ESG Investing

Is Change Coming for SEC Sustainability Disclosure?

The election of Joseph R. Biden as the 46th president of the United States and the Democratic sweep to power may set the stage for significant changes to Securities and Exchange Commission (SEC) sustainability disclosure regulation. These changes could have ramifications for US companies, investment firms, and investors themselves.

With Biden’s strong early commitments to fighting climate change and the Democrats’ keener focus on environmental, social, and governance (ESG) matters, the new administration may push for more rigorous SEC sustainability disclosures to improve US corporate performance on ESG metrics.

Slow ESG Adoption Challenges US Investors

During his tenure, former SEC chairman Jay Clayton resisted attempts to create a binding ESG framework and detailed sustainability disclosure requirements for SEC filings by public companies.

One implication of this is that the US has begun to lag behind jurisdictions such as the European Union in tailoring policies to reflect the dramatic rise in ESG investing over recent years. Without such policies, investors in the US seeking exposure to sustainable investing could be comparatively more susceptible to greenwashing. They may also find it more challenging to discern the extent of investment funds’ ESG credentials. Moreover, funds themselves often struggle to score corporations on ESG metrics due to the lack of a formal ESG framework for the disclosures US companies make in their financial reports.

Together, this all seems to raise the likelihood that the SEC will ultimately adopt a formal ESG framework for sustainability disclosures.

Will the SEC Shift on ESG?

The difference between the Biden and Trump administrations on the issue of climate change is stark. Former President Trump withdrew the United States from the Paris climate agreement—a move President Biden reversed on his first day in office. Biden appears to be positioning combating global warming as an imperative, targeting a 100% clean energy economy with net-zero emissions no later than 2050. Such an ambitious plan aligns itself with the kind of sustainability disclosure policies currently being pursued by the EU.

Investors organized by the Forum for Sustainable and Responsible Investment are sending the Biden administration a set of policy recommendations, including the appointment of SEC and Department of Labor (DOL) leaders who are knowledgeable about sustainable investing. Both Biden’s pick for SEC chairman, Gary Gensler, and his appointed interim chair, Allison Herren Lee, are thought to favor stronger ESG regulations. (Biden’s secretary nominee secretary for the DOL, Marty Walsh, was considered a “champion of ESG investing” during his six years as Boston’s mayor.)

This all seems to raise the likelihood that the SEC will ultimately adopt a formal ESG framework for sustainability disclosures to improve the quality of information available to investors. In the context of an EU-style ESG regulation, US investment firms would likely be required to report on the environmental sustainability of their products. Large US companies of all kinds might also need to regularly disclose how their revenue, capital, and operational costs relate to sustainable activities to comply with potential new SEC regulations.

The strong ongoing momentum for ESG may lead the way for more investment firms to reorient existing strategies toward sustainable investing over the coming years. Similarly, some may have to desist from labeling certain strategies as sustainable if they fall short of incoming requirements until they can justify a sustainable designation. ESG investors in general need access to higher-quality information on which to base their investment decisions; better-quality information stemming from sustainability disclosures could also help investors use proxy resolutions to improve companies’ performance on ESG metrics.

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