Verdani Insights: The SEC’s Proposed Rules Concerning ESG Disclosures: What, Why and How? (Part 1)

Mary Reames, J.D., LEED-AP O+M

Verdani Partners



When President Biden took office earlier this year, he brought with him a determination that the federal government would resume its leadership role in addressing environmental issues. With the Executive Branch taking several very visible actions in the environmental arena, including executive orders, political appointments, and budget and infrastructure proposals, other federal agencies have also indicated their willingness to address environmental matters that fall under their jurisdictions.


In June 2021, Securities and Exchange Commission (SEC) Chair Gary Gensler released his regulatory agenda, which contained the creation of rules around mandatory company disclosures with ESG implications. His areas of interest include climate-related risks and opportunities, ESG claims and related disclosures, human capital management, and corporate board diversity. Speaking about these agenda items, Gensler noted that:


“Investors representing literally tens of trillions of dollars of assets under management are looking for consistent, comparable, decision-useful information to determine whether to invest, sell, or make a proxy vote one way or another.”[1]


Several of these proposed rules may have direct implications for the real estate industry. For example, with respect to climate change, Gensler requested SEC staff to examine disclosure issues such as how corporate governance, strategy and risk management are affected by climate risk; what metrics may be most relevant to investors; whether disclosure requirements should differ by industry; and what disclosures may be required concerning forward-looking climate commitments.[2] Gensler has also asked staff to propose disclosure recommendations regarding human capital management. Gensler noted to the Asset Management Advisory Committee that such rules might include measures to enhance the transparency around human capital management as well as diversity and inclusion at the board and senior management levels.[3]


The full scope and contents of the rules will not be known until their release for public comment, which is expected by the end of this year. However, preparing for a heightened level of transparency is advisable. Those real estate companies that already report their ESG data using platforms such as GRESB or align their ESG programs with standards such as those promulgated by the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), or the Task Force on Climate-Related Financial Disclosures (TCFD) may be better positioned to adapt to any new ESG disclosure rules. For companies that do not currently have a formal ESG program or do not report on or align their programs with existing standards, advanced preparation is still possible. Based on Gensler’s published remarks and a recently released Sample Letter to Companies Regarding Climate Change Disclosures,[4] the following areas should be considered:



While the scope and contents of such rules are the obvious questions on everyone’s minds, two other important issues merit consideration. First, why is the SEC considering ESG-related disclosures? The Securities Act of 1933[5] and the Securities Exchange Act of 1934[6] require the disclosure of information that the SEC deems appropriate and necessary to protect and inform investors. Over the subsequent years, the U.S. Supreme Court has interpreted these acts to allow the SEC to require the disclosure of information that a hypothetical “reasonable investor” would consider “material” to the decision whether to invest.[7] The SEC is given broad discretion to determine what information the reasonable investor might consider to be material. In fact, the SEC has considered certain environmental issues to be material since 1982, and in 2010, released guidance indicating that, under certain circumstances, information specifically related to the impacts of climate change might be considered material.[8]


Earlier this year, Acting SEC Chair Allison Herren Lee requested public comment on, among other things, what ESG information companies should be required to disclose. Chair Gensler noted that “three out of every four of [the over 550 comments received] support mandatory climate disclosure rules,”[9] indicating that ESG matters are, indeed, material to many investors’ decisions. The House of Representatives has also expressed a belief that ESG issues are important to investors. In June, the House passed the ESG Disclosure Simplification Act of 2021, which finds that ESG matters are material to investors and requires the SEC to establish standards for ESG disclosures, including “a clear description of the views of the issuer about the link between ESG metrics and the long-term business strategy of the issuer.”[10] The Act has not yet been voted on by the Senate.


A second question concerning the SEC’s proposed rulemaking is how the SEC “will acquire and maintain the expertise to develop and oversee a disclosure regime”[11] that covers material ESG information. As Commissioner Elad Roisman stated, “It is fair to question how our staff is equipped to determine which climate or environmental information… is material to an investment decision today [and] how, and how often, the Commission would update these standards over time.” One option would be to adopt an existing third-party standard, as the SEC has done with standards set by the Financial Accounting Foundation and the Financial Accounting Standards Board. However, as Commissioner Roisman pointed out, even when utilizing these independent standard setters, the SEC exerts significant oversight. Finally, falling back on the adoption of a third-party standard begs the question of which standard or standards, among the many that compete for attention from the ESG industry, the SEC would adopt.


In sum, there appears to be broad consensus that issues surrounding ESG can be considered material and thus are fair game for SEC regulation. Whether the SEC drafts its own standards or utilizes all or parts of one or more pre-existing standards, it is clear that some measure of transparency around ESG issues will be required. Owners and managers of publicly traded real estate portfolios will benefit from taking a look at their ESG programs now, with an eye toward these future disclosure requirements.


References

[1] https://www.sec.gov/news/speech/gensler-speech-london-city-week-062321 [2] https://www.sec.gov/news/speech/gensler-pri-2021-07-28 [3] https://www.sec.gov/news/public-statement/gensler-amac-2021-07-07 [4] https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures [5] 15 U.S.C. § 77a et seq. [6] 15 U.S.C. § 78a et seq. [7] TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). [8] https://www.federalregister.gov/documents/2010/02/08/2010-2602/commission-guidance-regarding-disclosure-related-to-climate-change [9] https://www.sec.gov/news/speech/gensler-pri-2021-07-28 [10] H.R. 1187, Corporate Governance Improvement and Investor Protection Act, Sec. 1. [11] https://www.sec.gov/news/speech/can-the-sec-make-esg-rules-that-are-sustainable


 

About The Author


Mary Reames


Mary is a Communications Manager for Verdani Partners, drafting high-quality ESG communications and educational materials for Verdani’s 13 national and international client portfolios. Mary has a long history in the ESG industry, having worked as an environmental attorney for the City of Chicago and as a sustainability consultant and LEED-EB contracted reviewer. She holds a B.A. in Sociology/Anthropology, a B.S. in Sustainable Business Management, and a J.D. with a concentration in Environmental Law.