A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC

Thank you, John [Podesta], and thanks to the whole team here at the Center for American Progress, for hosting me today. I’ve had the honor of serving as Acting Chair of the SEC for nearly two months now, and I appreciate the opportunity to reflect on the enhanced focus the SEC has brought to climate and ESG during that time, and on the significant work that remains. Along with shepherding the agency through the transition and supporting the work of the SEC staff, no single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy.

Today I want to map out the ways in which we have brought investors’ voices to the forefront on these issues in recent months. The progress to date is a tribute to the hard work of the staff, both in my office and throughout the SEC. I especially want to thank my Senior Policy Advisor for Climate and ESG, Satyam Khanna, who has worked tirelessly and effectively across the agency on these issues. I know climate and ESG is of great interest to CAP as well, and I thank you for your critical work in this area.

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There is really no historical precedent for the magnitude of the shift in investor focus that we’ve witnessed over the last decade toward the analysis and use of climate and other ESG risks and impacts in investment decision-making. That’s not to say that investor focus on issues that also have social or ethical significance is new. In the U.S., we can trace it back to 18^th century efforts to align investing with religious principles, and see where it gained traction in the 1960s with respect to Civil Rights, and in the 1970s with respect to environmental issues.[1] But for a long time so-called impact or socially-responsible investing was perceived or characterized as a niche personal interest – the pursuit of ideals unconnected to financial or investment fundamentals, or even at odds with maximizing portfolio performance.

That supposed distinction—between what’s “good” and what’s profitable, between what’s sustainable environmentally and what’s sustainable economically, between acting in pursuit of the public interest and acting to maximize the bottom line—is increasingly diminished. Not only have we seen a tremendous shift in capital towards ESG and sustainable investment strategies, but ESG risks and metrics now underpin many traditional investment analyses on investments of all types – a dynamic sometimes referred to as “ESG integration.” In other words, ESG factors often represent a core risk management strategy for portfolio construction.[2] That’s because investors, asset managers responsible for trillions in investments, issuers, lenders, credit rating agencies, analysts, index providers, and other financial market participants have observed their significance in terms of enterprise value.[3] They have embraced sustainability factors and metrics as significant drivers in decision-making, capital allocation, and pricing.

This last year has helped to clarify why the perceived barrier between social value and market value is breaking down. COVID has driven focus on worker safety. Protests in the wake of the senseless killings of George Floyd and others have driven focus on racial justice. In both of these narratives we can also see connections to climate risk. With COVID, we saw supply chain disruptions similar to that which climate events can cause. We know climate presents heightened risks for marginalized communities, linking it to racial justice concerns. We saw in real time that the issues dominating our national conversation were the same as those dominating decision-making in the boardroom.[4]

Human capital, human rights, climate change – these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues. We see that unmistakably in shifts in capital toward ESG investing, we see it in investor demands for disclosure on these issues, we see it increasingly reflected on corporate proxy ballots, and we see it in corporate recognition that consumers and investors alike are watching corporate responses to these issues more closely than ever.[5]

That’s why climate and ESG are front and center for the SEC. We understand these issues are key to investors – and therefore key to our core mission. And just as we recognize that these issues do not observe artificial distinctions between society and financial markets, we recognize that climate and ESG transcend other boundaries as well. Geographical boundaries for one. These are global challenges for global markets that demand global solutions. Regulatory boundaries for another. Climate, for instance, is not just an EPA, Treasury, or SEC issue – it’s a challenge for our entire financial system and economy.

And boundaries within the SEC. At the agency, we are taking a holistic look at all of the ways climate and ESG intersect with our regulatory framework, and moving ahead with efforts across our offices and divisions to account for that. In the last couple of months, we’ve taken important steps forward. And we are actively laying the groundwork for more progress to come. I want to take this opportunity to review both where we’ve been and where I hope we are going.

Informing the Markets

The most fundamental role that the SEC must play with respect to climate and ESG is the provision of information – helping to ensure material information gets into the markets in a timely manner. Investors are demanding more and better information on climate and ESG, and that demand is not being met by the current voluntary framework. Not all companies do or will disclose without a mandatory framework, raising the cost, or resulting in the misallocation, of capital. Investors also aren’t getting the benefits of comparability that would come with standardization. And there are real questions about reliability and level of assurance for the disclosures that do exist. Meanwhile issuers are assailed from all sides by competing and potentially conflicting demands for information. That’s why we have begun to take critical steps toward a comprehensive ESG disclosure framework aimed at producing the consistent, comparable, and reliable data that investors need.

Climate Disclosure Directive to Staff. As an important near-term step, earlier this month I asked the Division of Corporation Finance to enhance its focus on climate-related disclosures.[6] In 2010, under the leadership of Mary Schapiro, the Commission for the first time provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters.[7] Part of what the staff will do now is review the extent to which public companies address the topics identified in the 2010 guidance and comply with current requirements. It’s also important that the staff engage with public companies on these issues and use the opportunity to evaluate the current state of climate disclosure. Much has changed in the last decade – in terms of market practices for gauging ESG-related risks, in terms of the science of climate change, and, unfortunately, in terms of the urgent nature of climate-related risks. And we need to assess how these risks are being analyzed and disclosed by companies now to inform an update to the 2010 guidance – and to inform our policymaking going forward.

Request for Comment on Climate Disclosure. To further inform our policymaking, today I am issuing a statement requesting public comment on climate disclosure.[8]  Of course we already have an extensive public record demonstrating investor desire for the SEC to ensure better disclosure in this space.[9] But, it’s time to move from the question of “if” to the more difficult question of “how” we obtain disclosure on climate. There are important questions to be answered here – what data and metrics are most useful and cut across industries, to what extent should we have an industry-specific approach, what can we learn from existing voluntary frameworks, how do we devise a climate disclosure regime that is sufficiently flexible to keep up with the latest market and scientific developments? Finally, how should we address the significant gap with respect to disclosure presented by the increasingly consequential private markets? Today’s request gets at these and other important questions. I encourage all market participants to weigh in and help us with this important work. I’ve said this before, but it bears repeating: I value engagement with all on these issues, including in particular those who may see them differently. These are complex issues and we will reach the best result through thoughtful engagement across a wide range of perspectives.   

Beyond Climate. As we further our engagement with the market on developing a disclosure framework for climate, we should also consider the broader array of ESG disclosure issues. As I’ve discussed at length before, climate is unique in the potentially systemic nature of the risks it presents.[10] But we must also make progress on standardized ESG disclosure more broadly. That means working toward a comprehensive ESG disclosure framework. In the near term, it should also include considering where we can advance initiatives on a standalone basis now, such as offering guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity,[11] and considering more specific guidance or rulemaking on board diversity. 

Another significant ESG issue that deserves attention is political spending disclosure. The SEC is currently prevented from finalizing a rule in this area,[12] but political spending disclosure is inextricably linked to ESG issues. Consider for instance research showing that many companies that have made carbon neutral pledges, or otherwise state they support climate-friendly initiatives, have donated substantial sums to candidates with climate voting records inconsistent with such assertions.[13] Consider also companies that made noteworthy pledges to alter their political spending practices in response to racial justice protests, and whether, without political spending disclosure requirements, investors can adequately test these claims, or would have held corporate managers accountable for those risks before they materialized.[14] Political spending disclosure is key to any discussion of sustainability. 

Protecting Shareholder Rights

While disclosure is key, it only works for shareholders if they can effectively use the information in overseeing their investments. Shareholders exercise oversight of the companies they own and the funds in which they invest through certain fundamental rights – and they are increasingly seeking to exercise those rights to drive corporate decision-making toward sustainable solutions and long-term value creation.

Shareholder Proposals

The shareholder proposal process is a key mechanism for engagement by shareholders with management of the companies they own. Climate change, workforce diversity, independent board leadership, and corporate political spending, as well as other ESG-related issues, are increasingly present on proxy ballots, reflecting investor interest in corporate accountability around these issues. Governance-related proposals have long-dominated shareholder proposals and helped improve corporate governance in significant ways.[15] But environmental and social proposals have been ascendant in recent years, making up more than half of all proposals filed in recent seasons.[16] There has been a marked increase in support for such proposals in the last decade, with average support nearly tripling, and a number of such proposals gaining majority support.[17]

Thus, as has been true for decades, the shareholder proposal process continues to provide an important mechanism for investors to improve corporate governance and advance sustainable long-term strategies at the businesses they own.

Improvements to the Shareholder Proposal Process. The SEC plays a critical role in the shareholder proposal process, with staff in our Corporation Finance Division drawing upon their deep expertise and experience to provide much needed certainty regarding when shareholder proposals may or may not be excluded from the ballot.[18]

Because of the vitally important nature of this function, I have asked the staff to develop proposals for revising Commission or staff guidance on the no-action process, and potentially revising Rule 14a-8 itself. The goal is to bring greater clarity to the no-action relief process, increase the number of proposals on the ballot that are well-designed for shareholder deliberation and votes, and reduce the number that are not. This could involve reversing last year’s mistaken decision to bar proponents from working together and restricting their ability to act through experienced agents.[19] It could also involve reaffirming that proposals cannot be excluded if they concern socially significant issues, such as climate change, just because they may include components that could otherwise be viewed as “ordinary business.”[20] 

Proxy Voting

An equally important component of shareholder democracy is shareholder voting rights. In the modern investing landscape, most shareholder voting is done through the proxy process. And a significant and growing number of those proxies are voted by investment fund fiduciaries on behalf of their investors.[21] In addition, there is increasing demand for opportunities to invest in funds with ESG strategies.[22] However, funds may not always reflect those preferences in their voting. That’s why our rules and guidance should clearly emphasize the importance of voting as part of funds’ and advisers’ fiduciary obligations to their clients. The rules should also help ensure transparency for investors around how their money is voted, and facilitate fair and efficient voting. To that end, I have taken a number of recent actions.

Re-Visiting Commission Guidance on Proxy Voting Responsibilities of Investment Advisers. Out of concern that the Commission’s August 2019 guidance[23] discourages fiduciaries from voting in certain circumstances, I have asked the staff to consider recommendations for enhancing, supplementing, or replacing that guidance to ensure that advisers understand how to weigh competing concerns of all types in deciding whether and how to cast votes on behalf of their clients.

Updating Fund Voting Disclosures. I have also asked the staff to consider updates to disclosures of fund voting decisions – which are filed on Form N-PX – to maximize transparency around fund proxy voting. The adoption of Form N-PX in 2003 was an important step forward in helping fund investors understand how proxies are voted on their behalf.[24] But nearly two decades have passed, and there is much room for improvement, including, for example, potentially greater standardization in these disclosures, structuring and tagging of the data, and more clarity and consistency in the description of ballot issues.

Finalizing a Universal Proxy Rule. Lastly, I have asked the staff to consider whether to recommend that the Commission re-open the comment file on the 2016 universal proxy rule proposal to take into account market developments since then and move towards finalization. That proposal would require the use of universal proxy cards in contested director elections that would, among other things, include the listing of all directors (whether management’s slate or a shareholder’s slate) up for election and better replicate how in-person voting works. This rule proposal represents a common-sense step forward in modernizing our proxy rules and protecting shareholder rights.[25] The proposal has been outstanding for far too long and should be finalized.

Ensuring Accountability

All of the steps I’ve discussed so far will increase corporate accountability to investors through enhanced transparency and through supporting the exercise of shareholder rights. But our Divisions of Examinations and Enforcement provide critical support in fostering corporate accountability. That’s why I’ve taken important steps to leverage the staff’s expertise in those Divisions.

Division of Examination’s Climate and ESG Priorities. This year’s annual examination priorities included an enhanced focus on climate and ESG, including by examining ESG fund proxy voting policies and practices to ensure alignment with investors’ best interests and expectations, as well as examining firms’ business continuity plans in light of intensifying physical and other relevant risks associated with climate change.[26]

Division of Enforcement’s Climate and ESG Task Force. In addition, two weeks ago, we announced the formation of the first-ever Climate and ESG Task Force within the Division of Enforcement.[27] The Task force will work to proactively detect climate and ESG-related misconduct, including identifying any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules and analyzing disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.

Examinations and enforcement are crucial mechanisms to aid compliance with the rules on the books and ultimately to redress violations. ESG is no different than any other subject matter in this regard. Just as we’ve incorporated considerations related to, for example, cybersecurity and Fintech into our exam and enforcement processes as the risks and impacts of those issues became more apparent,[28] we are now doing the same with respect to ESG.

Engaging Across Boundaries

Finally, I want to highlight the importance of engagement and cooperation on these issues. As I mentioned, ESG, and climate risks in particular, do not observe jurisdictional boundaries. That is why I am committed to close regulatory cooperation, both domestically with Treasury and other financial regulators, and internationally through bilateral cooperation and through supporting the important multilateral work being done through IOSCO and the FSB.

International Sustainability Standard Setter. I was particularly pleased to support IOSCO’s recent statement regarding the creation of a Sustainability Standards Board.[29] The SSB represents a promising approach toward the development of an international baseline for sustainability reporting upon which individual jurisdictions could build consistent with their own unique consideration.

Domestic Sustainability Standard-Setter. This also raises the question of a similar standard-setter domestically. One of the most challenging questions for the SEC is how to devise a climate and ESG disclosure framework that is flexible and can efficiently evolve as needed. One potential path that we should consider is the development of a dedicated standard setter for ESG (similar to FASB) under SEC oversight to devise an ESG reporting framework that would complement our financial reporting framework.[30]

Precisely because the risks and opportunities related to climate and ESG cut across all manner of boundaries, the SEC must do its part, in concert with market participants and regulators around the globe, to address these issues. The lack of common benchmarks and standardized language will continue to inhibit to some degree competitive dynamics around managing climate and other ESG risks.[31] Moreover market dynamics alone are not likely to be sufficient to mitigate these risks.[32] These are considerations outside of the SEC’s remit, but I point them out to note that our efforts do not occur in isolation, but rather are part of a broader policymaking landscape. While our efforts at the SEC should and will stay firmly rooted in our mission, we should not put blinders on or operate within silos in addressing this problem. We’ve seen compelling evidence, time and again, of the need to collaborate broadly among domestic and international regulators and with market participants to prevent or minimize global crises – from the Financial Crisis of 2008 to the global pandemic. Climate change and other ESG factors, particularly racial injustice and economic inequality, require us all to come together and see the bigger picture in order for each of us individually to carry out our missions effectively.

(Even) More Work Ahead for the SEC

Having covered a lot of ground today, I still haven’t reached all the places climate and ESG intersect with the SEC’s regulatory mission. Consider for example, ESG funds. We recently issued an investor bulletin to help investors understand the different potential ESG strategies funds may pursue.[33] We are working towards enhanced transparency around proxy voting. But we should consider additional steps such as, for example, an ESG-specific policies and procedures requirement.

In other areas, what steps should we take to enhance the reliability around existing climate and ESG disclosures, including potentially requiring auditor attestation of current voluntary sustainability reporting? And should the PCAOB establish better standards or guidance for how auditors currently address companies’ climate and ESG-related financial statement disclosures? How also do we encourage enhanced transparency by credit rating agencies regarding how they consider ESG factors? This is by no means an exhaustive list. These and other challenges remain.

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Before I close, I want to add a final note. I have focused these remarks on climate and ESG and the intersection of those issues with the SEC’s mission. But climate and ESG, and therefore these remarks, are fundamentally about protecting everyday investors. And so I would be remiss not to mention numerous other core retail investor protection issues on which the SEC should bring significant resources to bear. These include, among others, ensuring that we build strong and clear standards for broker-dealers under Regulation Best Interest, taking a hard look at the effects on retail investors of the continued flow of capital away from public markets,[34] and proceeding with equity market structure reforms including a holistic review of the many factors that affect whether retail investors receive the best execution of their trades. These initiatives are mutually reinforcing: none of these efforts will succeed unless retail investors can have confidence that our markets are safe and secure for them to invest their families’ economic futures.  

There is important work ahead at the SEC, and I look forward to working with new leadership, with my fellow Commissioners, and with the talented agency staff as we tackle these challenges together. This is a pivotal and exciting time at the SEC, and I am privileged to be a part of it.