In its first two months, the Biden Administration has given significant attention to climate-related and environmental, social, and governance (ESG) disclosure issues.
- February 1, 2021 — The SEC announced the appointment of Satyam Khanna as the Senior Policy Advisor for Climate and ESG. He is to oversee the SEC’s efforts relating to climate risk and other ESG developments.
- February 24, 2021 — Allison Herren Lee, the Acting Chair of the SEC’s Division of Corporation Finance, announced that the SEC would enhance its focus on climate-related disclosure in public company filings. In that announcement, Acting Chair Lee noted the relevance of climate-related issues to investors.
- February 26, 2021 — The SEC posted an Investor Bulletin on Environmental, Social and Governance Funds (ESG). The Bulletin observed the differing criteria that ESG Funds use in their investment strategies, and it highlighted that investors need to understand ESG Funds’ investment goals.
- March 4, 2021 — The SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The Task Force is to proactively identify potential ESG-related misconduct and disclosure violations.
- March 10, 2021 — The US Department of Labor (DOL) announced that it would not enforce Trump-era DOL rule amendments that require ERISA plan fiduciaries to select investments based solely on “pecuniary factors.”
- March 11, 2021 — In a speech, John Coates, the Acting Director of the SEC’s Division of Corporation Finance, advocated for the creation of an effective ESG disclosure system that is “adaptive and innovative” and noted that ESG factors are increasingly relevant to investment and voting decisions.
- March 15, 2021 — Acting Chair Lee announced that the SEC staff would be evaluating climate change-related disclosure rules and asked for public input on such disclosure.
- March 22, 2021 — The SEC launched a new page on its website to host information on the various agency actions relating to climate and ESG investing.
Of course, these actions are just the start. Much of the Biden Administration’s focus is likely to be on climate-risk. Some investment advisers and asset managers are advocating for guidance and specific disclosure standards on climate-related matters. Environmental and governance disclosures have been included in public reporting for some time, but more specific disclosure requirements in those areas may come as well.
And, what about the “S” in ESG? In addition to traditional “social” issues, over the last few years there has been increasing attention on supply chain issues, including forced labor, child labor, human trafficking, and sourcing of minerals. Disclosure about the sourcing and chain of custody of certain minerals is mandated by the SEC’s Conflict Minerals Rule.
The Conflict Minerals Rule was challenged in court, and in 2015 the DC court of appeals invalidated the portion of the Conflict Minerals Rule that required companies to state whether any of their products “have not been found to be ‘DRC conflict free.’” The SEC was to take additional action in furtherance of the court’s decision. However, no new guidance was provided until April 2017, when the SEC staff under the Trump Administration indicated that it would not recommend enforcement action against a company that was required to file a conflict minerals report with its Form SD but failed to do so. That guidance remains in place today. The Biden Administration’s early actions relating to ESG disclosure could be a preview of possible changes relating to the SEC’s Conflict Minerals Rule.
What might occur? First, as it is required to do, the SEC may review the Conflict Minerals Rule and revise it to address the court’s decision that certain disclosures required by the rule violate registrants’ free speech rights. But, it could implement an even broader overhaul of the rule, including increased disclosure obligations. Second, the SEC could provide new enforcement guidance to replace the guidance provided in April 2017. Third, the SEC could change its expectations and enforcement policy related to independent private sector audits (IPSAs), perhaps by increasing the circumstances under which an IPSA must be provided or expanding the scope of an IPSA. Fourth, Congress could revise Section 1502 of Dodd-Frank (which is the basis for the SEC’s Conflict Minerals Rule) by adding to the minerals covered by or expanding the geographic scope of the Conflict Minerals Rule. Of course, those changes would not apply to the Form SD filings due in May 2021. But, some of those actions could change the disclosure and IPSA obligations relating to calendar year 2021.
The bottom line? SEC registrants should stay tuned because, in light of the early ESG disclosure activity by the Biden Administration, changes to the SEC’s conflict minerals disclosure requirements and the enforcement of those requirements seem likely.