SEC Commissioner takes aim at ESG disclosure "myths" in recent remarks

Commissioner Allison Herren Lee of the U.S. Securities and Exchange Commission, in her May 24, 2021 remarks at the 2021 ESG Disclosure Priorities Event, took square aim at a number of ESG "myths" surrounding materiality standards as they relate to the disclosure of ESG and climate issues. 

Her remarks focused on dispelling "misconceptions" such as:

1. "ESG matters (indeed all matters) material to investors are already required to be disclosed under the securities laws." They are not, in her view, because absent a duty to disclose via an express disclosure requirement, the importance or materiality of information alone does not mandate its disclosure.  

2. "Where there is a duty to disclose climate and ESG matters, we can rest assured that such disclosures are being made." The Commissioner pointed to specific examples where lawyers, auditors and managers get the determination of "materiality" wrong in the agency's view, and noted that such cases can be difficult to police since the omitted information would be unknown to the public and the SEC.

3. "SEC disclosure requirements must be strictly limited to material information.": This is a misunderstanding of the SEC's approach to rule-making; the "materiality" standard arises from the anti-fraud rules but there are numerous examples of SEC regulations which specify disclosures of certain topics or metrics regardless of materiality. Moreover, a line-by-line approach to materiality is at odds with modern capital markets which have become increasingly comparative in nature thus requiring at least some specific metrics in order to make appropriate comparisons. 

4. "Climate and ESG are matters of social or “political” concern, and not material to investment or voting decisions." This myth is belied by the behavior of all market participants, including investors, who increasingly recognize ESG factors as significant drivers of decision-making, risk assessment, and capital allocation because of their relationship to firm value and therefore view climate risk and other ESG matters as material to their investment and voting decisions.

The SEC is currently seeking public comment on a rule proposal for climate and ESG disclosures.