U.S. Securities and Exchange Commission (SEC) Authority over Climate and ESG Disclosures: Beyond the Consideration of "Materiality"

The Scope of the US SEC's Authority Over Climate and ESG Disclosures: Beyond the Consideration of "Materiality"

Introduction

Since March 15, 2021, the U.S. Securities and Exchange Commission (SEC) has been seeking comment on the scope of information disclosure requirements for companies regarding climate risks and other environmental, social, and governance (ESG) matters. SEC Chair Gary Gensler has subsequently confirmed that the agency is developing enhanced disclosure requirements related to climate and "human capital management." These actions by the SEC are being taken against the backdrop of investors demanding higher levels of information disclosure from companies and financial institutions over the years.

The Basis and Mission of SEC Authority

The fundamental purpose established by U.S. securities laws is to "close securities channels," ensuring that securities are fully disclosed at the time of issuance. The mission of the SEC is to protect investors, maintain a fair, orderly, and efficient market, and promote capital formation.

In this process, the SEC's authority is designed to be broad, not strictly limited to the principle of "Materiality." Although the SEC may rely on this concept in specific limited circumstances, its authority is essentially to ensure that market participants can obtain reliable, consistent, and comparable climate and ESG-related information.

Evolution and Challenges of Disclosure Standards

In the past, the SEC has primarily guided disclosure through a principles-based approach, requiring companies to determine the content of their disclosures based on their unique circumstances. For example, in the 2010 Climate-Related Disclosure Guidance, the SEC described the ways in which climate risks could affect companies and encouraged the disclosure of relevant information, but it did not mandate that all companies disclose specific metrics such as carbon emissions or assets in specific high-risk geographic areas.

This principles-based approach may, in practice, lead to disclosures being limited only to information deemed important by management, rather than information deemed important by investors, or even no disclosure at all. In a system relying on a principles-based approach or the concept of "materiality," consistency and comparability of disclosures are difficult to guarantee.

Investor Demands and Future Directions

Despite the principles-based approach, investors expect more specific and comparable disclosures. Theoretically, investors can prompt management to make specific disclosures through mechanisms such as shareholder voting. However, the current mechanisms are insufficient to bring about market-wide, comprehensive disclosure changes.

Conclusion

The SEC's authority is intended to provide tools for investor protection, but to truly meet the market's enhanced demand for climate and ESG information, future considerations must focus on how to optimize disclosure standards to ensure consistency and comparability across different companies, thereby better serving investor decision-making needs.