SEC's ESG Plans for Public Companies May Get Frosty Reception in Court

What You Need to Know

  • Courts have not looked favorably on requiring public companies to disclose information not necessary for preventing deception in investing decisions.
  • The changing views of investors on the importance of ESG disclosures may be more impactful than new SEC regulation.
  • Gary Gensler told Senators that any new ESG disclosure rules would be based on what is “material to reasonable investors.”

Investors rightly demand that public companies disclose lots of information important for making investment decisions. As a result, public companies are often a useful target for disclosure of all sorts of information of general social interest even if that information is not important for making investment decisions.

The current calls for the Securities and Exchange Commission to compel disclosures of certain environmental, social and governance information may become a case in point. To the extent proposals suggest disclosure of information that a reasonable investor would not find significant to a trading decision, such proposals are on dubious legal footing.

Courts have not looked favorably on requiring public companies to disclose immaterial information not necessary for preventing deception in investing decisions even if the information may be of general public interest.

But as investors (rather than regulators) place greater importance on obtaining ESG information from public companies, existing laws will support greater disclosures.

Sea Change at SEC on ESG

What a difference a year makes — particularly for public companies trying to determine what sorts of disclosures to make about ESG issues.

This time last year, the SEC confirmed the long-standing requirement that companies were required to disclose all material information — on whatever topic — that would be necessary to avoid making management’s discussion and analysis of a company’s operations misleading.

This year, there are calls from Congress, the acting SEC chair and senior SEC staff suggesting that something more should be required — particularly regarding climate change issues.

Today’s calls for ESG disclosures stem in part from recommendations made by the Task Force on Climate Related Financial Disclosures, established in 2015 by a global group of regulators.

The TCFD “believes climate-related issues are or could be material for many organizations, and its recommendations should be useful to organizations, and its recommendations should be useful to organizations in complying more effectively with existing disclosure obligations.”

The TCFD’s recommendations appear to recognize the importance of aligning disclosures with what is important to investors.

This tension over climate change disclosures beyond what is material came to a head during the March 2 Senate Banking Committee hearing on Gary Gensler’s nomination to become chair of the SEC.

Sen. Pat Toomey, R-Pa., followed up on Gensler’s statement that investors “really want to see climate risk disclosures,” and that any new disclosure requirements would be based on what is “material to reasonable investors.”

Toomey asked Gensler whether, hypothetically, he would consider a company spending a “financially insignificant amount of money on electricity” to be material, and Mr. Gensler suggested the answer would be nuanced and based on the total “mix of information” rather than an isolated expenditure.

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