Climate and ESG issues are being prioritized by the SEC

GreenPortfolio was pleased to see a flurry of announcements from the Securities and Exchange Commission (SEC) related to climate and ESG issues in recent weeks. Concerns have been voiced for many years about companies either inflating how “green” their operations were or understating how their businesses impact climate change. We’re hopeful that these concerns might actually be addressed. Let’s take a few minutes to review what was actually announced and what it means.

By GreenPortfolio Team

March 18, 2021

The SEC will be reviewing filings from companies related to climate and ESG risk.

Focus on climate disclosures in public filings

On February 24, 2021, Acting Chair Allison Herren Lee directed “the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings.” While her notice certainly highlights renewed priorities within the SEC to ensure that companies are accurately portraying their ESG climate-related risks, there was no announcement of any actual changes in policies or procedures.

 

In fact, she notes that the SEC will merely review how public companies are addressing guidance previously published in 2010. This most recent announcement also indicated that they will assess if disclosures comply with current securities laws and “absorb critical lessons” on how the market is managing climate-related risks.

SEC Building

2021 examination priorities include climate-related risks

Next, on March 3, 2021, the SEC Division of Examinations announced its 2021 priorities. ESG and climate-related risks appeared to get top billing amid a variety of priorities included for the year. Two specific items were called out.

The first is proxy voting as it relates to climate and ESG risks to ensure that these votes align with investors’ best interests. No further explanation is given on this priority, but it could relate to increased shareholder actions pressuring companies to address behaviors related to climate change. These actions often involve proxy voting by large asset managers and it may be that the SEC is questioning if these actions are more in the interest of climate activists or shareholders. Ceres, an organization that tracks these types of climate-related proposals from shareholders, found that not only were there more of these types of proposals in 2020 than in previous years, but that they received a higher amount of support on average. This increased activity might have gotten the SEC’s attention and interest.

 

The second item mentioned was companies’ continuity plans in light of increased physical risk due to climate change. This makes sense as many locations throughout the country are seeing more extreme weather events more often. Whether wildfires, power outages, hurricanes, or floods if a company has not taken proper precautions to deal with these increased risks, shareholders need to be aware to be able to accurately assess their investment.

SEC task force

Creation of Climate and ESG Enforcement Task Force

Most recently, on March 4, the SEC announced an Enforcement Task Force focused on climate and ESG Issues. This announcement made the biggest ripple as it indicated that they would begin to “proactively identify ESG-related misconduct”. While the SEC did not give much more color as to what they consider misconduct, they indicated that they would be attempting to find “material gaps or misstatements” in public climate risk statements using more modern data analysis tools. Once again, no new rules or policies would be enacted, but instead, the SEC would be looking to enforce currently available guidelines.

The inclusion of climate risk assessments in public disclosures is indeed a fairly new addition for both companies and investors. Yet, over the years, there has been skepticism regarding how companies conduct their climate risk assessments. GreenPortfolio is optimistic that this new Climate and ESG Task Force will bring increased compliance and transparency to the market.

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