by Jamie Bonham, Director of Corporate Engagement.

The inevitable march toward mandatory ESG disclosure continues, though the road ahead is shaping up to be a bumpy one.

Editor’s note: This article first appeared in our Active Ownership Report from Q2, 2022 

The U.S. Securities and Exchange Commission (SEC) wrapped up consultation on its proposal to mandate climate-related disclosure. It was a consultation NEI participated in, and we were surprised by the proposal’s scope and ambition. If it moves forward, this landmark ESG development will be felt around the world.

In a nutshell, the rule would mandate the disclosure of climate-related information largely aligned with the Task Force on Climate-related Financial Disclosures (TCFD) in a company’s existing SEC-mandated financial disclosure documents. While the Canadian Securities Association (CSA) also proposed mandatory climate-related disclosure aligned with the TCFD, the SEC proposal is far more prescriptive, and far more ambitious. This gap in ambition is sure to cause consternation. The SEC did ask if Canadian issuers should be able to offer their CSA-compliant disclosures in lieu of meeting the SEC expectations. We suggested that would not be appropriate unless the Canadian expectations increased.

Our submission to the SEC’s consultation was broadly supportive and highlighted the importance of having reliable and comparable climate-related data from issuers. We found much to like in the proposal, from mandating GHG emissions disclosure to detailing governance oversight of climate risks to the requirement to disclose corporate transition plans and more.

The spectre of mandatory climate-related disclosure requirements has led to an unsurprising yet illuminating response from corporate and political actors. The current voluntary disclosure regime has broadly caught on across sectors, and most large issuers are already providing some level of disclosure. The number of companies that have committed to aligning with a net-zero future grows daily. According to Just Capital, some 25% of the Russell 3000 have set a net-zero by 2050 target. But the threat of having this disclosure mandated in auditable, legally binding financial disclosures has sparked an outcry. Industry associations have been particularly disparaging, asking that it be delayed, significantly altered, or dismissed outright. Legal action should the SEC carry forward with the existing proposal seems a strong possibility. The contradiction between what companies are already doing (e.g. disclosing climate-related data and setting ambitious GHG reduction targets) and the largely negative response to the consultation is jarring.

The backlash seems to mirror a broader backlash to ESG principles creeping into American discourse. To be fair, the proposal as it stands could be trimmed, and not every corporate entity that responded to the consultation was opposed. Some of the points raised by critics are indeed worthy of consideration. But the gap between investor and corporate expectations when it comes to climate-related disclosure is clear.

In the end, the SEC’s mandate is to protect investors, and the overwhelming majority of investors who responded to the consultation have been supportive. This is a textbook case of why investor policy advocacy is so important. We hope the weight of investor expectations will carry the day, and that we see a ground-breaking (if less onerous) rule issued by the SEC sooner rather than later.


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