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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 3 minutes read

SEC’s New “Climate and ESG Task Force” Signals Enforcement Focus on Sustainability Issues

On March 4, 2021, the US Securities and Exchange Commission (SEC) announced the creation of a “Climate and ESG Task Force” within the Division of Enforcement.  The announcement of the 22-member task force, which will be led by the SEC’s Acting Deputy Director of Enforcement, Kelly L. Gibson, is the latest in a series of signals that, under the Biden administration, the SEC will prioritize climate and environment, social, and governance (ESG) issues, consistent with the broader objectives of the administration.

In its announcement, the SEC stated that the “initial focus” of the task force will be to “identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.”  In addition to focusing on risk disclosure, the task force will also review “disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.” 

The SEC’s announcement also prominently noted that the task force would, among other things, employ “sophisticated data analysis to mine and assess information” to identify potential violations.  In the past few years, the SEC has significantly ramped up its data analytics tools and capabilities, and, in September 2020, the SEC announced its first settled actions against public companies for accounting and disclosure violations that were uncovered by use of these tools.  It now appears that the SEC is primed to use those tools to further its climate- and ESG-focused priorities.

The creation of the Climate and ESG Task Force follows a number of climate- and ESG-focused pronouncements and actions by the SEC in the last several weeks:

  • On February 1, the SEC announced that Satyam Khanna will serve as the first Senior Policy Advisor for Climate and ESG.  In this role, Khanna will advise on ESG matters across the SEC’s new initiatives.
  • On February 24, responding to years of advocacy from activist shareholders and others, Acting Chair Allison Lee announced that the SEC’s Division of Corporation Finance would begin reviewing and updating the SEC’s February 2010 interpretive guidance on the obligations of public companies and other issuers to disclose climate-related risks.  The SEC has, until now, generally limited itself to providing guidance on how the existing disclosure framework that requires disclosure of material risks applies to climate and ESG issues, rather than enacting new rules mandating specific types of disclosures in these areas.  It is unclear at this stage what the forthcoming updates might look like and how proscriptive they may be, particularly given apparent reluctance from Republican Commissioners to move beyond a principles-based disclosure approach to a stricter rules-based one. 
  • On March 2, President Biden’s nominee for SEC Chairman, Gary Gensler, commented at his Senate confirmation hearing on the need for companies to disclose climate risks, stating that “it is the investor community that gets to decide” what climate risks are material to them.  Gensler indicated that, as Chairman, he would push for greater disclosures, noting that the SEC “has a role to play to help bring some consistency and comparability” to public disclosures.
  • On March 3, the SEC published its 2021 Examination Priorities, which the SEC described as reflecting an “enhanced” focus on climate and ESG-related risks, and in particular whether companies are considering effective business continuity plans in response to growing climate change risks.

These recent developments are in line with President Biden’s campaign promise to make climate change a key focus of his administration, and follow other significant changes to the SEC’s enforcement practices, as we have recently discussed.  How the new task force will navigate ESG-related enforcement within the existing securities fraud framework remains to be seen, particularly since climate and ESG disclosure issues have not been the central focus of prior enforcement actions.  However, the SEC’s public pronouncements and internal actions in this area signal that that approach is poised to change.  The announcements also send a clear message that the SEC expects companies and other market participants to consider how ESG issues may impact a company’s financial future and to make appropriate disclosures to investors.