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The ESG Train Is Coming: Next Stop—Disclosure Requirements

Patrick J Paul


  • Discusses the Biden administration’s focus on climate change, environmental justice, and ESG tracking.
  • Explores President Biden’s Executive Order 14,030 that called for the development of a climate-related financial risk strategy.
  • Urges U.S. companies to anticipate that—whether via law, regulation, or investor pressure—the trend toward ESG reporting is coming and be prepared to act accordingly.
The ESG Train Is Coming: Next Stop—Disclosure Requirements
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With almost a full year under its belt, the environmental priorities of the Biden administration have begun to become more evident and themselves take shape—first by executive order and subsequently by proposed administrative rules and legislation. Climate change, environmental justice, and environmental, social, and governance (ESG) tracking and disclosure are clearly paramount priorities of the Biden administration.

In June, the U.S. House of Representatives passed H.R. 1187, the ESG Disclosure Simplification Act of 2021, as part of the Corporate Governance Improvement and Investor Protection Act. The bill would require securities issuers to annually disclose to shareholders certain ESG metrics and their connection to the issuer’s long-term business strategy. It also would establish an advisory committee tasked with, among other duties, recommending to the Securities and Exchange Commission (SEC) policies to facilitate the flow of capital toward environmentally sustainable investments.

Given its razor-thin approval in the House (215–214), with no Republican support, and the almost certain opposition to the bill in the U.S. Senate, which requires a 60-vote supermajority to pass legislation, the bill is unlikely to ultimately become law. Nevertheless, its passage, coupled with the Biden administration’s prioritization of environmental justice and climate-related risks, suggests that new ESG disclosure requirements for U.S. public companies are imminent.

For example, in its Statement of Administration Policy supporting the bill, the Biden administration notes that “[a]s our Nation builds a more equitable economic future, these measures will safeguard the financial security of America’s families, businesses and workers from risks including the climate-related financial risk they already face.” Stmt. of Admin. Pol. H.R. 1187 (June 24, 2021). The statement further announces Biden administration support for those efforts to account for climate risk in financial services, which will empower and protect investors and encourage transparency, accountability, and equity in corporate governance.

Historically, while the SEC encouraged discussion of ESG issues, it never promulgated ESG-specific rules. That’s about to change, as the SEC will become the lead agency for ESG disclosure. Nevertheless, while the U.S. Environmental Protection Agency is not the lead agency directing new disclosure rules, its regulatory actions will still clearly impact ESG-related risks, including climate change and environmental justice.

Consistent with its lead ESG-disclosure role and proceeding on a parallel regulatory path, the SEC in June 2021 released its spring 2021 rule list, which included requirements for ESG disclosures. More recently, pressures from activist investors concerned with climate policy and environmental justice have caused public companies to incorporate ESG policies and disclosures into their public filings. Until recently, such disclosures generally were voluntary, leaving an individual company to ascertain whether its ESG risks, proposals, and policies were sufficiently material to merit disclosure.

In spring 2021, the SEC requested public comment on a set of fifteen questions regarding whether current disclosures on climate change and ESG were providing sufficient information to investors. The SEC asked for comments on how it might best regulate, monitor, review, and guide climate change disclosures, with the goal of providing more consistent comparable and reliable data for investors, while also allowing companies to understand their obligations. Additionally, public comment was sought on whether the SEC should create a climate or ESG disclosure standard-setter, like the Financial Accounting Standards Board, and, if so, what that standard-setter should be empowered to regulate and review.

Additionally, the SEC sought feedback on whether climate-related requirements should be a single component of a broader ESG disclosure framework as well as how it could best create climate-related disclosure requirements that might complement a broader ESG disclosure standard. Finally, the SEC asked for public comment on how climate-related disclosure issues relate, if at all, to the broader scope of ESG disclosure issues. As of the writing of this article, public comment continues to be gathered in response to those questions, and it no doubt will form the foundation for future ESG disclosure requirements.

In March 2021, the SEC announced the creation of a climate and ESG task force within its division of enforcement. The task force has been directed to develop initiatives to proactively identify ESG-related misconduct. Its initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.

In May 2021, President Biden issued Executive Order 14,030, an executive order on climate-related financial risk. Exec. Order No. 14,030, Climate-Related Financial Risk, 86 Fed. Reg. 27,967 (May 25, 2021). It identified certain priorities designed to address the impacts of climate change that might present physical risks to assets, publicly traded securities, and private investments, including increased risks associated with extreme weather–created supply chain disruptions. The executive order acknowledged that the global shift from carbon-intensive energy sources would present a transition risk to many companies, their workers, and the communities in which they are located, but also noted that the shift would present opportunities to enhance U.S. competitiveness and economic growth. The executive order called for the development of a climate-related financial risk strategy; the assessment of climate-related financial risk by financial regulators; the consideration of climate-related financial risks to pension funds; the modernization of federal lending, underwriting, and procurement processes by acknowledging climate-related risks; and the consideration of long-term budget priorities in order to reduce the risk of climate change to the federal budget.

In July 2021, in prepared remarks before the SEC’s Asset Management Advisory Committee regarding funds that hold themselves out to the public as investing with an emphasis on sustainability and diversity, SEC Chair Gary Gensler observed that the asset management industry had substantial work ahead to improve the diversity and inclusion practices of the industry and to increase racial and gender diversity within it.

Arguably still in their infancy stages and still well behind European requirements already in place, these developments should send a signal to all U.S. companies—even those not publicly traded—that the ESG regulatory train is rolling and that the time is fast approaching to get on board to influence a future regulatory framework or get run over and be subject to one that could be less desirable. Whether publicly traded or not, U.S. companies should anticipate that whether via law, regulation, or investor pressure, the trend toward ESG reporting is coming and be prepared to act accordingly.