Increasing demand for companies to provide enhanced disclosures on climate-related and other environmental, social, and governance matters has raised questions about the Securities and Exchange Commission’s authority to require disclosures. That authority is broad and not limited to materiality.
Excerpt from this article from the Center for American Progress:
On March 15, 2021, the U.S. Securities and Exchange Commission (SEC) released a request for comments on whether and how it should require companies to disclose information related to climate risks and other environmental, social, and governance (ESG) matters. In May 2021, SEC Chair Gary Gensler confirmed that agency staff are developing enhanced climate-related and “human capital management” disclosures. The SEC’s actions follow more than a decade of growing investor demand for enhanced information from companies and financial institutions on these risks.
As a result of these developments, some companies, business representatives, and their political allies have raised questions regarding both the SEC’s authority to require such disclosures and the overall wisdom of imposing mandatory disclosures for ESG issues. Some have gone so far as to disregard securities laws and regulations to argue that the SEC could or should only require disclosure of information that is financially material to investors. If adopted, this radical rewriting of the SEC’s authority and materiality standard could reduce the level of information companies are required to disclose rather than address market participants’ need and desire for enhanced disclosures.
The SEC has the ability and responsibility to require disclosures, including ESG-related disclosures, that would further its mission to protect investors; promote more fair, orderly, and efficient markets; promote capital formation; and protect the public interest.
These responsibilities require the SEC to ensure that market participants have reliable, consistent, and comparable climate- and ESG-related information that is important to their business decision-making. The agency’s authority to require disclosures is not limited in any way by materiality, although the SEC and the courts may rely on this concept in specific, limited contexts. Moreover, what is material to investors today is broader than it has ever been.
