Towards a Framework to Measure Businesses’ Sustainability Initiatives in the United States

By: Kali Fleming

American investors are increasingly interested in mandatory disclosure requirements for public companies’ environmental, social, and governance (ESG) based data.[1] ESG-based data “refers to the three central factors in measuring the sustainability of an investment” which can be determinative in the value that companies create for their stakeholders.[2] The Securities and Exchange Commission (SEC) currently does not require public companies to disclose broad ESG-based data.[3] However, last year the SEC opened a period for investor input and investors called upon the SEC to adopt and implement a mandatory requirement for companies to disclose ESG-based data pursuant to Regulation S-K.[4] Following that period for investor input, the SEC adopted a disclosure requirement for human capital which is an ESG-based factor associated with a company’s workforce.[5]

President Joe Biden took investors’ interests in ESG-based disclosures and placed them at the forefront of his campaign platform, particularly with regards to climate risk disclosures.[6] Moreover, President Joe Biden nominated Gary Gensler, better known as the “Money Cop,” to serve as the new SEC Chairman for his Administration.[7] Incoming SEC Chairman Gensler gained his “Money Cop” nickname based on his interests in increasing transparency requirements for public companies, in part relating to the disclosure of ESG-based data.[8] It appears that the Biden Administration is positioning itself to give investors what they want in a mandatory ESG-based disclosure requirement. However, there are still significant challenges for SEC leadership to overcome to successfully implement such a requirement.[9]

One impediment to mandatory ESG-based disclosures pursuant to Regulation S-K is a lack of uniformity in existing frameworks.[10] The issue is two-fold: first, the disclosure framework must be uniform to allow companies to clearly ascertain what is required to be disclosed and second, to allow investors to compare companies’ ESG-based disclosures.[11] In May 2020, the SEC’s Investor Advisory Committee took the first step to solve this issue and “approved a recommendation that the SEC adopt an integrated disclosure regime that provides uniform ESG disclosures among public companies to permit investors to compare one company to another, and to provide a uniform framework for related disclosures for public companies.”[12]

This leaves investors and public companies wondering what may be included as a mandatory ESG-based disclosure pursuant to a uniform framework under Regulation S-K. There is not a clear answer as best practice ESG-based disclosure requirements are drawn from “a patchwork of frameworks” worldwide.[13] We can look to these existing frameworks to try and anticipate what would be required of public companies under a mandatory ESG-based disclosure framework in the United States.

For example, the SEC may choose a framework similar to the ESG-based framework that the European Commission adopted for its financial sector in March 2019.[14] Notably, this framework is only applicable to the European financial sector and focuses primarily on environmental disclosures.[15] On the other hand, the SEC may choose a framework similar to the International Business Council of the World Economic Forum (WEF)’s “universal ESG reporting metric framework” which was published in September 2020.[16] Rather than using the ESG framework directly, the WEF “organized its framework around the four pillars of governance, planet, people, and prosperity.”[17] As a result, the WEF framework is a bit more robust than the European framework, as it applies to a broad range of sectors and disclosure metrics.[18] Whatever the case, it is clear that the Biden Administration seeks to impose robust ESG-based disclosure requirements with a particular focus on the environment, diversity, and workforce treatment.[19] Public companies must consider the possibility that the Biden Administration, under the leadership of SEC Chairman Gensler, will push for these disclosure requirements within the next year.

[1] See Comments on Proposed Rule: Modernization of Regulation S-K Items 101, 103, and 105, U.S. Sec. and Exch. Comm’n, https://www.sec.gov/comments/s7-11-19/s71119.htm (last visited Mar. 24, 2021).

[2] What is ESG and why do we care?, Janus Henderson Investors (Nov. 2019), https://www.janushenderson.com/en-us/investor/article/esg-and-why-care/ (indicating that a company can create value for “employees, customers, suppliers, and wider society including the environment”).

[3] See Paul M. Dudek, Paul Davies, Ryan J. Maierson & Kristina S. Wyatt, SEC Amendments to Regulation S-K Are Silent on ESG Disclosures, Lexology (Aug. 31, 2020), https://www.lexology.com/library/detail.aspx?g=3a05b393-a2a7-42bc-b27f-564110eeeab7. But see Colin P. Myers & Thomas A. Utzinger, SEC Amends Regulation S-K Disclosure Rules with Minimal ESG Requirements, ABA (Dec. 15, 2020), https://www.americanbar.org/groups/environment_energy_resources/publications/ed/20201215-sec-amends-regulation-s-k-disclosure-rules/ (indicating that the SEC made amendments on November 9, 2020, which require companies to disclose human capital resources “including any human capital measures or objectives that the [company] focuses on in managing business” but not climate change or diversity).

[4] See Commissioner Allison H. Lee, Regulation S-K and ESG Disclosures: An Unsustainable Silence, SEC (Aug. 26, 2020), https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26 (providing that investors “find ESG risks to be as or more important in their decision-making process than financial statements . . .”).

[5] Louis Rambo & Frank Zarb, Expect New SEC Leadership to Require More ESG Reporting, JDSupra (Jan. 12, 2021), https://www.jdsupra.com/legalnews/expect-new-sec-leadership-to-require-6303414/ (hereinafter Louis Rambo) (noting that the requirement is “principles based” and as such does “not call for uniform, comparable disclosures”).

[6] Id. (noting that Biden’s platform included “requiring public companies to disclose climate risks and greenhouse gas emissions . . .”).

[7] Stacey H. Mitchell, Cynthia May Mabry, Kenneth J. Markowitz, Bryan C. Williamson, & Meaghan Jennison, Biden’s “Money Cop” to Shine a Light on ESG Disclosure as SEC Requirements – and a Potential Universal Reporting Framework – Appear Imminent, Lexology (Feb. 1, 2021), https://www.lexology.com/library/detail.aspx?g=4985bba5-5fb4-4a5c-9b43-c7373074112c (hereinafter Stacey H. Mitchell) (noting that Gensler is an advocate for ESG-based reporting).

[8] Id.

[9] See generally Louis Rambo, supra note 5 (discussing certain challenges associated with adopting and implementing a uniform framework for ESG-based disclosures).

[10] Id. (providing that former SEC Chairman Jay Clayton was “reluctant to require broad disclosure . . . noting skepticism that a uniform set of disclosure requirements could be established that would be relevant to all industries and companies”).

[11] Id.

[12] Id.

[13] Joseph Charuy, Patchwork to Framework – Standardising ESG Investment Disclosures, Fin. Focused (Sept. 15, 2020), https://finfoc.com/2020/09/patchwork-to-framework-standardising-esg-investment-disclosures.

[14] James Hester, A Look at the EU’s New ESG Disclosure Framework, Impactivate (July 30, 2019), https://www.theimpactivate.com/a-look-at-the-eus-new-esg-disclosure-framework/.

[15] Id.

[16] Stacey H. Mitchell, supra note 7 (noting that the framework was developed in “collaboration with the Big Four accounting firms” and contains “21 ‘core metrics’ and 34 ‘expanded metrics’ that map the United Nations Sustainable Development Goals”).

[17] Id.

[18] Id.

[19] Id.