Wednesday, June 09, 2021

Roisman weighs in on balancing benefits, burdens of ESG disclosures

By John M. Jascob, J.D., LL.M.

As calls increase for the SEC to require public companies to include granular disclosure on environmental, social, and governance (ESG) topics in their SEC filings. Commissioner Elad Roisman has urged the Commission to be particularly careful to ensure that companies can actually provide information that benefits investors without incurring undue costs and burdens. In a recent speech, Roisman expressed the hope that the SEC can predict the costs resulting from a new ESG disclosure regime clearly enough to mitigate them in its rulemaking process. Roisman delivered his remarks at the ESG Board Forum held by the Corporate Board Member Institute in Washington, D.C.

At the outset, the commissioner expressed his continuing reservations about the SEC issuing prescriptive, line-item disclosure requirements, particularly regarding ESG. He observed that the reason that there is not standardized "E" data yet from companies is that standardization is very difficult. Some of the data that has been requested is inherently imprecise, relies on underlying assumptions that continually evolve, and can be reasonably calculated in different ways, he noted. Unless the information can meaningfully inform an investment decision, it is at best not useful and at worst misleading.

Electric cart before the horse. Roisman reiterated his position that the SEC’s disclosure framework already requires public issuers to provide information that is material to investors. To the extent that material risks to a company can be categorized as "E," "S," or "G," he does not see a legal justification for failing to disclose that information under the SEC’s existing rules. Given that SEC Chair Gary Gensler has expressed the Commission’s intent to pursue ESG disclosure rules, however, Roisman raised several questions that the Commission will have to grapple with in promulgating any new regulations in this area. These questions include inquiries concerning:
  1. the precise items of "E," "S," and "G" information that investors currently lack;
  2. the rationale for making the SEC, and not the EPA, the appropriate federal agency to require climate-related disclosures;
  3. the expertise needed for the SEC to come up with "E" and "S" disclosure requirements;
  4. the oversight and infrastructure necessary to incorporate the work of external standard-setters; and
  5. the best way for the SEC to tailor ESG disclosure requirements to balance benefits with the inevitable costs.
Putting the "electric cart before the horse," the commissioner then focused his remarks on his last question concerning costs and benefits. This is not because it is more important than the other questions, Roisman said, but because the agency has ESG disclosure rules in process, he believes the discussion is relevant regardless of how the SEC approaches the other questions.

Foreseeable costs. Roisman noted that any new disclosure requirement will cause companies to incur costs, including not only costs in obtaining and presenting the new information, but also the costs of increased liability for making these disclosures. Although these cost categories are not necessarily unique to ESG disclosures, they may be greater given the potential scope and novelty of "E" and certain "S" categories. If the goal is to craft a proposal that gets ESG information into the hands of investors, Roisman believes the SEC has the obligation to foresee these costs so the agency can do something to head them off.

Tailoring ESG disclosure requirements. Roisman said that scaling any new ESG disclosure requirements could lighten the burden on smaller companies, similar to the approach the SEC has taken regarding certain other disclosure mandates. Despite suggestions that the Commission take the unprecedented step of imposing ESG requirements on public and non-public companies alike, Roisman believes that any new requirements should be limited to public companies that have undertaken the regular public reporting that the SEC’s disclosure regime requires.

Given the difficulties in reliably sourcing and calculating certain information, Roisman believes that the Commission will also need to be reasonable in its expectations of what companies can disclose and how they disclose it. For example, a company’s ability to calculate Scope 3 greenhouse gas emissions depends on the firm gathering information from sources wholly outside the company’s control, both upstream and downstream from its organizational activities.

Roisman worries that for most "E" information, companies will have to rely on outside vendors to evaluate and obtain some of this information and that the SEC’s regulations will inflate the demand—and cost—for such data. In Roisman’s view, the SEC should allow issuers flexibility in how they present much of this new information, recognizing the limitations in the precision of these disclosures. The commissioner also expressed concerns about subjecting any new requirement to heightened verification measures, such as an audit or an attestation.

Mitigating litigation risk. In order to help address the inevitable litigation risk that will come with sweeping new disclosure requirements, Roisman advocates that the SEC consider a safe harbor for companies that are earnestly trying to provide this new information, along the lines of that which is available for companies’ forward-looking statements. "We would be asking companies to tell us what they know, as best as they can discern it," Roisman said. "I worry we would chill that effort if we did not provide them some space to provide that disclosure."

Roisman said the Commission should also consider whether such disclosures should be furnished to the SEC, rather than filed, thus tracking the approach the Commission has adopted with regard to the disclosure of payments related to resource extraction. To the extent that investors want additional "E" and "S" information and benefit from the uniformity and comparability provided by SEC-required disclosures, those benefits can be realized without imposing the level of liability that filing with the SEC presents, Roisman said.

Roisman also thinks that a new ESG disclosure regime will have to be phased in and have an extended implementation period. He said that it is reasonable that companies could take different approaches to their disclosures, and this variation could benefit investors, who can then express preferences back to issuers. In order to allow this natural process to occur, Roisman urged the SEC to be patient in how it chooses to implement this new regime. And regardless of how the SEC tailors this aspect of the rules, the Commission should allow a good amount of time for the compliance measures to develop before it brings any enforcement actions, Roisman said.