3 Important Considerations for the Future of ESG

As the Securities and Exchange Commission (SEC) readies proposed rulemaking on environmental, social, and corporate governance (ESG) related topics, there are many top-of-mind issues professionals across various industries are facing.

During the recent U.S. Chamber panel “The Future of ESG: the SEC, Scope 3, and Liability,” members of the Chamber’s Center for Capital Markets Competitiveness (CCMC) spoke with experts from public companies about the future of ESG.

The U.S. Must Focus On Raising, Deploying, and Moving Capital In Response to Market Developments

According to Jay Clayton, senior policy advisor and of counsel for Sullivan & Cromwell LLP, the U.S.’s most competitive advantage is its nimbleness of capital and labor.

“The ability of capital and labor … to use our markets to move into industries is what has enabled the United States to be at the forefront of the economic changes we've seen over the last 30 years,” Clayton said.

He noted that, as a country making up 4.4% of the world population, the U.S. has around 70% of the world's leading companies and an even larger percentage of the world's leading companies in new industries.

“That is something that we need to stay laser-focused on: the ability to raise, deploy, and move capital around in response to market developments,” Clayton continued.

SEC-Registrants Must Be Aware of Liability Considerations Around ESG Disclosure

The real estate sector, including real estate investment trusts (REITs), are working on becoming “responsible stewards of their own resources and the planet’s resources,” said Penny Rostow, SVP of Regulatory Affairs & deputy general counsel for Nareit.

“Some REITs have been able to transition tenants to so-called green leases, which can include provisions in the lease that require tenants to provide emissions data, but this will not be a quick process,” she said. “Commercial leases in the United States tend to be very long-term: 10, 20, [or] 30 years.”

She added that SEC-registrants must also be careful when reporting third-party data under the Exchange Act without any assurance or other forms of protection — an issue that remains unaddressed.

“All in all, I think it’s going to be a long-term process,” said Rostow. “Which is why … we suggested that at this juncture, REITs and other public real estate companies should only be required to report greenhouse gas emissions arising from operations under their direct and immediate control.”

The SEC Has Recently Increased Its Focus on ESG-Related Issues

During the past few years, the SEC has increased its focus on ESG — particularly on climate change issues.

“In just the last year, the commission announced that it had hired its first senior policy advisor for climate and ESG, it created a climate and ESG task force as part of the division of enforcement [and] it directed the division of corporation finance to enhance its focus on climate change disclosures,” said Brian Richman, associate attorney at Gibson Dunn & Crutcher. “The SEC greatly increased its climate-related and ESG-related activity, scrutinizing through multiple channels climate-related claims and forward-looking statements.”

Richman noted two important developments in particular: First, the SEC and DOJ have been investigating whether certain asset management firms have “overstated the extent to which they’d rely on or use sustainable investing criteria in managing their assets.”

Second, the Division of Corporation Finance has been closely examining companies’ climate change disclosures and has shared a number of comment letters relating to climate change disclosure issues.

“These letters asked companies to provide information on various ESG-related issues, including material litigation and regulatory risks related to climate change, and to explain why certain information disclosed in companies’ corporate social responsibility statements or sustainability reports were not included in SEC filings,” Richman said.

“While I don't think these letters should be read as a mandate to include any type of wider range in climate claims discussions in a company's filings, I do think they demonstrate the types of questions that issuers could expect to receive in the future related to ESG managers,” he continued. “It could also indicate areas where the task force or the Division of Enforcement is likely to focus in the future.”