In February 2021, then-SEC Chair Allison Herren Lee announced the agency’s intent to update its guidance regarding disclosure related to climate change matters initially issued in 2010. Subsequently, in March, the SEC responded to increased investor demand for disclosure information pertaining to environmental, social, and governance (ESG) matters and climate risks by announcing the creation of a Climate and ESG Task Force in the Division of Enforcement. May saw the new SEC Chair Gary Gensler state the agency’s intent to propose a rule requiring the disclosure of “human capital” metrics. Notably, Gensler described this diversity, equity, and inclusion (DEI) initiative as “one of my top priorities.” While this trifecta of SEC activity did not result in the appearance of an ESG-themed dress at the recent MET Gala, it piqued the interest of investigative due diligence firms.
In skipping the kiddie pool and diving into the deep end of the ESG conversation, the SEC has conferred gravitas to the topic which was lacking in the United States. While the UN launched the Principles for Responsible Investment (UNPRI) as early as 2006, and the EU announced an action plan on sustainable finance in March 2018, a dearth of governmental regulation left American companies directionless regarding ESG reporting. Notably, the SEC’s involvement will spur ESG considerations by companies previously unconcerned with such issues or those which had adopted a wait and see approach. While not the SEC’s intention, a benefit of compliance with recent SEC ESG requirements is the ability of American companies operating internationally to better comply with existing and emerging foreign regulations.
Especially notable amongst the SEC’s recent ESG activity is Chair Gary Gensler’s clear commitment to DEI issues. While the August 2020 modernization of Regulation S-K rules required registrants to describe their human capital resources, reviews of Form 10-K filings in the following months revealed the change left registrants with many questions, including uncertainty regarding the level of detail sought by the SEC. Notably, it remains to be seen how aggressive the SEC will become in determining if registrants’ disclosure information is sufficiently thorough. However, Chair Gensler’s personal focus to make DEI issues a priority for SEC registrants signified that the topic is not merely regulated to a passing press release. The activity by both outspoken SEC leadership and the agency’s rank-and-file policy staffers emphasises the need for due diligence consumers to obtain an awareness of potential ESG trouble spots concerning future investments, partnerships, and executive hires.
For SEC registrants unmoved by the agency’s recent ESG and DEI actions, the 2022 Congressional Elections and 2024 Presidential Elections will play a crucial role in determining the incorporation of ESG and DEI considerations into their corporate strategy. It remains to be seen if holdout companies can wait out the current SEC agenda. However, even if the prospect of continued SEC activity does not effect change, consumer pressure concerning social and environmental issues is crossing partisan lines. In doing so, public preference is undermining wait and see approaches to organizational reporting on ESG and DEI issues.
For consumers of investigative due diligence interested in following the SEC’s lead and incorporating ESG and DEI considerations into their future plans, working with a seasoned investigative firm confers several immediate benefits. First, it leaves an audit trail. This is vital for making the company’s commitment to ESG and DEI issues known to regulators, stakeholders, employees, and the general public. Secondly, it opens eyes to previously unconsidered areas of concern including adverse media, regulatory issues, legal trouble and problematic industry affiliations. Interested in learning more? Reach out to Vcheck Global to learn how we can allay your ESG and DEI concerns using a combination of automation, artificial intelligence, and analyst driven research.
Seth Harlan is Senior Associate, Market & Regulatory Affairs at Vcheck Intelligence.
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