SEC Passes Climate Disclosure Rules After Two-Year Wait

POMERANTZ MONITOR | MARCH APRIL 2024

By Jonathan D. Park

On March 6, 2024, the United States Securities and Exchange Commission (“SEC”) approved a set of long-awaited regulations requiring securities issuers to provide climate-related disclosures in their annual reports and registration statements. The final rules significantly scale back the proposal released nearly two years prior, after a comment period that saw record levels of feedback from investors, industry groups, and other stakeholders. SEC Chairperson Gary Gensler, who was joined by two Democratic colleagues in a 3-2 party-line vote approving the regulations, stated that “[t]hese final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.”

After the regulations are phased in, the final rule will require many registrants to disclose, among other things: certain greenhouse gas (GHG) emissions, subject to a materiality requirement; climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition; the actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook; and any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks.

In financial statements, registrants will be required to disclose, in the income statement, aggregate expenditures and losses as a result of severe weather events and other natural conditions, as well as to disclose costs and charges recognized on the balance sheet due to severe weather events and other natural conditions. Both of these requirements are subject to a monetary threshold. If carbon offsets and renewable energy credits (“RECs”) are material to a registrant’s plan to achieve disclosed climate-related targets, the registrant must disclose a roll-forward of the beginning and ending balances. Registrants must also disclose whether, and if so, how, severe weather events and other natural conditions, as well as disclosed climate-related targets or transition plans, materially affected estimates and assumptions reflected in the financial statements. Large accelerated filers (issuers with a public float of $700 million or more) must begin making these financial statement disclosures in annual reports or registration statements that include financial statements for the year ending December 31, 2025, while accelerated filers (issuers with a public float greater than $75 million but less than $700 million) have an additional year to comply. The financial statement disclosures will be subject to audit requirements and management’s internal control over financial reporting. For large accelerated filers and accelerated filers other than smaller reporting companies (SRCs) and emerging growth companies (ERGs), the registrant’s auditor will assess controls over these disclosures.

During the comment period after publication of the proposed rule, significant attention was paid to the question of what information companies would be required to disclose outside of the audited financial statements. In particular, the final rule requires registrants to disclose “Scope 1” GHG emissions (i.e., those from the registrant’s owned or controlled operations) and “Scope 2” GHG emissions (i.e., those from purchased or acquired electricity, steam, heat, or cooling). In a change from the proposed rule, these disclosures are only required if they are material. Materiality, the SEC emphasized, is not determined merely by the amount of these emissions, but by whether a reasonable investor would consider the disclosure as having significantly altered the total mix of information made available. For instance, the SEC explained, “[a] registrant’s Scopes 1 and/or 2 emissions may be material because their calculation and disclosure are necessary to allow investors to understand whether those emissions are significant enough to subject the registrant to a transition risk that will or is reasonably likely to materially impact its business, results of operations, or financial condition in the short- or long-term.”

The rule allows registrants to delay Scope 1 and Scope 2 disclosures until the due date of their Q2 quarterly report for the following year. Large accelerated filers must begin including Scope 1 and Scope 2 emissions disclosures in annual reports or registration statements that include financial statements for the year ending December 31, 2026. Accelerated filers have two additional years to comply. SRCs, ERGs, and nonaccelerated filers are exempt from the requirement to provide GHG emission disclosures.

Beginning with fiscal year 2029, large accelerated filers must attest with “limited assurance” as to the accuracy of the Scope 1 and Scope 2 emissions disclosures. Beginning two years later, such filers must attest to the accuracy of these disclosures with “reasonable assurance.” Accelerated filers (other than SRCs and ERGs) need only provide “limited assurance” attestations beginning with fiscal year 2033.

The rule will also require disclosure of processes for identifying, assessing, and managing material climate-related risks; information about any climate-related targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition; and any oversight by the board of directors of climate-related risks and any role by management in assessing and managing such risks.

Notably, the final rule does not require disclosure of “Scope 3” GHG emissions, which are those produced along the registrant’s “value chain,” such as by the registrant’s suppliers. Though Scope 3 emissions can be substantial, and even greater than a company’s Scope 1 and Scope 2 emissions, the SEC eliminated this disclosure requirement in the face of vigorous opposition by business groups. This was likely an attempt to head off challenges and the prospect of a court decision invalidating the regulation.  Scope 3 disclosures are required by the European Commission’s Corporate Sustainability Reporting Directive (CSRD), as well as by California for certain companies doing business in that state, so many issuers will be obligated to assemble and report such information in any case.

Several lawsuits seeking to invalidate the rule have already been filed by Republican attorneys general of several states, industry groups, and energy companies.  Environmental advocates have also sued, arguing that the rule does not go far enough, in particular by removing Scope 3 disclosure requirements.  The cases have been consolidated in the United States Court of Appeals for the Eighth Circuit.  Many consider the Eighth Circuit a conservative court where the Republican and industry challengers will find a sympathetic ear.

If the final rule eventually becomes effective, investors will surely benefit from the disclosures it requires, despite its pared back scope. A company’s GHG emissions, and any plans to mitigate them or otherwise achieve climate-related targets, are increasingly necessary for investors to evaluate a company’s outlook. Moreover, disclosure of how extreme weather events have affected a company’s financial condition is increasingly material in light of the growing frequency and severity of such events.  If the rule becomes effective, lawsuits and investigations regarding alleged violations of the disclosure requirements are likely, and will further clarify company’s obligations under the rule.

The final rules are available on the SEC’s website (https://www.sec.gov/rules/2022/03/enhancement-and-standardization-climate-related-disclosures-investors) and will be published in the Federal Register.

SEC Finalizes Rules Relating to SPACs, Shell Companies, and De-SPAC Transactions

POMERANTZ MONITOR | MARCH APRIL 2024

By Brian O’Connell

On January 24, 2024, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules and guidance that affect Special Purpose Acquisition Companies (“SPACs”) and offerings in which SPACs acquire and merge with private company targets (“de-SPACs”). The rules were initially proposed in March 2022 and were followed by a comment period. Approval was granted via a 3-2 vote, with two commissioners making statements in dissent. The rules a set to become effective July 1, 2024. The rules aim to enhance investor protection, including increasing disclosure requirements in connection with SPAC offerings, as well as to explicitly align SPAC offerings with traditional IPOs.

SPACs, also known as “shell” or “blank check” companies, are development-stage companies that have no operations of their own, apart from seeking private companies, known as “target companies,” with which to engage in a merger or acquisition to take the target public. The SPAC first has gone public via its own IPO. Once the merger between the SPAC and the target company is complete, the target, or operating company, is the sole surviving entity, and it transitions to a public company. This transaction and IPO with the target company is called a de-SPAC, since the SPAC essentially ceases to exist in the process.

SPAC IPOs have surged in popularity in recent years. In 2021, the United States saw a whopping 613 SPAC IPOs, representing 59% of all IPOs that year. SPACs have often relied on celebrity backing to boost their popularity: for example, Shaquille O’Neal advised a SPAC for Beachbody; Peyton Manning, Andre Agassi, and Steffi Graf invested in a SPAC for Evolv Technology; Jay-Z invested in The Parent Co.; Serena Williams served on the board of directors of Jaws Spitfire Acquisition Corp.; Alex Rodriguez is CEO of Slam Corp., and former Speaker of the House Paul Ryan served as Chairman of Executive Network Partnering Corp. Much like their concern with celebrity-backed crypto investments, regulators have been anxious about retail investors’ vulnerability to being misled by a famous name backing a blank check company offering. Although SPACs have subsided somewhat in popularity since their peak in 2021, SPAC IPOs remain in the news, with Trump Media Technology Group going public via de-SPAC on March 26, 2024 under the ticker “DWAC.” SPAC IPOs still accounted for 43% of IPOs in 2023.

Many have raised concerns that the SPAC structure lacks investor disclosure and transparency policies that serve as investor protections under the Investment Company Act. This means that SPAC investors lack protections that are typical in traditional IPOs, which leaves SPAC retail investors vulnerable to being misled. However, critics of the new rules, including dissenting commissioner Mark Uyeda, have pointed out that SPACs now require disclosures in excess of equivalent M&A transactions.

Given the attention and lure to retail investors, regulators will continue to focus on this means of IPO, and these new rules will shape the disclosure requirements for SPACs and de-SPACs. The SEC’s new rules set out to enhance disclosure requirements and provide guidance on the use of forward-looking statements with respect to SPACs, SPAC IPOs, blank check companies, and de-SPAC transactions. Specifically, the new rules provide that the Private Securities Litigation Reform Act (“PSLRA”) safe harbor is not applicable to de-SPAC transactions, which now explicitly aligns de-SPAC offerings with traditional IPOs. In his statement on January 24, SEC Chair Gary Gensler noted that “investors are harmed when parties engaged in a de-SPAC transaction over-promise future results regarding the target company”—something that investors regularly have suffered, as forecasted results have by and large not panned out. Although the PSLRA safe harbor is explicitly not applicable, other safe harbors, such as the “bespeaks caution” doctrine, which is judicial as opposed to statutory, may still apply. However, this new rule may tamp down on the amount and frequency of overly rosy projections in de-SPAC offerings.

The rules also address issuer obligations and liabilities for de-SPAC IPOs, including requiring that SPAC target officers sign the de-SPAC registration statements, which make them liable for misleading statements. The rules also include a new provision, Rule 145a, which makes the issuer a registrant under the Securities Act.

The final rules require disclosures from issuing companies at both the SPAC blank check stage and the de-SPAC stage regarding conflicts of interests, dilution risks, and the target company operations. Regarding dilution, the rules require detailed disclosure concerning material potential sources of additional dilution that non-redeeming SPAC shareholders may experience at different phases of the SPAC lifecycle, including the potentially dilutive impact of the securities-based compensation and securities issued to the SPAC sponsor, its affiliates, and promoters; any material financing transactions after the SPAC’s IPO, or financing that will occur in connection with the de-SPAC transaction closing; and redemptions by other SPAC shareholders.

The rules further require additional disclosure about the SPAC sponsor, its affiliates, and any promoters, including their experience, material roles and responsibilities, and the nature and amount of all compensation of these parties. SPAC sponsors will be required to disclose the circumstances or arrangements under which the SPAC sponsor, its affiliates, and promoters have or could transfer ownership of any of the SPAC’s securities. The rules also require the identification of the controlling persons of the SPAC sponsor and any persons who have direct or indirect material interests in the SPAC sponsor and the material terms of any “lock-up” arrangements for the SPAC sponsor and its affiliates. SPAC IPOs and de-SPAC IPOs will also be required to state in the prospectus cover pages the SPAC’s timeframe to complete a de-SPAC, redemption rights, and the SPAC sponsor’s compensation.

The SEC declined to adopt Rule 140a, which had been included in the proposed rules in March 2022. This would have clarified that anyone who acts as an underwriter in a SPAC IPO and participates in the distribution associated with a de-SPAC is engaged in the distribution of the surviving public entity’s securities. Such a person or entity, therefore, would be construed as an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act. Under Section 11 of the Securities Act, underwriters can be liable for misstatements in registration statements, which incentivizes them to perform careful due diligence. Although this rule was not adopted, the SEC explained in the Final Release that it believes “the statutory definition of underwriter, itself, encompasses any person who sells for the issuer or participates in a distribution associated with a de-SPAC transaction,” and therefore construes anyone involved in the distribution within a de-SPAC to fall within the meaning of Section 2(a)(11) of the Securities Act.

Under these rules, SPAC target companies that are not subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 will be required to make non-financial disclosures that are included in a traditional IPO, including: (i) Item 101 (description of the business); (ii) Item 102 (description of property); (iii) Item 103 (legal proceedings); (iv) Item 304 (changes in and disagreements with accountants on accounting and financial disclosure); (v) Item 403 (security ownership of certain beneficial owners and management, assuming completion of the de-SPAC transaction and any related financing transaction); and (vi) Item 701 (recent sales of unregistered securities).

Overall, these rules aim to reduce the differences between de-SPAC offerings and traditional IPOs that led to SPAC investors being less robustly protected. Companies should be mindful of these new rules, while investors can now make use of their enhanced protections when choosing to invest in a SPAC, vote on a merger, redeem or not redeem shares in a de-SPAC, or invest in a de-SPAC offering. The new regulations mean that due diligence processes in advance of de-SPAC offerings will likely take longer, and that investors will have more protections, both in terms of the robustness of disclosures and legal options should the prices decline.

The Future of Item 303-Based 10b-5 Claims

POMERANTZ MONITOR | NOVEMBER DECEMBER 2023

By Elina Rakhlin

A major unresolved question in securities litigation is headed back to the Supreme Court this term.  In Macquarie Infrastructure Corp. v. Moab Partners, L.P., SCOTUS will consider whether failing to disclose information required by Item 303 of the SEC’s Regulation S-K can support a private claim under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.  For plaintiffs seeking to hold companies accountable for misleading their investors by omitting material information from SEC filings, the stakes could not be higher.

Item 303’s Disclosure Duty and the Absence of a Private Right of Action

Item 303 requires that public companies include a Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section in their periodic SEC filings.  The MD&A must describe known trends, demands, commitments, events or uncertainties that are reasonably likely to materially impact the company’s financial condition or operating performance.  The SEC has made clear that Item 303 imposes an affirmative duty to disclose material information.  A company violates Item 303 by omitting information about a known trend or uncertainty that investors would consider important.

However, courts have widely recognized there is no private right of action under Item 303 itself—in other words, investors cannot sue directly for a company defendants’ nondisclosures.  Instead, plaintiffs are forced to seek recovery for these Item 303 violations within an existing securities fraud claim that does have a private right of action—most commonly, under Section 10(b) and Rule 10b-5.

This raises a key unsettled question–when does an Item 303 violation form the basis for an omissions case under Section 10(b)?

The Split: Can an Item 303 Violation Support a 10b-5 Claim?

To prevail on a Rule 10b-5 omission claim, plaintiffs must prove (1) the company had a duty to disclose, and (2) the omitted information was material.  All courts agree that violating Item 303 breaches the duty to disclose.  Where they diverge is whether an Item 303 violation, without more, makes the omission material for purposes of 10b-5.

Some circuits have held that Item 303 does not create a Section 10(b) duty to disclose.  The Ninth, Third and Eleventh Circuits have held that just because a trend or uncertainty should be included under Item 303 does not mean that omitting it is a violation of Section 10(b). In their view, an Item 303 violation alone cannot establish a 10b-5 claim.  Even if the omission breached Item 303, plaintiffs must separately prove materiality and scienter under 10b-5’s standards.

The Second Circuit disagrees.  It has held that omitting information required by Item 303 is “indeed an omission that can serve as the basis for a Section 10(b) securities fraud claim.”  Under this theory, violating Item 303 satisfies 10b-5’s materiality element automatically.  Plaintiffs need only adequately allege the other 10b-5 requirements, such as scienter.

This divide is pivotal given the broad consensus among the courts that there is no private right of action under Item 303.  As such, investors must look to Section 10(b) and Rule 10b-5 as one of their only avenues to obtain redress for Item 303 violations.  The Circuit split thus determines whether investors can hold companies liable at all for these omissions. 

This split also formed the basis for the Supreme Court’s 2017 decision to grant review in a case presenting the same question, Leidos Inc. v. Indiana Public Retirement System.  However, the case settled before oral argument.  Macquarie gives the Court an opportunity to finally resolve the split.

The Macquarie Litigation

In Macquarie, plaintiff Moab Partners brought 10b-5 claims against Macquarie Infrastructure and its executives.  Moab alleged that Macquarie concealed the known risk that impending regulatory changes restricting use of “high-sulfur fuel oil” in shipping would materially and adversely impact its storage and transportation business.  Specifically, Moab claimed Macquarie violated Item 303 by failing to disclose in its SEC filings the company’s significant exposure to high-sulfur fuel oil and the risks posed by the new regulations.

The district court dismissed the case, finding Moab failed to sufficiently allege either an Item 303 violation or scienter.  The Second Circuit reversed the district court’s decision.  Critically, it held that Macquarie’s omission of the fuel oil exposure and regulatory risks, in violation of Item 303’s disclosure duty, was sufficient to plead a material omission under 10b-5.  The court also found scienter adequately alleged.

Macquarie’s Petition for Certiorari

Macquarie petitioned the Supreme Court for certiorari on the question of whether the Second Circuit erred in holding that “a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b).”  Macquarie argues that this holding improperly expands liability under 10b-5 beyond what the statute and Court precedent permit. In its view, 10b-5 reaches only “deception”—i.e., misleading statements—not pure omissions of information that Item 303 requires be disclosed. Macquarie contends that the Second Circuit’s decision conflicts with Basic v. Levinson, which held that silence, absent a duty to disclose, is not misleading under 10b-5.  Macquarie argues that Item 303’s more expansive disclosure standards make it ill-suited to support 10b-5 liability, which requires materiality be plead with specificity under the PSLRA.

Macquarie further contends that allowing 10b-5 liability for Item 303 omissions will compel companies to make overly defensive disclosures and spur meritless litigation.  Macquarie claims that the Circuit split causes problematic forum shopping, with plaintiffs disproportionately bringing these claims in the Second Circuit.

Moab Partners’ Opposition

In its opposition brief, Moab first argues that Macquarie’s petition should be denied because the Leidos question is not as important as it once seemed.  It claims the Circuit split has proven “superficial,” with most courts dismissing Item 303-based claims on other grounds, such as immateriality or lack of scienter.

Moab defends the Second Circuit’s position as correctly reflecting 10b-5’s text and the principle that misleading omissions are actionable.  It argues that Item 303 creates a mandatory disclosure duty whose breach can mislead investors.  Moab distinguishes “pure omissions” from “half-truths,” arguing that Macquarie’s affirmative statements in SEC filings (like touting steady performance) also triggered a duty to disclose the Item 303 trend.

Finally, Moab argues that allowing 10b-5 liability for Item 303 omissions does not improperly expand the private right of action.  Plaintiffs must still plead and prove materiality, scienter, and all other 10b-5 elements.  Moab contends the robust 10b-5 requirements appropriately limit these claims.

What’s Next?

On September 29, 2023, the Supreme Court granted certiorari in Macquarie Infrastructure Corp. v. Moab Partners.  The case is currently set for oral argument on January 16, 2024.  For years, federal courts have disagreed on whether failing to make required Item 303 disclosures can support private securities fraud suits under Section 10(b) and Rule 10b-5.  The Supreme Court will likely finally resolve this dispute.

The Second Circuit allows these suits; the Ninth Circuit bars them unless plaintiffs show the omission also made affirmative statements misleading.  The Court cares about uniformity in federal securities laws, and the Second Circuit’s approach impacts markets nationwide; so the stakes are high.

Plaintiffs currently have an easier path bringing Item 303-based claims in the Second Circuit.  To plead such a claim there, plaintiffs must adequately allege: (1) defendants violated Item 303; (2) the omitted information was material; (3) defendants acted with scienter; (4) plaintiffs’ purchase/sale of the securities at issue; (5) plaintiffs’ reliance on the omission; and (6) the omission caused losses. 

The Ninth Circuit imposes more stringent requirements, in which plaintiffs are not only required to sufficiently allege those same elements but also show that defendants’ Item 303 nondisclosures made affirmative statements materially misleading.  This increased burden steers plaintiffs to the Second Circuit whenever possible.

If the Court sides with Macquarie, it will be harder for plaintiffs to hold companies liable for misleading omissions in periodic SEC filings.  Ruling for Moab keeps another tool in investors’ anti-fraud arsenal.  No matter the outcome, plaintiffs likely must meet heightened pleading standards for these claims going forward.  If the Supreme Court permits Item 303-based suits under 10b-5, plaintiffs still must rigorously allege facts supporting each element—especially materiality, scienter, and the PSLRA’s particularity mandate.  If the Court bars these suits absent misleading affirmative statements, the path forward is harder still.  Indeed, significant unknowns exist regarding the future of Item 303-based claims as the Court could impose greater requirements on investors seeking to bring these claims or issue a decision that produces more confusion than clarity, leaving the question open to further interpretation and differing applications of the law among the lower courts.  Either way, more vigorous pleading and tighter case screening is the future for Item 303-based 10b-5 actions.

ESG Disclosure in the Biden Era

POMERANTZ MONITOR | MARCH APRIL 2021

By Jennifer Pafiti

The Securities and Exchange Commission (“SEC”) requires companies to disclose their most significant risk factors in their filings in order to warn investors of the risks of either purchasing or continuing to own their company’s stock. Such disclosures may also serve as a “safe harbor defense” for public companies in securities litigation arising from their statements to investors, in that predictions, projections and expectations in offerings and other disclosure documents may not be construed as misleading if they contain sufficient cautionary language disclosing specific risks.

Law360 has just published the findings of a review that it, along with analytics provider Intelligize, conducted on changes in companies’ risk disclosures at the dawn of the Biden era. According to their review, at least 97 companies updated the “risk factor” sections of their SEC filings as of February 26 “to reflect President Biden’s arrival in office.”

Law360 and Intelligize found that fossil fuel-energy companies and drug developers are the most common stock issuers updating their risk disclosures to warn investors of potential policy changes that could harm their businesses under a Biden administration. Other industries, they report, have cautioned investors that a rise in corporate taxes could affect their profitability. According to Law360, “Fallout from the coronavirus pandemic has also been a recurring “risk factor.” ... Some banks are now warning investors that policies aimed at relieving borrowers may affect their bottom lines.”

Under the former SEC Chair, Jay Clayton, the SEC adopted more than 90 new rules. Investor advocates and state securities regulators criticized the “principles-based” rules enacted under Clayton for leaving too much to interpretation and providing inadequate guidance as to their scope of and compliance. For example, Regulation Best Interest (Reg B1), prohibits brokers from placing their own interests ahead of their customers, yet does not require brokers to meet the same rigorous “fiduciary standard” that is imposed on investment advisers.

One of the keystones of President Biden’s agenda is his commitment to protecting the environment. He has promised to hold polluters accountable by establishing “an enforcement mechanism to achieve net-zero emissions no later than 2050.” Biden’s ambitious environmental goals may face challenges in the Senate, but he will have some leeway to pursue them via the SEC.

Biden has nominated Gary Gensler, an academic, former investment banker, and former government finance official in the Obama administration, to serve as the SEC’s 33rd chair. During his confirmation hearing on March 2, Gensler told the Senate Banking, Housing and Urban Affairs Committee that he supports more climate risk disclosure, pledging that the SEC will undertake economic analysis and seek public feedback on how to advance it. “There are tens of trillions of investor dollars that are going to be looking for more information about climate risk,” he said, adding that “issuers will benefit from such disclosures.”

SEC Commissioner and Acting Chair, Allison Herren Lee, is strongly critical of policies adopted under Clayton’s tenure. She has called the agency’s failure to require the disclosure of environmental, social, and governance (ESG) related risks such as diversity and climate change “an unsustainable silence” – evoking, for some, Rachel Carson’s seminal 1962 book, Silent Spring, which helped to inspire an environmental movement that led to the creation of the U.S. Environmental Protection Agency. In her September 23, 2020 Statement to the Amendments to Rule 14a-8, Lee wrote, “Climate change, workforce diversity, independent board leadership, and corporate political spending, as well as other ESG-related issues, are increasingly important to investors—and increasingly present on proxy ballots. ... Environmental and social proposals have been ascendant in recent years, making up more than half of all proposals filed in recent seasons.” She criticized Clayton’s SEC for moving to restrain those efforts “just as they are gaining real traction.”

On March 5, SEC Commissioners Hester M. Peirce and Elad L. Roisman – both Republicans – published a joint statement in which they appear to dig in their heels to privilege the status quo. Referring to the recent “steady flow of SEC “climate” statements” they ask:

What does this “enhanced focus” on climate-related matters mean? The short answer is: it’s not yet clear. Do these announcements represent a change from current Commission practices or a continuation of the status quo with a new public relation twist? Time will tell.

It is certainly likely, though, that the SEC under Biden will scrutinize claims made by investment firms and financial advisors regarding their ESG funds, on the lookout for “greenwashing” attempts to make a fund appear more sustainable or ESG-compliant than it actually is.

Congressional Democrats, meanwhile, have been promoting legislation that would require companies to disclose ESG-related risks for years. Senator Elizabeth Warren’s proposed Climate Risk Disclosure Act of 2019 “would require public companies to disclose more information about their exposure to climate-related risks, which will help investors appropriately assess those risks, accelerate the transition from fossil fuels to cleaner and more sustainable energy sources and reduce the chances of both environmental and financial catastrophe.”

Representative Juan Vargas introduced the ESG Disclosure Simplification Act of 2019 to establish a Sustainable Finance Advisory Committee within the SEC that would “submit to the Commission recommendations about what ESG metrics the Commission should require issuers to disclose.”

Treasury Secretary Janet Yellen, who has called climate change “an existential threat,” intends for her department to play an integral role in fighting it. She is expected to appoint a “climate czar” and to use the Financial Stability Oversight Council to crack down on climate-related financial risks.

On March 10, 2021, the U.S. Department of Labor announced that it would suspend enforcement of Trump- era regulations limiting socially conscious investments by retirement plans while crafting new regulations that “better recognize the important role” of ESG investments in retirement plans.

The Investment Company Institute (“ICI”), which manages over $34 trillion in assets globally, has called upon public companies in the United States to provide ESG disclosure consistent with standards set by the Task Force on Climate-Related Financial Disclosure (TCFD) and Sustainability Accounting Standards Board (SASB).

On March 17, at a virtual conference of the ICI, Acting SEC Chair Lee defined the principal that is “the basis of shareholder democracy: through clear and timely disclosure, we empower investors to hold the companies they own accountable—including accountability on climate and ESG matters.” Expressing concern that “our regulations have not kept up with this new landscape of institutional investor-driven corporate governance,” Lee called for changes to shareholder proxy voting disclosures that would incorporate “soaring demand” for ESG investment strategies.

According to Benjamin D. Stone of Mintz Insights, “Should President-elect Biden successfully institute a regulatory framework for corporate ESG disclosures, investment funds will be well-positioned to deliver trillions of dollars of investment capital into the U.S. economy to meet climate goals.”

Still, the SEC has yet to define ESG or direct companies on exactly which ESG-related risks it wants them to disclose. The United States lags well behind Europe in this regard. The EU Sustainable Finance Disclosure Regulation (2019/2088) comes into force on March 10, 2021. In the United Kingdom, new climate-related disclosure regulations that apply to investment managers in the U.K. are expected to be phased in from 2022.

It remains to be seen whether the United States can catch up.