SEC Commissioner Uyeda Suggests that ESG Disclosures Contribute to Decline in IPOs
In a recent lecture delivered at Columbia Law School/Business School at the "Going Public in the 2020s" conference, SEC Commissioner Uyeda bemoaned "the general decline in the number of public companies over the past twenty-plus years." One reason Uyeda proffered for this decline--specifically in the number of IPOs--was the existence of "regulatory burdens," in effect, "the costs of being a public company." Uyeda then argued that the SEC could reduce this regulatory burden and "encourage capital formation by promulgating rules that: (i) are grounded in financial materiality and (ii) adequately consider smaller companies' ability to pay for the compliance costs." Specifically, Uyeda took issue with "the Comission's current regulatory agenda [of] climate change, human capital, cybersecurity, and share repurchase," stating that "[w]hile some of these issues may be important to particular investors . . . [t]he[se] disclosure requirements do not appear to be rooted in whether a reasonable investor would consider the information important in his or her decision to invest in a company's stock."
In particular, Uyeda objected to the focus on "non-financial factor[s]," as although "there can be a reasonable investor standard for financial factors of quantitative or qualitative importance," "it can be more difficult to reach consensus on disclosure without an apparent financial impact . . . [and so] it may be difficult to establish a reasonable investor standard for non-financial factors." Uyeda also highlighted that these "disclosure rules . . . impose significant costs on companies" and that "[s]uch costs may also disincentive private companies from going public," and, further, that "the mere possibility that new, burdensome, and immaterial disclosure requirements may be imposed in the future could similarly cause private companies to think twice about going public."
While this critique of regulatory burdens and their associated costs is hardly novel, nor surprising, the fact that Commissioner Uyeda specifically focused on the SEC's proposed climate disclosures in this context is noteworthy. In particular, Uyeda's focus on the apparent lack of connection between these proposed disclosures and the "objective standard of the reasonable investor" due to the absence of materiality is a potent criticism. One should expect to encounter this critique again in the political arena or the law courts as various entities try to convince the federal government to weaken the SEC's proposed climate disclosures or abandon them altogether.
The Commission’s current regulatory agenda includes climate change . . . . While [this] issue may be important to particular investors, the Supreme Court has held that materiality turns on an objective standard of the reasonable investor. . . .
[I]t may be difficult to establish a reasonable investor standard for non-financial factors. The costs of providing such disclosure, however, are quite real.
When the Commission’s disclosure rules move away from financial materiality, they potentially impose significant costs on companies to produce the disclosure but provide limited or no use to a reasonable investor making an investment decision. . . . Such costs may also disincentive private companies from going public. Moreover, the mere possibility that new, burdensome and immaterial disclosure requirements may be imposed in the future could similarly cause private companies to think twice about going public.