Adequate Disclosures and Support for ESG claims

ESG Developments

Adequate disclosures and support for ESG claims continue to be a priority and a trend to watch. Warburton is here to help support your efforts including serving as an independent verifier of your claims.

Early this year, the SEC Investor Advisory Committee made recommendations relating to ESG Disclosures. Under current SEC regulations and guidance, the disclosure of ESG issues is required only if “material”― information regarding an ESG issue is required to be disclosed only if it would be viewed as significantly altering the “total mix” of information available for investor. In September 2020, at a “Virtual Roundtable on the Role of Asset Management in ESG Investing” hosted by Harvard Law School, SEC Commissioner Hester Peirce cautioned against a standardized formula approach to ESG disclosures. Ms. Peirce stated that although she understood the requests for the SEC to establish a mandatory framework for ESG disclosures, she believes the SEC should adhere to its “tried and true principles-based disclosure framework.” Ms. Peirce raised concerns that a prescriptive approach to ESG disclosures would have negative effects including increasing costs, would be contrary to the SEC’s “principles-based disclosure framework,” which is “rooted in materiality,” and not guarantee consistency, as companies may apply ESG metrics to the specific characteristics of their “operations, judgments and assumptions.”

In September the CFTC published the report, Managing Climate Risk in The U.S. Financial System. The report lists a set of 53 recommendations that regulators together with the private sector should initiate as soon as possible including:

1. The U.S. should establish a price on carbon. It must be fair, economy-wide, and effective in reducing emissions consistent with the Paris Agreement. This is the single most important step to manage climate risk and drive the appropriate allocation of capital.
2. All relevant federal financial regulatory agencies should incorporate climate-related risks into their mandates and develop a strategy for integrating these risks in their work, including into their existing monitoring and oversight functions;
3. Financial authorities should consider integrating climate risk into their balance sheet management and asset purchases, particularly relating to corporate and municipal debt;
4. Regulators should consider additional, appropriate avenues for firms to disclose other substantive climate risks that do not pass the materiality threshold over various time horizons outside of their filings;
5. Regulators should consider that a growing number of companies are creating greenhouse gas reduction targets and strategies out to the year 2035 or 2050, and targeted disclosure related to these items may be appropriate to facilitate robust efforts toward this positive trend; and
6. Financial regulators should consider the following principles for effective climate-related disclosures:
   • Disclosures should represent relevant information.
   • Disclosures should be specific and complete.
   • Disclosures should be clear, balanced, and understandable.
   • Disclosures should be consistent over time.
   • Disclosures should be comparable among companies within a sector, industry, or portfolio.
   • Disclosures should be reliable, verifiable, and objective.
   • Disclosures should be based on current consensus science (and updated as the science evolves) and the best available projections regarding climate change impacts.
   • Disclosures should be provided on a timely basis.