On March 11, John Coates, the Acting Director of the Division of Corporate Finance at the SEC (and a former professor at Harvard Law focusing on law and economics), delivered remarks at the Tulane Corporate Law Institute. In his statement, Coates focused on ESG disclosures, noting that “ESG no longer needs to be explained” and that these issues are “important” to “investors, public companies, and capital markets.”
Significantly, Coates noted the issue of climate risk and climate change as information that should be featured in ESG disclosures. He compared the issue of climate change to the prior disclosure regime concerning asbestos, as an example of a risk that became increasingly apparent–and necessary to disclose–over time.
When considering this statement in the context of all of the other measures recently announced by the Biden Administration, including other statements by the SEC, it is clear that the question of climate change and the appropriate degree of disclosure will be an increasing focus for regulatory agencies over the coming months–and could lead to potential enforcement action.
Going forward, I believe SEC policy on ESG disclosures will need to be both adaptive and innovative. We can and should continue to adapt existing rules and standards to the realities of climate risk, for example, and the fact that investors increasingly are asking for ESG information to help them make informed investment and voting decisions. We will also need to be open to and supportive of innovation—in both institutions and policies on the content, format and process for developing ESG disclosures.
Many ESG-related issues are similar to ones we have faced before. Asbestos-related disclosure is a great example. For years, asbestos-related risks were invisible, and information about asbestos would likely have been called “non-financial.” Over time, those risks went from invisible to visible to extremely clear, and clearly financial. Not surprisingly, disclosure about these risks did not initially show up in SEC filings, but there too they went from invisible to increasingly disclosed.