SEC Chair Jay Clayton and Commissioners Hester M. Peirce and Allison Herren Lee weighed in on the agency's recent proposal and guidance regarding financial disclosure requirements.

As previously covered, the SEC proposed rule amendments designed to "modernize, simplify, and enhance" certain Regulation S-K disclosure requirements. The SEC also issued guidance on the key performance indicators and metrics under Regulation S-K Item 303, Management's Discussion and Analysis (or "MD&A") of Financial Condition and Results of Operations.

In a public statement, Mr. Clayton expressed support for the proposal, saying that it would "substantively benefit investors and our capital markets more generally." He noted that the agency will continue its ongoing disclosures initiative, and will prioritize disclosures regarding (i) the current and potential effects of the coronavirus and (ii) environmental and client-related efforts. He also noted that:

  • there are significant challenges to creating and assessing climate-related disclosures mandates and guidance due to (i) the "complex, uncertain, multi-national/jurisdictional and dynamic" nature of the topic, (ii) the forward-looking nature of climate-related factors which does not match the currently verifiable and largely historic disclosure-based regulatory regime, and (iii) regulators potentially using their judgments and experience to inadvertently influence investors' decisions;

  • the staff is continuing to review how investment advisers and other issuers are following guidance and mandates on environmental and climate-related disclosures;

  • the staff is continuing to seek issuer and investor engagement in order to (i) learn how investors are using and analyzing environmental and climate-related disclosures to make investment decisions, (ii) understand to what extent issuers recognize, analyze and address these risks, and (iii) remind them of the agency's principles-based disclosures requirements and that as circumstances change, disclosures may be amended;

  • the agency is committed to international disclosure review initiatives and is working with non-U.S. regulators that include IOSCO's Sustainable Finance Network (SFN) Steering Group, the Financial Stability Board's (or "FSB") Task Force on Climate-Related Financial Disclosures (TCFD), the Bank of England, the UK Financial Conduct Authority, the European Securities and Markets Authority, and the European Commission, as well as domestic counterparts at the U.S. Treasury Department and the Federal Reserve Board; and

  • the agency encourages market participants to continue providing feedback and has urged international counterparts, such as IOSCO and the FSB, to also engage with market participants.

Ms. Peirce praised the proposal and guidance for supporting (i) the agency's principles-based approach to regulation and (ii) the concept of materiality. According to Ms. Peirce, the proposal does not "bow" to demands for a more aggressive regulatory approach that would indiscriminately require environmental, social and governance ("ESG") and sustainability disclosures. The proposed amendments and guidance instead focus on information that is useful for an investor seeking a return on their investment. Ms. Peirce emphasized that the proposal does not prioritize providing disclosures that are important only to non-investors or a select group with goals that are only loosely related to profitability.

Ms. Lee criticized the proposal for not standardizing disclosure requirements regarding climate change risk and removing certain significant disclosure items (i.e., Item 301, Item 302, Item 303(a)(4) and (a)(5)). Overall, Ms. Lee stated that the SEC is relying too heavily on a principles-based "materiality" standard that does not address the "overwhelming" investor requests for standardized ESG disclosures, which will inadvertently cause significant costs to investors. Although most large public companies voluntarily issue ESG disclosures, Ms. Lee warned that such disclosures without a regulatory standard:

  • vary from company to company, therefore making it difficult for investors to compare companies;

  • create varying and sometimes competing standards and principles leading to unnecessary workstreams and costs; and

  • lack third-party verification and therefore could give investors inaccurate or incomplete information.


Commissioner Lee complains about the absence of a "mandatory standardized framework" for evaluating disclosure as to climate risk or other ESG measures in the absence of a government mandate. Perhaps the reason why there is no such standardization is that no objective standardization is possible. For example, does nuclear power rate high as being good for climate change or does it rate low as being dangerous? Who is to be the arbiter of what is a socially good organization? In the absence of any reasonable objective standardized measures, wouldn't it be better for ESG scoring to be left to private organizations that can establish their particular ESG scoring systems that private investors can accept or reject?

Commissioner Lee's comment that the absence of a standardized ESG framework is "putting US companies at a competitive disadvantage globally" requires empirical support for the proposition to be persuasive.