Michael Osnato, Michael Wolitzer, and Meaghan Kelly are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Osnato, Mr. Wolitzer, Ms. Kelly, David Blass, Allison Bernbach, and Carolyn Houston. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
In the run up to the 2020 presidential election, we had predicted that a Biden administration would usher in an era of heightened SEC scrutiny. We also anticipated that ESG (environmental, social and governance) and SRI (socially responsible investing) would become a priority for the SEC’s Division of Examinations (the “Exam Division”). For more on this priority shift, see Simpson Thacher, The SEC Under New Management—Outlook for 2021 and Beyond.
Proposed Legislation and Regulatory Scrutiny. One way this shift has manifested is in proposed legislation. Last month, the Climate Risk Disclosure Act of 2021 was introduced by Senator Elizabeth Warren and Representative Sean Casten. The Act would direct the SEC to promulgate rules requiring public companies to disclose additional information about their greenhouse gas emissions and fossil fuel assets, and how climate change would affect their valuation. There has also been an increase in regulatory attention in this area. In March 2021, the SEC released a request for public comment on climate change disclosures. Also in March 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement, with the stated initial focus on identifying material misstatements in issuers’ disclosure of climate risks under existing rules, as well as to analyze disclosure and compliance issues relating to advisers’ ESG strategies. In its announcement, the Task Force solicited tips and whistleblower complaints related to ESG. And earlier this month, SEC Chair Gary Gensler told the House of Representatives Financial Services Committee that he expected the SEC to propose new rules on corporate climate risk disclosures in the second half of 2021. Additionally, the Exam Division’s April 9, 2021 Risk Alert highlights deficiencies, internal control weaknesses and effective practices identified during recent examinations of investment advisers, registered investment companies and private funds related to ESG investing. For more on this Risk Alert, see our prior post on the Forum.
