Adding momentum to a decade-long trend, the Biden administration has accelerated the push for enhanced environmental, social and corporate governance (ESG) disclosures. While climate disclosures — such as carbon emissions — are the most highly publicized of the ESG disclosures that investors, insurers and customers are increasingly demanding, the trend goes beyond that to include disclosures of the broader social impacts of a company’s or industry’s operations. These recent broad and diverse Biden administration ESG initiatives related to climate suggest that the United States is following in the path of the European Union in requiring public companies to provide enhanced disclosure of not just climate-related risks — but also to disclose on a broader set of environmental, social and corporate governance topics.
Biden Administration Signals Potential for Enhanced ESG Disclosures
Most certainly, as highlighted by several actions over the past several months, the new administration is making enhanced disclosure of climate risk a priority. In March of this year, then Acting Chair of the Securities and Exchange Commission (SEC) Allison Herren Lee requested public input on 15 questions focusing on whether disclosures related to climate change are providing enough information to investors. The SEC is building upon its 2010 interpretive guidance on climate change that provided clarification on existing requirements to “assist companies in satisfying their disclosure obligations under the federal securities laws and regulations.” The March request is primarily focused on whether requiring more robust climate related disclosure is warranted, but it also seeks input on whether the SEC should require broader ESG disclosure as well, specifically asking “[s]hould climate-related requirements be one component of a broader ESG disclosure standard” and “[h]ow should the Commission craft climate-related disclosure requirements that would complement a broader ESG disclosure standard?” In connection with the request, SEC staff has held meetings with numerous stakeholder groups and received a substantial number of comment letters representing a variety of perspectives. Although the comments and feedback received will inform any proposed rulemaking, both SEC Chair Gary Gensler and SEC Division of Corporation Finance Acting Director John Coates have indicated in public settings that the SEC is prepared to act quickly to propose both new climate and human capital management-related disclosure rules.
Acting Chair Lee’s March request came before President Biden issued his Executive Order on Climate-Related Financial Risk on May 20. The Executive Order calls for a sweeping review of both federal activities that could be impacted by climate change and current climate disclosure requirements applicable to publicly regulated companies. The Executive Order requires White House economic officials to issue a report later this year outlining a government-wide strategy to determine the risks that climate change poses to “programs, assets, and liabilities” of the federal government and to assess other climate-related financial risks. The report will identify what financing tools the federal government will need to meet the Biden administration’s goal of net zero greenhouse gas emissions by 2050. Notably, the Executive Order specifically calls for an examination of how public and private investments can play “complementary” roles to meet the financing needs necessary to address climate change. Although it’s clear that the Executive Order primarily focuses on assessing and applying actions the federal government should take to mitigate the impact of climate change both from and to its operations, the Executive Order’s reference to public private partnerships to finance programs and projects signals future opportunities. The Executive Order also asks the Financial Stability Oversight Council to determine the risk to the financial stability of the federal government from climate change and requires an analysis of other government programs such as the pensions and procurement systems.
Congress and the Climate Risk Disclosure Act
Not to be outdone by the executive branch or the SEC, Congress is also in the picture. Earlier this year, the Climate Risk Disclosure Act was again introduced in both the U.S. House and Senate. It would require the SEC, in consultation with other federal agencies, to issue rules no later than two years after enactment requiring public companies to disclose:
- direct and indirect greenhouse gas emissions.
- the total amount of fossil-fuel related assets owned and managed.
- the impact on its valuation if climate change continues its current trajectory or, alternatively, if it is held to 1.5 degrees Celsius.
- risk management strategies related to climate change, specifically the physical and transition risks of climate change.
It is unclear if this legislation will be considered this year — or if it can even garner the necessary 60 votes to be considered in the Senate. However, it’s clear that the Democrats in Congress share the Biden administration’s urgency when it comes to increasing public disclosure of the impact public companies are having on climate change and how they are managing the associated risks.
The opportunity for proponents of greater disclosure of climate risk and broader ESG issues may present itself in the next several months. To date, federal action has focused on climate impacts related to the operation of the federal government — and on greater disclosure of ESG issues by public companies. The federal government has not yet addressed disclosure requirements for participants in public-private partnerships and borrowers and grantees of federal money. With the federal government poised to pass a significant infrastructure bill, it is foreseeable that Congress will start requiring ESG materiality assessments as part of the application process for certain federal contract, grant and loan programs, as well as for participants in certain public-private partnerships. Such requirements would provide the federal government with greater transparency into the risks and opportunities faced by recipients of taxpayer-funded programs, as well as into how they are managing them. If the federal government were to require ESG assessments as part of an application for certain grant, loan or partnership programs, it would have significant impact on its borrowers, grantees, and partners by leveraging the federal government’s significant market power.
Those doing business with the federal government should evaluate how they would comply with a new materiality assessment requirement in grant and loan applications. These assessments are complicated, take time to prepare, and, if required by new federal mandates, must be meticulously accurate.
The question is no longer if public-traded U.S. companies will face additional climate and ESG-related disclosure requirements — they most certainly will — in private markets. The question is whether the federal government is willing to make additional non-financial disclosures a requirement for doing business with Uncle Sam? The recent climate-related actions by the Biden administration strongly suggest that may soon be the case.