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SEC to Review Climate-Related Disclosure: The Start of Things to Come

Under the Biden administration, issuers can expect renewed regulatory focus on climate change and other ESG-related disclosure matters.

On February 24, 2021, Securities and Exchange Commission ("SEC") Acting Chair Allison Herren Lee issued a Statement on the Review of Climate-Related Disclosure in which she directed the SEC's Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. As part of its enhanced focus in this area, the SEC Staff will update 2010 guidance provided to public companies on disclosure requirements as they apply to climate change matters to take into account developments in the last decade. 

The SEC previously declined to standardize or make mandatory disclosures relating to many environmental, social, and corporate governance ("ESG") issues, instead requiring public companies to disclose ESG risks only if they deem the risks material to their business. When the SEC proposed amendments to modernize its MD&A disclosure requirements in January 2020, then-Commissioner Lee sharply objected to the proposal because it did not "make any attempt to address investors' need for standardized disclosure on climate change risk." In another sign that pressure is building for further SEC regulation in the area, on December 2, 2020, the ESG Subcommittee of the SEC's Asset Management Advisory Committee ("AMAC") submitted a Discussion Draft to the AMAC, setting out potential recommendations for discussion and to solicit feedback from the AMAC. Among those recommendations was that the SEC adopt mandatory standards for corporate issuer disclosure to help ensure consistent, comparable, complete, and meaningful disclosure on ESG risks.

Reiterating her previous views, Acting Chair Lee stated in her February 22 remarks at Chatham House's "Responsible Business 2021" conference that "[c]limate presents risks that are unique in scope, breadth, and complexity, and has the potential to trigger abrupt and disruptive shocks to our financial system, with significant and potentially devastating consequences for the real economy. That's why understanding and responding to climate risk as a systemic risk is a top priority for the SEC." She also stressed her commitment to working closely with the SEC's international counterparts and organizations to reach a cooperative global solution.

Portending a renewed focus in the area, the SEC also recently announced the hiring of Satyam Khanna as Senior Policy Advisor for Climate and ESG in the office of Acting Chair Lee, where she will advise the SEC on ESG matters and advance related new initiatives across the agency.

Currently, with the Commissioners generally split 2-2, it is unlikely that major rule changes in the area will be formally proposed or adopted at the Commission level until a new Chairman is appointed. Indeed, if he is confirmed, Gary Gensler, President Joe Biden's nominee for Chairman of the SEC, will be the tie-breaking vote. As previously noted, under Mr. Gensler's leadership, companies can expect an increased focus on ESG issues, including more prescriptive rules related to ESG disclosures and, more specifically, rules that make climate change disclosures mandatory. 

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