Push-Pull: Discourse in the ESG Rulemaking Landscape
Recent remarks from two SEC Commissioners illustrate the broader divide about environmental, social and governance (ESG)-related disclosures and the resulting compliance costs public companies and regulated entities could face.
On Oct. 17, 2022, SEC Commissioner Jaime Lizárraga spoke at the 2022 Future of ESG Data Conference. Lizárraga focused on three rulemaking concerns: 1) climate risk disclosures by issuers; 2) enhanced ESG disclosures by funds and investment advisors; and 3) ESG-related fund names. Lizárraga reminded the audience that "[i]t's important to understand that a company's greenhouse gas emissions … is a widely-used metric by investors." He also pointed to a recent finding that sustainable and impact investing by money managers grew from $178 billion in 2005 to almost $17 trillion in 2020. As such, these proposals are meant to "ensur[e] investors receive the information they need to make the most informed investment decisions." But at what cost?
SEC Commissioner Mark Uyeda also spoke recently at the Small Business Capital Formation Advisory Committee. However, Uyeda took a different tack from Lizárraga. Uyeda pointed out the decreasing number of publicly traded companies and voiced concern about how market and regulatory trends could be contributing to that decline. He noted that recent proposals may impose additional compliance costs for public companies and urged the Commission to "revisit the assumption used in many recent Commission rulemakings, that the costs for outside legal counsel to comply with SEC reporting obligations is $400 per hour."1 The effect may be that Lizárraga's goal that the SEC's "rules will help move market participants forward in producing high-quality data that will allow for more rigorous due diligence, enable investors to more easily differentiate between market participants on ESG-related claims, and ultimately, help investors make more informed investment decisions" could be tempered by the practical concerns voiced both by his colleagues and rule commenters.
These remarks illustrate the broader divide going on around current and proposed ESG regulations. There is no question there is a groundswell of support from large institutional investors, public interest groups, and – more broadly – the Biden administration for more robust ESG disclosures and practices. The SEC has repeatedly noted various data points – such as the trillions of dollars in ESG-related investments and the high percentage of companies impacted by climate-related risks – as support for its proposed rules for both Advisers/Funds and Public Companies. Additionally, national securities exchanges (such as Nasdaq) and various states have implemented – or attempted to implement – various ESG-related rules around, among other things, board diversity.
However, a separate group of lawmakers and interest groups have engaged in counter measures to resist these efforts through proposed legislation and court filings. For example, in September 2021, the Texas Legislature passed Senate Bill 13, which prohibits Texas state agencies from working with companies that discriminate against fossil fuel companies and requires financial institutions to certify that they are not boycotting fossil fuels. Kentucky, Oklahoma and West Virginia have followed suit, while the Arizona and Indiana legislatures are currently considering similar legislation. Further, the Florida legislature has proposed a law that would restrict investment factors in management of pension assets to "only consider maximizing the return on investment on behalf of Florida retirees," implicitly limiting the amount of consideration that could be given to ESG factors. Similarly, when the SEC approved Nasdaq's Board Diversity Rule in August 2021, which became part of Nasdaq's corporate governance requirements as Rules 5605(f) and 5606, opponents filed legal challenges across the country. And, as we noted in our previous write-up on the U.S. Supreme Court's decision in West Virginia v. Environmental Protection Agency, we expect that the legal challenges are only beginning when it comes to the SEC's proposed ESG-related rules.
The SECond Opinions Blog will continue to monitor the agency's activity in this space and provide further updates. If you need any additional information on this topic – or anything related to SEC enforcement – please contact the authors or another member of Holland & Knight's Securities Enforcement Defense Team.
1 For example, one large corporation noted in its comment letter in response to the SEC's Proposed Climate Rule that "[t]he cost of significant structural changes to existing enterprise resource planning systems for large corporations can easily reach into the hundreds of millions of dollars."