April 27, 2022

ESG and Climate Change Blind Spots: Turning the Corner on SEC Disclosure

This article examines four areas in which the SEC, for more than a decade, resisted reform or impeded shareholders’ access to sought-after environmental, social, and governance (ESG) information. These areas are: (1) the SEC’s refusal to act on several rulemaking petitions submitted during the years 2009 to 2018, which called for expanded ESG disclosure; (2) the SEC’s grudging promulgation of rules concerning social disclosures as required by Congress in the Dodd-Frank Act of 2010; (3) the SEC’s 2020 revisions to SEC Rule 14a-8, which make the submission of shareholder proposals more difficult, thereby thwarting investor efforts to raise ESG concerns; and (4) an SEC commitment beginning in 2016 to move away from line-item disclosure to a more principled-based system.

The article then discusses several reasons for this ESG disclosure reticence, notwithstanding clear trends among investors reflecting the importance of ESG information. First, there was a blind spot in place that either mistakenly assumed issuers already operate under an affirmative disclosure obligation when ESG information is material or more generally resisted the concept that much ESG information is material, decision-useful information using traditional definitions of “materiality.” But these blind spots toward ESG significance are also symptoms of a larger and more endemic blind spot. Specifically, many SEC officials adhered to an unduly narrow construction of the SEC’s tripartite mission – to protect investors; maintain fair, orderly, and efficient capital markets; and facilitate capital formation – and they thereby regarded disclosure to effectuate social or political change as outside the scope of the agency’s mission. Yet, in adopting the federal securities laws in the 1930s, Congress had a much broader understanding of the purposes of disclosure, which included giving shareholders information on how America’s public companies were being managed and how companies and banks were exercising power – power that had profound effects on the American economy. Fundamentally, Congress sought mechanisms of corporate accountability, which is precisely what it sought to achieve in the Dodd-Frank ESG provisions, and what current investors are demanding through the shareholder-proposal process and through ESG-rulemaking petitions.

Because the SEC is now widely expected to propose requirements for expanded climate and human capital disclosure in the first quarter of 2022, some of the prior sources of resistance may no longer present obstacles. But, because the article illuminates some of the more persistent misconceptions surrounding ESG disclosure, its analysis continues to be relevant as the SEC’s process for ESG disclosure unfolds.