1] Acting Chair Lee included several specific questions for commentators’ consideration in her request. Although not a formal rulemaking, she set a 90-day window for comments to be submitted, which expired on June 13.

Since Lee’s request, the U.S. Senate confirmed Gary Gensler to serve as permanent SEC Chair. Gensler has picked up where Lee left off, indicating publicly that he intends to propose a climate disclosure rule and potentially other rules addressing human capital and political disclosures as part of a focus on environmental, social, and governance (ESG) issues.[2] As a result, the comments to Lee’s request will likely inform the work of Gensler, the other Commissioners, and the staff in crafting a climate disclosure rule.

Some Commissioners’ views are already taking shape. Commissioners Lee[3] and Elad Roisman[4] have given several speeches outlining their views and considerations on potential new disclosure rules.

This article highlights a few of the key themes from some of the comment letters that stakeholders have filed and also provides additional considerations for how interested parties are likely to continue the dialogue with the Commission and its staff during the rulemaking process.

Comments on Climate Change Disclosures – Key Comments by Sector

The letters[5] highlighted several policy considerations for a potential rulemaking, including but not limited to the following:

• whether to mandate climate disclosure or permit voluntary disclosure;
• what the scope of the disclosure should be (g., Scope 1, 2, and/or 3 greenhouse gas emissions)[6];
• whether issuers should be able to “furnish” or “file” climate disclosures;
• whether the SEC should adopt existing standards from the private sector;
• whether the SEC should appoint a third-party standard setter; and
• whether the SEC should regulate third-party ESG raters.

Views on these issues varied considerably by sector. Many issuer companies (through their own letters or trade associations) emphasized the desire for any new disclosure obligation to be flexible and rooted in the SEC’s traditional materiality standard since any new disclosure obligation is likely to impose additional compliance costs and to introduce potential new legal liability. Users of this data—like asset managers, third-party service providers, and accounting firms—generally indicated strong support of mandatory, specific, and standardized disclosure requirements.

Asset Managers

Asset managers BlackRock[7] and Vanguard[8] submitted letters in support of mandating climate disclosures.  They also expressed support for global harmonization of standards that are based on the work of the Sustainability Accounting Standards Board and Task Force on Climate-related Financial Disclosures.[9] Notably, Blackrock urged the Commission to extend climate disclosure obligations to large private companies as well to “avoid regulatory arbitrage.” While Vanguard advocated for disclosures that cover companies’ Scope 1 and 2 greenhouse gas emissions, Blackrock recommended that the Commission include Scope 3 through a phased approach.

Issuers

Trade associations representing issuers such as the U.S. Chamber of Commerce (the Chamber) recommended that any climate disclosure rule be principles-based and based on the Supreme Court’s materiality standard. Additionally, the Chamber wants the SEC to address liability concerns such as requiring climate disclosure to be furnished not filed. The National Association of Manufacturers likewise recommended that the SEC focus on material information and argued for filings to be furnished rather than filed.[10]

Third-Party Service Providers

Third-party service providers often use ESG-related data to provide ratings, analysis, and other relevant information to investors. Generally, this sector is supportive of adopting mandatory climate disclosures that would capture companies’ Scopes 1 and 2 greenhouse gas emissions.  Bloomberg L.P. and Morningstar both called for including all or some Scope 3 emissions.[11]^,[12] One major index company argued that the SEC should not regulate the methodologies of third-party raters out of concern that such an approach might dilute the raters’ independence and thus their credibility in the marketplace.[13]

Think tanks and non-profits

Comments from think tanks and non-profits varied considerably but are worth noting, as they may have influence in this political climate. For instance, Better Markets argued for a robust climate disclosure regime that includes an assessment where companies must disclose the risks they face from climate change, as well as an estimate of how much those risks contribute to or mitigate climate change. Americans for Financial Reform, Public Citizen, and others joined together in a letter urging the SEC to make disclosures part of SEC filings and subject to full audits. [14] Moreover, these organizations called for conditioning registration exemptions “upon the disclosure of ESG details in the [relevant] securities.”[15]

Looking Ahead

While Lee’s request for public input had a closing date, interested parties are certain to continue engaging the Commission on potential ESG disclosure rules through meetings and written communications with staff and Commissioners.

Often as a first step, firms may meet with the key decision-makers at the SEC. On this particular matter, the SEC’s Division of Corporation Finance, which oversees the Commission’s disclosure regime, is expected to play a key role in developing any new rules. Another likely audience will be the Office of the Chief Accountant.

Of course, Commissioners and their staff can also influence the early drafting of rules by giving speeches, meeting with the Chair and other Commissioners, and interacting with their colleagues. Thus, considerable dialogue between market participants and Commissioners’ offices will continue.

Gensler’s remarks on June 23 during the annual London City Week illuminated his goalposts along the path that Lee set when seeking the comments described above.[16] Last year’s dialogue about the question of whether ESG disclosures should be mandated by the SEC has evolved into a top priority from the new Chairman to expand the SEC’s existing disclosure regime. His eye for potential requirements is not just toward what firms might be required to disclose going forward but also toward requirements stemming from commitments that have already been made.

At the City Week event, Gensler’s attention to detail was clear, as he listed several potential human capital metrics that might be prescribed, “such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.”[17] If Gensler’s oversight of the promulgation of Commodity Futures Trading Commission regulations pursuant to the Dodd-Frank Act is instructive, the process of developing ESG-related disclosures will be carried out swiftly. The SEC has indicated publicly[18] that a proposed rulemaking could come in October after what will continue to be a summer of intense discussion and preparation.[19]

[1] Commissioner Allison Herren Lee, Public Input Welcomed on Climate Change Disclosure, SEC.gov (Mar. 15, 2021), available at www.sec.gov/news/public-statement/lee-climate-change-disclosures.

[2] Katanga Johnson, U.S. SEC chair provides more detail on new disclosure rules, Treasury market reform, Reuters (June 23, 2021), available at www.reuters.com/business/sustainable-business/sec-considers-disclosure-mandate-range-climate-metrics-2021-06-23/.

[3] Commissioner Allison Herren Lee, Climate, ESG, and the Board of Directors: You Cannot Direct the Wind, But You Can Adjust Your Sails, SEC.gov (June 28, 2021), available at www.sec.gov/news/speech/lee-climate-esg-board-of-directors.

[4] See Commissioner Elad L. Roisman, Can the SEC Make ESG Rules that are Sustainable? SEC.gov (June 22, 2021), available at www.sec.gov/news/speech/can-the-sec-make-esg-rules-that-are-sustainable; Commissioner Elad L. Roisman, Putting the Electric Cart before the Horse, SEC.gov (June 3, 2021), available at www.sec.gov/news/speech/roisman-esg-2021-06-03.

[5] Comments on Climate Change Disclosures, SEC.gov, available at https://www.sec.gov/comments/climate-disclosure/cll12.htm.

[6] The Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting standard classifies a company’s GHG emissions into three ‘scopes.’ Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. Greenhouse Gas Protocol FAQ, available at https://ghgprotocol.org/sites/default/files/standards_supporting/FAQ.pdf.

[7] See Blackrock. et al., Request for Input on Climate Change Disclosure, (June 11, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8906794-244146.pdf.

[8] See Vanguard. & John Galloway, Public Input Welcomed on Climate Change Disclosures, (June 11, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8906800-244148.pdf.

[9] Id.

[10] See National Association of Manufacturers & Chris Netram, at 2 (June 8, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8895803-241279.pdf.

[11] Bloomberg, Public Input on Climate Change Disclosures, at 3 (June 3, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8880665-240115.pdf.

[12] Morningstar, Public Input Welcomed on Climate Change Disclosures, at 4 (June 9, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf.

[13] Remy Briand, Public Input on Climate Change Disclosures, (June 12, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8911327-244284.pdf.

[14] See Americans for Financial Reform Education Fund & Public Citizen, at 3 (June 14, 2021), available at https://ourfinancialsecurity.org/wp-content/uploads/2021/06/AFR_PC-SEC-RFI-Sign-on_Update.pdf.

[15] Id. at 3.

[16] SEC.gov, Prepared remarks at London City Week (June 23, 2021), available at www.sec.gov/news/speech/gensler-speech-london-city-week-062321.

[17] Id.

[18] Katanga Johnson, U.S. SEC chair provides more detail on new disclosure rules, Treasury market reform, Reuters (June 23, 2021), available at www.reuters.com/business/sustainable-business/sec-considers-disclosure-mandate-range-climate-metrics-2021-06-23/.

[19] Securities and Exchange Commission, Climate Change Disclosure, Office of Information and Regulatory Affairs (2021), available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202104&RIN=3235-AM87 .