Climate Action Heats Up at SEC!

More news this week about the Securities and Exchange Commission’s approach to climate change: the Enforcement Division has created a new task force to examine corporate disclosures about climate and ESG issues; and the two Republican commissioners on the SEC published a warning shot against the agency’s new climate change enthusiasm.

Let’s start with the Enforcement Division, since they’re the folks who could be all up in your climate business sometime soon. The task force will be led by Kelly Gibson, the acting deputy director of enforcement, and have 22 members drawn from across the Enforcement Division’s headquarters, regional offices, and specialized units. 

The team’s initial focus will be “to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules,” according to an SEC press release.  The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.

Tellingly, the task force will also tap into the SEC’s “sophisticated data analysis to mine and assess information across registrants, to identify potential violations.” It will also take point on evaluating whistleblower tips related to ESG issues and referring valid tips to appropriate enforcement units. 

“Climate risks and sustainability are critical issues for the investing public and our capital markets,” acting SEC chairman Allison Herren Lee said in a statement. “The task force announced today will play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.”

All this is interesting because just last week Lee announced that the Division of Corporation Finance would be paying more attention to the climate change disclosures that companies include in their usual SEC filings. That effort, Lee said, was intended to help SEC staff understand how well firms are or aren’t following guidance from 2010 meant to encourage more disclosure of climate change issues. Lee also said the review was a prelude to the SEC staff drafting updated climate change guidance sometime in the future.

Now we have this companion move on the enforcement side, and I admit that I’m surprised. To the best of my recollection, we’ve never seen an SEC enforcement action based on insufficient or misleading climate change disclosures from a firm. I’m not even sure what that would look like. That is, what would a materially misleading disclosure about climate change actually be? How would the SEC make that judgment? Even if the violation were a misleading marketing statement, would that be an SEC enforcement issue; or would staff flip that complaint to the Federal Trade Commission or FINRA for some sort of false advertising beef?

Then again, perhaps that’s the whole point here: for SEC staff, in both the Corporation Finance and Enforcement divisions, to understand the current state of companies’ climate change disclosure and how that squares with SEC guidance. Maybe there will be no enforcement at all, until such time as the SEC adopts new, more specific climate change disclosure requirements where violations will be more demonstrable — and enforceable. 

Meanwhile, on the GOP Side

We also have a statement from Republican commissioners Hester Peirce and Elad Roisman warning against Lee and the SEC staff getting carried away. Their statement was steeped in a genteel “we’re not quite sure what’s going on here” tone, but make no mistake — this was a warning shot. One notable paragraph:

[W]e assume that the new initiative is simply a continuation of the work the staff has been doing for more than a decade, and not a program to assess public filers’ disclosure against any new standards or expectations. After all, the Commission has not voted on any new standards or expectations relating to climate-related disclosure. The timing of this release — just before many public companies were due to file their annual reports — underscores its apparent function as a re-framing of the ongoing work, rather than the announcement of anything new.

Peirce and Roisman are correct that SEC staff can only review disclosures against existing standards. The question is where the demarcation line between appropriate review and overstepping really is, since the existing guidance for cllimate change disclosure is such a gossamer thing. Their line about, “After all, the Commission has not voted on any new standards or expectations,” is clearly a message that some company unhappy with a climate change enforcement action should could try to challenge the agency in court on those grounds.

Their statement also tut-tuts the Division of Examinations’ list of 2021 examination priorities released earlier this week, which put climate-related issues right at the top. Why, they asked? Don’t SEC regulatory examinations take a risk-based review of a financial firm’s compliance with existing regulations and statutes — including compliance with existing SEC guidance on climate change disclosure? Why all the hoopla now?

“These reviews touch on climate and ESG-related risks, which is not surprising given the increasing number of climate- and ESG-themed products and services,” Peirce and Roisman said, “but their focus is appropriately much broader.”

And so they continue throughout eight paragraphs, trying to curb any expectations people might have for more aggressive SEC attention to climate change. Instead, they say, the SEC should stick to enforcing its existing rules, while CorpFin staffers examine climate change disclosures and come back to the commission in due course with possible reforms. 

Which — who are we kidding here? — Republicans will also oppose in due course, too. Thus the world turns.