"The Enforcement Climate is Changing for ESG Disclosures", 27 Jan 2022

Businesses and investment firms worldwide are rushing to embrace the use of Environmental, Social, and Corporate Governance (ESG) factors to educate investors, customers, and vendors about their commitment to addressing climate change and other significant societal harms. But recent actions by regulators and other law enforcement authorities in the United States and Europe demonstrate that companies choosing to make such statements must act with the same rigor and care as with their financial disclosures…

One recent example of regulators’ views on ESG disclosure shows that authorities are using enforcement proceedings unrelated to ESG to set the stage for how companies should view the ESG metrics they report to investors and customers. Yet without clear ESG guidance from regulators across the globe, companies face uncertain requirements for these burgeoning disclosures.

Though SEC has a robust enforcement tool box for securities-related wrongdoing, these tools are not particularly well suited for regulating ESG disclosures…

One problem with Reg. S-K is that its requirements typically focus on a company’s financial information, and ESG-related concerns do not always translate neatly into numbers…

But because most of these tools were crafted to address overtly fraudulent conduct, their utility for pursuing more nuanced ESG disclosure issues is necessarily limited…

The SEC has recognized that its power to enforce ESG disclosure deficiencies is lacking, and has responded to the administration’s call for a “whole of government approach” to address these issues by vowing to shore up its enforcement authority…

The lesson here is that the federal government is looking for ways to exercise its limited ESG enforcement authority, using creative approaches such as invoking breach provisions in a prior DPA or commenting on a company’s disparate discussion of ESG factors in different documents…