On October 25, SEC Commissioner Mark Uyeda spoke at the Georgetown Law Hotel and Lodging Summit sharing his view on SEC-mandated climate change disclosures. While the Commissioner acknowledged the robust public response to rules regarding climate change disclosure proposed by the SEC (see our Legal Update, “US SEC Proposes Rules Regarding ESG for Certain Funds and Advisers”), he challenged the efficacy and propriety of such regulations on the grounds of “materiality” in federal securities laws and the comparability of ESG disclosure in fund documents.
Amongst the myriad sub-issues underpinning the seemingly straightforward environmental, social, and governance (ESG) factors that Commissioner Uyeda identified is the subjectivity of how ESG is considered by investors and issuers. As the past has shown, the meaning of ESG will likely shift over time. Pointing out the SEC rulemaking’s lack of agility to accommodate changes, the Commissioner questioned the necessity for the SEC to step in and mandate uniform disclosure requirements. “Once hard-wired into the SEC rule book,” Commissioner Uyeda observed, “regulations have a tendency not to be subject to retrospective review for a long time.”
His remarks highlighted the importance of materiality, the cornerstone of the federal securities laws. The departure of ESG disclosures from such standards, risks subjecting “corporate management to liability for insignificant omissions or misstatements,” which “may cause it simply to bury the shareholders in an avalanche of trivial information” and hinder informed decision-making, the Commissioner quoted Supreme Court Justice Marshall.
Commissioner Uyeda cautioned against the “broadening of financial materiality to encompass ‘qualitative’ materiality.” “A more outcome-driven approach based on their perspective of the public good,” the Commissioner argued, “… risk[s] a regime that is subject to the whims of the administration in power – regardless of its political affiliation.” He noted it will be Main Street investors bearing the consequences of increased costs, the complexity of disclosure, and the inevitable increase in litigation caused by such a regime.
Regarding next steps, Commissioner Uyeda raised concerns about the SEC’s over-packed regulatory agenda, both in general and with respect to ESG-related rule-making, and warned of adverse effects of overwhelming businesses with significant and costly new regulations.
See the Commissioner’s complete speech here.