SEC Lays Groundwork for D&I and ESG as Chair Nomination Proceeds

March 12, 2021

The 2021 agenda for the SEC and broader financial markets regulation is beginning to take shape.  The Senate Banking Committee approved Gary Gensler’s nomination for SEC Chair by a 14–10 vote (including two Republican senators).  It is almost certain that his nomination will be approved by the full Senate.  As Mr. Gensler was testifying before the Banking Committee, the SEC’s Acting Chair, Allison Herren Lee, announced the creation of a Climate and ESG Task Force in the Division of Enforcement.  The task force will be led by Kelly L. Gibson, the Acting Deputy Director of Enforcement.

Mr. Gensler highlighted the growing importance of human capital data to investors, stating companies should be required to disclose more information about workforce diversity.  However, he stopped short of supporting Nasdaq’s proposal on board diversity before the Commission.  Mr. Gensler also testified that companies should be required to provide greater disclosure on political spending and their climate risk.

The new Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct.  Initially, it will identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.  It will eventually evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues.  The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.  

Just Capital (a nonprofit promoting socially responsible investing) was encouraged by the creation of the task force but also highlighted that ESG metrics remain in their infancy.  “Clearly, the SEC isn’t playing around.  Yet with universal measurement standards on ESG performance still a work in progress, and the current overall state of disclosure on many key ESG issues leaving a lot to be desired, this creates an interesting tension.”  Relatedly, the DOL recently announced that it would not enforce two rules finalized in November and December 2020 requiring plan fiduciaries to select investments based solely on “pecuniary factors.”

On proxy advisor reform, Mr. Gensler did not advocate for repealing or rolling back the recently finalized rules.  He noted he is supportive of a competitive proxy advisory market (as opposed to the current duopoly) but also stipulated his belief that proxy advisors provide a needed service, especially during the crush of proxy season.

Outlook:  The Biden administration seems intent on shifting how ESG and D&I risks are disclosed, breaking them out of the “corporate social responsibility” silo to a wider investment risk consideration that requires clearer public disclosure from companies.  Mr. Gensler highlighted that “[i]t’s the investor community that gets to decide what’s material to them.”  While some Republican Senators questioned the materiality of these disclosures, Mr. Gensler noted that shareholder proposals requesting ESG disclosures have seen increased vote support at annual meetings.