As Chairman Clayton reaches the end of his tenure, Commissioners Lee and Crenshaw continue to push for SEC action on climate change.

By Paul A. Davies, Paul M. Dudek, Ryan J. Maierson, and Kristina S. Wyatt


In recent years, the market has witnessed a sharp divide both within the US Securities and Exchange Commission (SEC or Commission) itself and between the investor community and the SEC over the regulation of environmental, social, and governance (ESG) disclosures, as discussed in this blog post. The Commission, under the direction of Chairman Jay Clayton, has declined to entertain the regulation of ESG disclosures outside of human capital issues, even upon the adoption of amendments in August 2020 to the provisions of Regulation S-K governing the companies’ business description, risk factors, and legal proceedings. Last week, the Commission adopted amendments to the provisions of Regulation S-K governing Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and, in line with its previous actions, declined to include any provisions related to ESG disclosures.

On One Hand, Urgent Action Advocated on ESG Issues Across the US Financial System

The year 2020 rang in with the seminal letters from Larry Fink to BlackRock’s investors and the CEOs of the companies in which BlackRock is invested, which placed ESG squarely on the agenda of the investment community. Those letters were followed by a continued swell of investor demand for ESG data, as discussed in this blog post.

The ESG theme has continued throughout the year, including in the form of recommendations from the SEC’s Investor Advisory Committee and Asset Management Advisory Committee, urging the SEC to take action on ESG disclosures, as outlined in this blog post. SEC Commissioner Allison Herren Lee has been a staunch advocate for SEC action to address climate change and the broader range of ESG issues through the Commission’s disclosure program. In a September 27, 2020, op-ed Commissioner Lee declared, “We face an enormous task with a tight time frame and the highest of stakes — the livability of the planet. The S.E.C. can act now.” More recently, in remarks to the Practising Law Institute’s Annual Institute on Securities Regulation,  Commissioner Lee proclaimed, “This is an all-hands on deck effort. We need to solicit engagement from all market participants, leverage the work that has already been done by TCFD and others, and move forward with considered, informed rule-making and other initiatives in this space.”

In September 2020, the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the US Commodity Futures Trading Commission issued a report on the systemic threats posed by climate change to the financial system. According to the report, “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy. Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity.”

During Climate Week 2020, the International Business Council of the World Economic Forum, in collaboration with Deloitte, EY, KPMG, and PwC, published a white paper that proposed a set of common metrics for reporting on ESG factors. The report, “Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation,” followed a January 2020 consultation draft, which explained the concerns it intended to address: “The context in which businesses now operate has been transformed by climate change, nature loss, social unrest around inclusion and working conditions, COVID-19 and changing expectations of the role of corporations. Further, the global pandemic has exacerbated underlying and longstanding failures regarding equality and access to economic opportunities. To continue to thrive, companies need to build their resilience and enhance their licence to operate, through greater commitment to long-term, sustainable value creation that embraces the wider demands of people and planet.”

In November 2020, the Board of Governors of the US Federal Reserve issued a Financial Stability Report to provide an assessment of the resilience of the US financial system. This report addressed the impact of climate change risk on financial stability for the first time, and reflects Chairman Jerome Powell’s November 5, 2020, statement acknowledging the need to incorporate climate change into the Federal Reserve’s risk and regulatory framework.

Both within and outside the United States, calls for consistent ESG reporting standards have been loud and clear and regulators and standard setters are attempting to respond. In September 2020, the International Federation of Accountants proposed the creation of a new international sustainability standards board that would operate alongside the International Accounting Standards Board. Then, in November 2020, the International Organization of Securities Commissions (IOSCO) opened its annual meeting with a discussion of sustainable finance, and specifically, the objective of establishing a consistent and comprehensive framework for corporate sustainability disclosures.

On the Other Hand, Deep Skepticism About ESG Issues

The sense of urgency to address climate risks and other ESG factors is not universally shared. The SEC and the US Department of Labor (DOL) have recently taken positions that reflect a deep skepticism of the materiality of climate change risks and other ESG factors (as discussed in this blog post, related to the SEC’s recent actions; this blog post, related to the DOL’s positions; and this blog post, related to the DOL’s recent rule amendments). When the SEC amended Regulation S-K, its principal disclosure regulation, in August 2020 and again in November 2020, it declined to address climate change, diversity and inclusion, and other key ESG factors — despite multiple calls from market participants for the SEC to step in and drive enhanced disclosure of this information. In each case, SEC Commissioner Lee (joined in November by Commissioner Caroline Crenshaw, who joined the SEC in late August 2020) issued a dissenting statement objecting to the Commission’s failure to enhance its disclosure rules relating to ESG disclosures.

In September 2020, the SEC adopted amendments to Exchange Act Rule 14a-8, the “shareholder proposal” rule, that limit shareholders’ ability to add matters to proxy statements for consideration at annual company meetings. During the 2020 proxy season, shareholders put forward over 420 proposals relating to ESG issues — representing an increase from 2019, even as overall shareholder proposals declined in 2020. As a result, some view this amendment as a blow to shareholders seeking to encourage companies to improve their ESG performance and transparency regarding ESG risks. As Commissioner Lee noted in her statement opposing the amendments to Rule 14a-8, “These changes will be most keenly felt in connection with ESG issues, which comprise the main subject matter of shareholder proposals, at a time when such proposals are garnering increasing levels of support.”

The Future Regulation of ESG Disclosures

On November 16, 2020, Chairman Clayton announced his intention to step down as Chairman of the SEC as of the end of the year in anticipation of the incoming Biden Administration. In a speech to the Economic Club of New York on November 19, 2020, the Chairman reviewed his tenure and conducted an inventory of his achievements.

Toward the end of his speech, Chairman Clayton addressed climate-related disclosures. He noted that issuers are already required to disclose climate change information under the SEC’s existing rules, to the extent that the information is material. In regards to the future adoption of additional, standardized climate change disclosures, Chairman Clayton said, “I am of the view that any standardization should be approached on a sector-by-sector basis, starting with the sectors that are already using metrics to track and assess climate-related risks.” This comment may be a nod to the Sustainability Accounting Standards Board’s framework, though precisely what the Chairman has in mind remains to be seen. He concluded his remarks by saying, “I expect to have more to say on this soon, so please stay tuned.”

As Chairman Clayton closes out his tenure, and the SEC awaits President-elect Biden’s appointment of a new Chair, Commissioners Lee and Crenshaw are preparing to lay the foundation for the regulation of ESG disclosures. In a joint statement dissenting from the amendments to the MD&A rules, Commissioners Lee and Crenshaw expressed their disappointment that the amended rules failed to address the disclosure of climate change risks, noting that investors “are echoing that call for improved climate disclosure, recognizing the systemic risks that climate change poses to global financial stability.”

Despite their disappointment, Commissioners Lee and Crenshaw found what they termed a silver lining: “We have an opportunity going forward to address climate, human capital, and other ESG risks, in a comprehensive fashion with new rulemaking specific to these topics. In addition, the Commission should have an internal task force and ESG Advisory Committee that is dedicated to building upon the recommendations of leading organizations, such as the Task Force on Climate-related Financial Disclosures, and defining a clear plan to address sustainable investing. There’s no time to waste in setting to ourselves to this task, and we look forward to rolling up our sleeves to establish requirements for standard, comparable, and reliable climate, human capital, and other ESG disclosures.”

Latham & Watkins will continue to monitor developments in this area.