by Gregg LaBar

October 13, 2021

The U.S. Securities and Exchange Commission (SEC) is expected to issue proposed environmental, social and governance (ESG) disclosure regulations during the first quarter of 2022.

Since the Biden Administration took office in January 2021, this has been a fast-moving agenda, and, until recently, the proposed rules were expected to be released before the end of 2021. Now, the timetable seems slightly delayed, but all indications are that the proposed rules will be forthcoming not long after the new year.

Once the proposed rules are issued, many milestones and hurdles will remain before any proposed regulations could be finalized and take effect. Those additional steps will likely include receiving comments on the proposed rule(s), holding congressional hearings, revising the regulations, securing approval from at least three of the five SEC commissioners, dealing with inevitable court challenges and phasing in implementation.

Nonetheless, recent SEC statements, initial comments from stakeholders and ongoing analysis by many pundits have outlined a framework that appears to be taking shape:

  • The SEC appears interested in the “E,” “S” and “G.” Climate change is the environmental focus, “human capital management” appears to be the social topic of most interest to the SEC, and cybersecurity and data privacy appear to be a priority under governance (in addition to the other governance topics the SEC already regulates).
  • The SEC is likely to propose both qualitative (management approach) and quantitative (performance data) disclosure requirements.
  • On climate change in particular, the SEC said it wants investors to have “consistent, comparable and decision-useful” disclosures about greenhouse gas emissions, the financial impact of climate change and progress toward climate-related company goals.
  • The SEC is feeling pressure to act from a number of sides: investors, environmental activists, European governments and some big companies. SEC Chairman Gary Gensler has pointed out that the SEC received more than 550 unique comment letters to its request for input earlier this year, and 75% of the commenters supported mandatory climate disclosure rules.
  • Human capital management priorities are likely to include: gender and ethnic diversity of Boards and senior management teams, as well as investment in and impact of employee training and development programs.

Many uncertainties will continue until the proposal is issued. These include: Will the SEC rely on existing reporting frameworks such as the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures or come up with its own standard? Will there be different requirements for different industries? Will there be an effort to have the U.S. participate in a global standard (which would be highly unusual for U.S. policymakers)? In what existing or new forms will the ESG disclosures need to be published? What methods should be allowed for calculating the data points? Will the SEC include a “comply or explain” provision? Will there be one rule or separate rules for climate change, human capital management, and cybersecurity and data privacy?

A forthcoming proposal should provide more answers soon, and then the deeper analysis of the potential impact can begin. We will be watching this closely in the months ahead.