The chairman of the Securities and Exchange Commission thinks the Commission stands on firm ground with respect to its legal authority to mandate that public companies include climate-related disclosures in their registration statements and periodic reports.
Chairman Gary Gensler made his remarks at an April 12 Ceres webinar briefing on the SEC’s climate disclosure rules proposed last month. The proposed “the Enhancement and Standardization of Climate-Related Disclosures for Investors” rule would require climate disclosure from all U.S. public companies.
The issue of the Commission’s legal authority in promulgating the climate disclosure rule was raised by SEC Commissioner Hester Peirce as part of her detailed rebuttal in opposition to the proposed rule.
“I think this has just been a long tradition; our legal authority embedded in the ‘33 and ‘34 [Securities and Exchange] Acts and so forth are about full and fair disclosure,” said Gensler. “And companies are making such disclosures—hundreds of companies are making such disclosures and investors are currently making decisions based upon those disclosures. So, our role is really to help bring some consistency—one might call it some standardization to those disclosures.”
Gensler’s comments outlined the historical timeline of the SEC disclosure regime and various changes throughout the decades—including the development of Form 10-K and guidance from 2010 regarding climate-related disclosures—and how investors want access to information to assess potential risks.
“Across all of these disclosures, the same principles apply: Again, investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” he noted. “Further, the SEC has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.”
In addition to explaining that he is guided by the Commission’s three-part mission to protect investors, maintain efficient markets and facilitate capital formation, Gensler noted that he is also guided by the concept of materiality. “As the Supreme Court has explained, information is material if ‘there is a substantial likelihood that a reasonable shareholder would consider it important’ in making an investment or voting decision, or if it would have ‘significantly altered the total mix of information made available,’” he emphasized.
Enforcement Issues
Responding to a question about how he envisions the SEC enforcing the climate disclosure mandate, Gensler said he hopes to first get through implementing the proposal before turning to enforcement.
“I don't want to prejudge, but if we adopt, there are a number of years of implementation,” he said. “But yes, over the decades, we also have a large corporate finance unit that reviews filings, whether you’re going public through an IPO, an S-1 filing, the filings for mergers and the annual 10-K reports; so I would hope that first implementation, then consultation with the Division of Corporate Finance around review of the filings, but ultimately there’s also an enforcement part of it.”
Meanwhile, in outlining the various prongs of the proposal, Gensler explained that the reason the proposal calls for disclosures to be filed on the 10-K, rather than solely on a company website or elsewhere, was to make it easier for investors to find the information in one place, rather than having to search different locations that might differ from one issuer to another.
Gensler also strongly encouraged interested stakeholders to weigh in with comments, whether in support or opposition to the proposal, and to be as detailed as possible. Comments on the proposal should be received by May 20, 2022.
