One could say 2020 was the year when the world became aware of the need for ESG reporting.
The pandemic brought the world face-to-face with the reality of what large-scale disruption of economic activity looks like and made people aware of the cost of unbridled actions against the environment.
There was much talk in 2020 about how environmental, social, and governance factors must be gauged and ESG reporting brought to the mainstream. There were attempts to come up with a single set of standards that companies could follow for their ESG reporting. Then there were skeptics who said the ESG movement was only a marketing gimmick. We have talked about some of these issues in an earlier blog post.
Through it all, however, the US Securities and Exchange Commission has been largely silent on the matter of requiring ESG reporting from the companies it regulates — statements of dissent from Commissioners Allison Herren Lee and Caroline A Crenshaw notwithstanding. Talk on ESG reporting, at least at the administration level, has mostly been carried on in Europe and other jurisdictions. But things are set to change in 2021.
The biggest sign of change is in the US’ re-entry into the Paris Climate Agreement under the Biden administration. And there are two specific developments with regards to the Securities and Exchange Commission, which give a direction to future regulation by the agency. The first is the appointment of Gary Gensler as SEC chair, and the second is the creation of a dedicated ESG advisor’s position.
We examine each of these developments separately.
The US re-joins the Paris Climate Agreement
Among the first things that President Joe Biden did after taking office is to have the US re-join the Paris Climate Agreement. Right after his inauguration on Jan 20, President Biden sat in his Oval Office and signed 15 executive orders and two executive actions — among which was returning the US to the climate deal, to which the country is an important signatory.
It may be recalled that the Paris Agreement was adopted at a United Nations climate conference in December 2015 and came into force in November 2016. But just seven months later in June 2017, the then US administration said it was withdrawing from the agreement, citing an unfair regulatory and financial burden on US companies.
The climate deal is a pledge by countries to limit the rise in the overall global temperature to less than 2 degrees Celsius above pre-industrial levels (the target is just 1.5 degrees Celsius). The deal includes a commitment by rich countries to help poorer countries adapt to climate change and switch to renewable energy sources. A commitment to turn the tide against climate change is essentially a commitment to ESG reporting.
Appointment of Gary Gensler as SEC Chair
President Biden has chosen Gary Gensler to head the US Securities and Exchange Commission. Gensler, the former chair of the Commodity Futures Trading Commission (CFTC) who has been leading Biden’s financial policy transition team, comes with a reputation as a tough regulator.
Gensler was no favorite of Wall Street during his term at the CFTC, when he oversaw the creation of a regulatory framework for the derivatives markets in line with the Dodd-Frank Act of 2010. Lax regulation of the derivatives market is blamed for causing the financial crisis of 2008.
A view of the things to come with Gensler at the helm of the SEC can be had from a statement by a fellow at the conservative Competitive Enterprise Institute, Richard Morrison, ahead of the former’s appointment.
“I urge Mr. Gensler to focus on the Commission’s core mission of protecting investors and facilitating capital formation, not on divisive initiatives like forcing companies to report on whether they’ve supported a laundry list of political causes.”
Gensler, whose appointment as SEC chair is still to be confirmed in the US Senate, is expected to bring in regulation for ESG reporting by companies, among other regulatory safeguards.
SEC Commissioner Allison Herren Lee has been named the acting chair until the confirmation. It may be recalled that Lee has herself been very vocal about the lack of progress on matters of sustainability and climate risk within the SEC. Lee has spoken about requiring mandatory ESG reporting from companies.
A dedicated ESG advisor for the SEC
The SEC now has a dedicated advisor on ESG issues. The agency announced on Feb 1, 2021, that it has appointed Satyam Khanna as Senior Policy Advisor for Climate and ESG in the office of Acting Chair Herren Lee.
Satyam Khanna, until recently a resident fellow at the NYU School of Law’s Institute for Corporate Governance and Finance, was also part of the Joe Biden-Kamala Harris presidential transition team. He will advise the SEC on all matters ESG ‘and advance related new initiatives across its offices and divisions, according to the agency’s press release.
“Having a dedicated advisor on these issues will allow us to look broadly at how they intersect with our regulatory framework across our offices and divisions,” said Lee.
What do these developments mean?
ESG reporting by US companies has so far been voluntary. That might change.
President Biden has indicated that climate change is a priority issue for him. And it is certain that one of the SEC’s future moves could be to require companies to state what effect their activities have on the environment and society.
Also on the cards are emissions standards, which companies would be held accountable for the meeting. This is in line with Biden’s presidential campaign promise of establishing “an enforcement mechanism to achieve net-zero emissions no later than 2050”.
The tone is set for the US to gain the ground it has lost on climate action, as well as for the SEC to move forward in seeking ESG reporting by the entities it regulates. The months ahead will show what concrete action the present administration, and especially the SEC, will take so that the US is no longer on the sidelines of the ESG movement.