The U.S. Securities and Exchange Commission has broad authority to require disclosure of climate and ESG information.

The SEC Has Broad Authority to Require Disclosure of Climate and ESG Information

Since 2021, as investor demand for disclosures on corporate climate risks and other environmental, social, and governance (ESG) matters has increased, the U.S. Securities and Exchange Commission (SEC) has faced extensive discussion regarding whether to require companies to disclose relevant information. SEC Chair Gary Gensler has confirmed that its staff is developing an enhanced disclosure framework for climate-related and "human capital management" disclosures.

SEC's actions are driven by investors' demand for more information about risks to companies and financial institutions over the past decade. Some corporate representatives and political allies have questioned the SEC's power to require disclosure and the overall reasonableness of mandatory ESG disclosure. Some argue that the SEC should only require disclosure of information that is financially material to investors.

The SEC has the authority to require disclosure, including ESG-related disclosures, and its responsibility is to further fulfill its mission of protecting investors, promoting a fairer, more orderly, and efficient market, fostering capital formation, and protecting the public interest. This requires the SEC to ensure that market participants have access to reliable, consistent, and comparable climate and ESG-related information, which is crucial for their business decisions.

The Link Between SEC Disclosure Authority and Mission

The U.S. established the SEC through the Securities Act of 1933 and the Securities Exchange Act of 1934, with a core mission to protect investors, maintain a fair, orderly, and efficient market, and promote capital formation. History shows that a lack of reliable disclosure has been one of the factors leading to the 1929 stock market crash. According to legislative history, the SEC's authority is intended to fulfill its duties by requiring listed companies to continuously disclose information.

The Evolution of Disclosure Principles

SEC's disclosure authority is not limited by the "materiality" principle. Although courts and the SEC may reference this concept in certain circumstances, the law allows the SEC to make broader disclosures based on its mission. In climate disclosure, the SEC has adopted a "principle-based" approach rather than establishing standardized itemized disclosure requirements. For example, in the 2010 climate disclosure guidance, the SEC described the specific ways climate risks could affect companies, encouraging companies to disclose relevant information, but did not mandate that all companies disclose specific items such as carbon emissions or assets in specific high-risk geographic areas.

While this principle-based approach helps management understand the focus of disclosure, it has limitations in many areas because it may only disclose projects that management deems important rather than information that investors deem important, leading to insufficient consistency and comparability in disclosures.

Limitations of Shareholder Proxy Mechanisms

Theoretically, investors can submit an issue to the shareholders' meeting through a shareholder vote and strive to gain enough support to urge the company to comply.Limitations of Shareholder Proxy Mechanisms

In theory, investors can submit an issue to a shareholder meeting for a vote through shareholder voting and seek sufficient support to urge the company to comply. This mechanism is known as the "proxy process" under SEC supervision. However, this method is insufficient to bring about the broad, market-based disclosure changes that investors, lenders, suppliers, workers, customers, and governments require.

Conclusion

Although the SEC has adopted a principle-based approach to ESG disclosures, the lack of specific, standardized item disclosure requirements for key factors such as climate risk makes information incomparable across different companies. The SEC has broader authority to ensure that market participants receive reliable information about climate and ESG risks.

• Information Sources
• Center for American Progress, The SEC Has Broad Authority To Require Climate and Other ESG Disclosures
• https://www.americanprogress.org/article/sec-broad-authority-require-climate-esg-disclosures