Navigating the waters: The SEC’s focus on ESG – Environment

Holland & Knight Partner and former SEC Enforcement
Scott Mascianica, assistant director, sat down at the computer on March 28, 2022.
Eric Werner, Associate Regional Directors for Enforcement
For more information, please contact the SEC’s Fort Worth Regional Office.
History of agency in relation to Environmental, Social and Other Matters
Governance (ESG), the current disclosure framework and materiality
ESG considerations and the paradigm are part of existing rules.
Agency’s Recent Proposed ruleIf enacted, it will be mandatory
New disclosures on climate for public companies. Holland & Knight’s ESG Team recently
This summarizes the proposed rule.
We discuss today’s discussion in this post with Werner.

Why the SEC Cares about ESG

• Current and former commissioners offer a variety of options.
  Reasons why most of them support a new climate-centric set
  Public companies must comply with disclosure requirements They are the most important.
  This is to ensure investors have access relevant and valuable material
  Information to help you decide whether to make or keep an investment
  investment.
• Today, investors are more interested in investing than ever before.
  Only the audited financial reports of the company in which they are located
  may invest – they are interested in how the company is
  Companies can have a positive impact on their communities and the environment. Notably, companies
  They are often keen to reveal to the investing public much more than that
  This information is required to file SEC filings. Companies are growing in number
  We are willing to share more information with the investing public
  They ensure investors can evaluate their ESG efforts.
  The information is consistent and comparable.
  paramount.

The Social Component of ESG: Unpacking

• Many books have been written about the Environmental component of ESG.
  This is what the SEC’s proposed recently proposed focus on.
  disclosure rule. However, the Social component of ESG can also be included.
  It is important, even if the through-line from social concern to a
  It may be more difficult to assess a company’s financial performance.
• Werner agreed with his view that the Business Roundtable’s 2019 Statement about the
  The purpose of a corporation(Statement) provides context
  When considering the importance of social issues to a company’s business and its employees,
  investors. The Statement, signed 181 CEOs, emphasizes that
  Companies should treat suppliers ethically and fairly.
  Value and invest in their employees, and their communities. That’s how you do it.
  Lens, social concerns, and their relationship with a company’s.
  Overall viability and the bottom line are important.
• For example, dealing with human trafficking risk posed by a
  Company’s operations demonstrate the importance of Social
  Companies are a significant component of the company’s bottom line.
  Perform their compliance function and assess the risks.
  Effective anti-human treatment comes with significant costs
  Trafficking in internal controls and procedures (or failing them),
  It will have an impact on the organization and its shareholders.¹

The ESG over Time and the SEC

• The ESG industry is not new to SEC. The agency has already issued
  Interpretative guidance regarding compliance since the 1970s
  environmental laws. For example, it was a variety in 1975.
  Disclosure matters relating to “environmental and/or social” In
  2010. The SEC published Interpretive releaseTo make public
  Companies could be given guidance on how to comply with existing disclosure requirements
  Apply to climate change matters. It issued a 2016 report. Concept releaseRequest for public comments
  Modernizing disclosure requirements in Regulation S–K
• The Division of Examinations was established in recent years.
  Climate-related Risks as Priority for annual exams, The Division of
  Corporation Finance A sample letter was publishedPublic companies
  Climate change disclosures and the Division of
  Enforcement was formed Climate and ESG Task Force.
• The long-awaited SEC report was released last week.
  Proposed rule for mandatory climate-related disclosure
  Holland & Knight Info Flash summarizes the information.

SEC Enforcement’s Potential Areas of Focus

• If the rule is adopted as expected, it would be effective immediately
  Naturally, the Enforcement Division of the SEC takes time to get there.
  Get on top of things and take legal action.
• The SEC was already in place long before the rule was proposed.
  Founded the Climate and ESG Task Force. The Task Force has so far been successful.
  The Division of Enforcement, more generally, has been looking at
  Material gaps or misstatements in SEC filings of issuers relating to
  to climate and other ESG concerns. The staff takes into account
  How impressive is it to see what companies already disclose about ESG topics
  These statements are strong and true to the truth.
  Be disclosed is included. Werner stated that this was not an a
  Prescriptive approach to existing disclosure.
  Staff’s efforts and attempts to understand what are normal.
  What companies are saying and how they’re saying them.
  Whether they are correct and complete.
• Werner observed that the SEC’s Fort Worth Regional Office,
  He is responsible for the Enforcement program. He has a wealth of expertise.
  There are many opportunities in the energy sector to address ESG.
  Investigative and enforcement questions. He also noted that his
  office is in more of an information-gathering stage, looking at
  Regional issuers: Get familiar with their disclosures.
  Staff observe potential disclosure gaps to determine whether they could be.
  There is reason to be concerned.
• Similar to agency enforcement actions involving
  Cybersecurity issues, including a last-year action involving
  Allegations of violations of Exchange Act Rule 13a-15a(a) requirements
  It seems likely that it will be related to disclosure controls or procedures
  Except for alleged ESG disclosure fraud cases,
  Enforcement Division is available to use a variety
  Non-scienter, controls based provisions for enforcement actions
  ESG could also be subject to strict liability provisions
  disclosure. Companies should, therefore, disclose.
  Consistently and carefully examine the information they are receiving
  Choose to disclose and explain why it is important. Take care
  Operate with effective internal controls and procedures for monitoring
  For completeness and accuracy.

Existing Disclosure Obligations, Considerations

• The current and long-standing disclosure system, which includes as
  It pertains to ESG and can generally be summarized into two buckets
  • Principles-based disclosureMade in the
    rubric of materiality – a non-prescriptive format that allows
    Flexible based on the specific company makeup of the issuer
    Investors are interested in what it determines. Some argue that
    ESG rulemaking will not be necessary and will be too prescriptive.
    The long-standing, principles-based approach is superior
    Methodology for companies that are sufficiently self-aware and able.
    Inform investors about important environmental and social issues
    Governance topics. Others, including a majority
    SEC’s commissioners concluded that some companies simply don’t exist.
    Not doing it right or not going enough, which leads to the need to
    A new rule.
  • ESG-related issues will be addressed through targeted rules
    Regulation S-K already covers a large portion of the existing stockRequire
    disclosure on ESG-related topics such as environmental-related
    Capital expenditures, diversity on boards and governance requirements.
    Dissenters use these to argue against any new legislation
    rule. The United States operates at the moment under a hybrid arrangement.
    Disclosure model allows companies to be as broad as possible in a
    They are principles-based, but they are also available in a disclosure environment
    Expected to address specific issues investors care most about and in a
    way that ensures consistency and comparability

The Proposed Rule, and the Comment Process

• Although the rule was recently proposed, it does not have any current status.
  enforceability, the issue – and the content of the proposed
  rule – are advanced enough and important enough to the
  Gary Gensler, Chair Commission that it is widely known that
  Some rule, and one that is likely to be substantially the same as the
  Proposal will be adopted.
• In the typical life cycle of a rule proposal-to-final, some
  Public comment allows for improvements to be made.
  process. Commissioner
  Allison Herren Lee Comment previously requestedIn 2021,
  There was a significant response, which was clearly taken into consideration.
  The proposed rule even includes a reference to it. This fact, along with the
  Sensation of momentum and majority support for the commissioners
  proposal may indicate that the proposed regulation is unlikely to be implemented
  Significant changes are inevitable.
• However, it is vital to have comments.
  Now is the best time to review and digest the proposed rule.
  SEC will listen to investors, companies, and other interested parties
  It can be improved by stakeholders, and how it can be made more efficient.
  The likes of excessively burdensome.

The Proposed Rule Distilled

• These are the Key Highlights.Werner offered a general
  Summary of the proposed rule and a reference to the Commission Fact sheet. He observed:
  • Certain disclosures in annual registration statements and annual reports
    For climate-related risk, financial reports will be required
    These are reasonably likely have a material effect on a company.
    Statements of financial results for business or consolidated entities
  • Companies will have to disclose certain governance-related risks
    Management information about the board and management processes
    Climate-related risks being addressed
  • Companies will also have to disclose certain greenhouse gases
    (GHG) Emission metrics around what are commonly known as Scope 1
    Scope 2 and Scope 3 emissions – which have been much
    The proposed document will be discussed prior to and after its release
    rule
  • Some companies may need to include an attestation
    Requirement for GHG emissions
  • Certain financial statements will have to be disclosed by companies
    metrics under Regulation S-X
  • There will be a phase-in and safe harbors.
    New requirements
  • Companies that have already established or disclosed a particular climate
    Information about targets or goals will be required.
    What has been done to address them and how can we monitor progress towards them?
    Moving forward, goals and targets

• Climate-related RisksThe proposed
  Rule, “climate-related risk” is a term that can be used to describe a specific term.
  “Actual or potential adverse impacts of climate-related events”
  Conditions and events that affect a registrant’s consolidated financials
  Statements, business operations or value chains in their entirety.
  Many will be interested to know if this term is available in their language.
  A final rule as it is proposed, or if it will need to be revised in the
  comment process. Regardless of what its ultimate meaning may be,
  Werner expects that the concept itself will be in a final ruling.
• Value ChainThe new rule, as proposed, will
  Include required disclosures regarding upstream and downstream
  activities that are part of a company’s operation. For the vast majority
  Companies, this would also include activities by other parties Other
  More thanThe company itself, e.g. its vendors and suppliers.
  Therefore, the entire value and supply chain might need to be vetted.
  Both potential and actual climate-related threats. The risks associated with climate change are both real and possible.
  Proposed rule’s disclosure threshold remains premised upon
  Company-specific materiality, which many companies will refer to, is what it means for many companies.
  Enterprise-wide assessment of supplier and vendor activities
• Reasonable LikelyThe proposed rule will apply to
  Companies would be required to disclose climate-related material
  Risks that are “reasonably most likely to have a material effect”
  “impact” on their operations or results. This is not an.
  altogether new term for public companies; its use – in
  As part of assessing forward-looking trends disclosures,
  Management’s requirements, commitments and events.
  Discussion & Analysis (MD&A) – dates to a 1989
  Interpretive release
• Safe Harbors. In its release of this proposed
  Rule, the SEC makes numerous references to forward-looking statements
  Certain aspects of the law would be protected by “safe harbors”.
  Rule under the Private Securities Litigation Reform Act.
  However, the agency acknowledges that there are important limitations.
  The PSLRA safe harbour. It would not apply, for example, to
  Disclosure in registration statements
  offering. Furthermore, the PSLRA safe harbor wouldn’t have any
  Applicability to the SEC’s ability to bring enforcement
  actions. Werner stated that the agency has the ability to bring about, and historically.
  Enforcement actions have been brought based on the company’s claims
  Forward-looking statements are encouraged.
• Governance.The governance perspective is the most important.
  The ESG rule that the SEC proposes to adopt is based on a similar model as its predecessor.
  Recent cybersecurity rule proposal
  Among other things disclosure is required
  Information processes for boards and management
  climate-related risks.

It is important to continue studying and refining your reasoning.
It is worth noting that the SEC’s release of more than 500 pages is quite extensive.
It is obvious that certain aspects of this proposed rule are not surprising.
If enacted, they suggest at least some part of a reasonable path
Certain requirements must be met, such the proposed phase-in
Based on the filer’s size and certain safe harbours, they are applicable.
The SEC’s most important rule is the one proposed by the SEC.
Initiative for extensive, comprehensive, and complex disclosure
It has been decades, based on the sheer amount and quality information
We expect that there will be continued need for this information.
debate and potential legal challenge

What steps should companies and their counsel now, starting from a
Process perspective, keeping the proposed rule in view Every company
There is no doubt that everyone is different and that there is no one-size fits all.
answer. Werner believes companies should keep that in mind
Words matter. In his concluding remarks, he noted that companies spend a lot of money on words.
They spend a lot of time and money crafting and revising the language they use.
Choose what they want to include in SEC filings.
Consider the meaning of the words they choose.
Described and why they are used. What do they really mean?
Ultimately, whether they are complete and accurate.

ESG is a simple term that can be deceivingly simplified. It encompasses years of experience.
Increasing focus on a wide range of issues and questions.
They are as varied as the companies that have to deal with them. Holland & The SECond Opinions Blog are two examples.
Knight’s ESG- and Securities Enforcement Defense Teams, will
Continue to monitor this space for the agency.
Provide further updates and be available to help if you need more
Information on this rapidly changing issue.

Footnote

¹More information on the intersection of
Compliance with corporate policies, ESG, anti-human trafficking and other measures
Barbara Martinez, a former chief executive of Holland & Knight, is a Holland & Knight Partner.
Section of Special Prosecutions for the U.S. Department of Justice
The Miami U.S. Attorney’s Office.

This article is meant to be a guide.
guide to the subject matter It is a good idea to seek specialist advice
Discuss your particular circumstances.