SEC Commissioner Lee Advocates Standardized ESG Disclosures

SEC Commissioner Allison Herren Lee advocated for greater public company disclosure, financial firm reporting and regulatory oversight on environmental, social and governance ("ESG") factors in order to protect investors.

In remarks at the Practising Law Institute's 52nd Annual Institute on Securities Regulation, Ms. Lee urged the SEC to "consider our regulatory mission more broadly, including our oversight of funds and their advisers, credit rating agencies, and accounting standards." Likening the dramatic impact of the COVID-19 pandemic on the economy to the looming risks posed by climate change to investors, capital formation and markets, Ms. Lee argued that the financial risks presented by climate change are "systemic." She explained that (i) the potential shocks to the financial system can be intense and widely proliferated, (ii) the risks can impair substantial parts or the entirety of the financial system and (iii) the impact of the shocks can spill over to "the real economy."

To mitigate the impact of the systemic financial risk posed by climate change, Ms. Lee asserted that greater ESG disclosure and better evaluation of data is the place to start. Ms. Lee stated that as businesses are now "actively compet[ing] for capital" on the basis of its ESG performance, the SEC should collaborate with market participants to establish a disclosure framework that would ensure that banking and non-banking financial entities, which are some of the most substantial investors in the fossil fuel sector, provide transparent disclosures as to their contribution to direct and indirect greenhouse gas emissions (or "Scope 3 emissions").

Ms. Lee encouraged the SEC to explore standardized disclosures from issuers regarding their definition of "'green,' sustainable or ESG-focused" funds. She also suggested that (i) the SEC should assess credit rating agencies based on the consistency, transparency and accuracy of their models with regard to ESG factors and (ii) the Financial Accounting Standards Board should include climate risks in its analyses when applying GAAP.

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