Securities Litigation

In a March 15, 2021 address to the Center for American Progress, SEC Acting Chair Lee was clear:

No single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy.

That’s been apparent from the steady stream of climate and ESG-focused initiatives she has been announcing since January.  Her reasoning is that because many investors (and indeed asset managers and other market participants) think these issues are significant, then they are:

Human capital, human rights, climate change – these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues. We see that unmistakably in shifts in capital toward ESG investing, we see it in investor demands for disclosure on these issues, we see it increasingly reflected on corporate proxy ballots, and we see it in corporate recognition that consumers and investors alike are watching corporate responses to these issues more closely than ever.

That’s why climate and ESG are front and center for the SEC. We understand these issues are key to investors – and therefore key to our core mission.

It’s a more activist framing of the long-established (but retrospective) materiality standard from TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976):  A fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in decision-making.  So the decline of distinctions (“supposed distinctions,” she says) between social objectives and profitability, now makes these a market-driven imperative (or “ESG integration”) that compels the SEC to move beyond “if” and engage actively with “how.”

Acting Chair Lee recapped the efforts to date and ways her initiative touches on the SEC’s work:

• Climate Disclosure Directive – requiring the Staff to assess the current state of climate disclosures against the SEC’s existing 2010 guidance;
• Request for Comment – Lee issued a same-day Request for Public Comment on climate-change disclosures, addressing 15 questions, here: here. Those questions include suggestions of potential industry-specific disclosure mandates, development of uniform disclosure metrics, and even broader ESG disclosures.
• “Beyond Climate” – Suggesting new focus on “the broader array of ESG disclosure,” including workforce diversity, board diversity, political spending, and more.
• Shareholder Proposals – To ease the proposal process for the recent uptick in ESG shareholder initiatives (over half in recent seasons), including proxy rights.
• Examination and Enforcement Task Force – Aligning the Divisions of Examinations and Enforcement with these priorities. I addressed Examination here and Enforcement here; along with Commissioners Roisman and Peirce’s suggestion that existing materiality standards might be sufficient and questioning whether this is merely new emphasis or a sub-silencio rulemaking effort.
• Standard Setting – Lee wants to close international and domestic cooperation for the development of common metrics and disclosure standards:

Precisely because the risks and opportunities related to climate and ESG cut across all manner of boundaries, the SEC must do its part, in concert with market participants and regulators around the globe, to address these issues. The lack of common benchmarks and standardized language will continue to inhibit to some degree competitive dynamics around managing climate and other ESG risks.

The past months have brought a lot of sound and fury on climate and ESG issues.  It remains to be seen if this is merely their moment in the sun after a long-simmering evolution, or instead a harbinger of tectonic shifts in government mandates.

Acting Chair Lee’s address is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 34 years of experience representing financial institutions in litigation, regulatory, and compliance matters. See attorney profile.