As reported by Bloomberg, Acting Corp Fin Director John Coates told a webinar audience that mandatory ESG disclosures were “overdue,” and that the SEC was moving quickly on related rulemaking. In the webinar, sponsored by NYU’s Institute of Accounting Research and the Institute for Corporate Governance & Finance, Coates said that he expects the SEC to soon be in a position to review and consider staff proposals for prescriptive rules on ESG addressing both general and industry-specific requirements. These actions are expected to be the SEC’s most significant action on climate since the 2010 guidance. (See this PubCo post.)
According to Bloomberg, Coates confirmed that, based on his conversations with the new SEC Chair, Gary Gensler, he expects that Gensler will continue the focus on ESG that was initiated by former Acting Chair Allison Lee.
Bloomberg reports that, according to Coates, the new disclosure requirements will focus on three topics: diversity, equity and inclusion; climate change; and human capital management. To be effective, he said, new SEC rules “must produce results that are useful, consistent, and comparable.” He noted that, contrary to prior suggestions from Lee that the staff would likely update the 2010 guidance (see this PubCo post), he expected the SEC to instead just move forward with rulemaking.
Coates acknowledged the enormous challenge that the SEC faces in undertaking a rulemaking project of this size and complexity, noting that, as an academic, he had not quite appreciated the cost to the agency of this type of rulemaking in terms of personnel and other resources. In addition, he recognized that the compliance effort required on the part of companies and the potential for liability could trigger substantial pushback from companies affected. However, he believed that new ESG rules have been expected and are already “priced in.” In addition, many companies—over 90% of the 250 largest companies—already provide voluntary sustainability reports, which are subject to the antifraud provisions of the securities laws even if they are not filed with the SEC. In response to an audience question, Coates downplayed as not a “first-order determinant” the concern that mandatory ESG reporting would deter companies from going public. In addition, he observed that private companies are also facing market demands for ESG disclosures.
Coates said that, in crafting new rules, he expected to seek input from issuers, trade groups, investors and standard-setters. In observations regarding the request for public comment that Lee had issued in March, Coates focused on questions regarding potential use of an independent standard-setter, such as who should serve as the standard-setter (including any existing standard-setters) and the role of the SEC in selecting, overseeing and funding the standard-setter. He noted that, as an example, the SEC has relied on the FASB to set accounting standards. Coates reported that the SEC had received about 30 comment letters so far, but that the June 13 comment deadline was a soft one and he expected additional comments to come in.
Former SEC Commissioner Robert Jackson conducted the interview with Coates, and he and Coates, both academics, had a discussion about the issue of materiality in the context of ESG. According to Bloomberg, one challenging issue was whether the same ESG issues are material across all industries. Coates indicated that he agreed with the position of SASB that some issues of sustainability may be material across the board, while others may differ among different industries. Jackson maintained that materiality must be considered from the perspective of the investor, not the issuer or its counsel. Coates noted in addition that “investor-focused materiality” is subject to change based on events, citing as an example the transformed perception over time of the materiality of asbestos. Importantly, both Jackson and Coates contended that the SEC has never limited its disclosure requirements to only material data, citing as an example the low threshold for disclosure of perks in the executive comp rules.
There has also been a fair amount of discussion of the possibility of uniform global sustainability reporting standards. Coates seemed to put the kibosh on that idea as “not practical” due to political and legal difference among countries. But, he indicated, we could come close. To that end, he advocated consistency in all countries’ requirements for “measuring and validating ESG data.” For example, he suggested that methodology for calculating GHG emissions should be standardized, even if the disclosure requirements may differ.