By R. Jason Howard, J.D.
In a comment letter dated June 18, 2021, the North American Securities Administrators Association (NASAA) stated that it supports the SEC’s efforts to "develop and bring uniformity to climate change disclosure standards," noting that investors are increasingly factoring climate change risks into their investment decisions, and, as such, improving those disclosures that should be considered a matter of investor protection.
Greenwashing. Greenwashing occurs when companies "may make selective or misleading disclosures about the environmental benefits of their products or services," making the company appear more environmentally friendly than it really is. A uniform standard for public companies reporting on climate risks, according to the letter, will avoid greenwashing and allow investors to understand a companies environmental record and compare against other potential investments. The NASAA also believes the SEC’s rulemaking efforts should extend beyond issuers to "credit ratings and ESG scores issued by credit rating agencies, as well as disclosures by investment companies about fund holdings and investment strategies," to remove confusion and allow for more sound investment advice from investment advisers and broker-dealers.
Absent standards; promote uniformity. Recognizing that efforts in this area have seen the development of multiple disclosure frameworks as well as efforts to develop global standards, the NASAA espoused its support for H.R. 1187, the ESG Disclosure Simplification Act, under which, public companies would have to disclose in proxy or solicitation materials "a clear description of the views of the issuer about the link between ESG metrics and the long-term strategy of the issuer," and "a description of any process the issuer uses to determine the impact of ESG metrics on the long-term business strategy of the issuer."
Acknowledging the possibility that H.R. 1187 might not become law, the NASAA suggested that until a consensus standard emerges, a regulation that "requires a registrant to describe the methodology by which it measures climate change-related risks and impacts would serve regulators and investors well."
Improved examination and enforcement efforts. The SEC needs to provide greater clarity on how to craft climate change disclosures or the usefulness of examination and enforcement efforts may be diminished, exposing the SEC to criticism that enforcement is the SEC’s mechanism of regulation, according to the letter.
Other ESG-related disclosures. Addressing the SEC’s question in its request as to whether climate-related requirements should be a component of a broader ESG disclosure framework, the NASAA responded in the affirmative, suggesting that beyond climate change, the recognition of the importance of diversity in corporate governance is increasing and, in that light, the NASAA has written in support of H.R. 1277, the Improving Corporate Governance through Diversity Act, and H.R. 2123, the Diversity and Inclusion Data Accountability and Transparency Act.
Incentivize large private companies. The NASAA also recommended that the Commission explore options to incentivize greater disclosures of ESG-related information by large private companies. Not addressing ESG disclosures by both public and private companies concurrently may result in large issuers remaining private for excessive amounts of time, according to the letter.
ESG related investor education. In concluding, the NASAA cautioned that despite there not being a consensus on standards, investors still need to be informed and protected and, as such, the NASAA hopes the SEC will join them in educating investors on ESG issues.