April 19, 2021

Volume XI, Number 109

Advertisement

April 16, 2021

Subscribe to Latest Legal News and Analysis

SEC Going Cyber-Hunting for ESG-Related Misconduct

On March 4, 2021, the Securities and Exchange Commission announced the formation of a Climate and ESG Task Force in the Division of Enforcement (the “Task Force”).  The Task Force will be aimed at detecting ESG-related misconduct so that investors can fully consider these issues in their investment decisions.

Short for “environmental, social and corporate governance,” ESG has become an increasingly hot topic in recent years.  As the threat of climate change has risen, more and more investors have begun to factor sustainability into their investment decisions.  Similarly, investors today are making a conscious effort to invest in companies whose social policies, such as racial equity and community relations, align with their own values.  The creation of this task force signals that the SEC views ESG as a critical piece in the investment decision-making puzzle and that additional safeguards are needed to adequately protect investors.

According to the SEC’s press release, the primary objective of the Task Force will be to identify any material gaps or misstatements in issuers’ disclosure of climate risk under existing rules.[1]  More broadly, the Task Force will also analyze disclosure and compliance issues in relation to the ESG strategies of public companies, investment advisers and investment funds.  Acting Deputy Director of Enforcement, Kelly L. Gibson will lead the Task Force, which will consist of an interdisciplinary team of 22 members across SEC’s headquarters, regional offices and Enforcement specialized units.  By using data analysis to mine and evaluate information on issuers, the Task Force expects to uncover ESG-related misconduct that could have a material impact on investment decisions.  In addition, the launch of the Task Force comes on the heels of the appointment of Satyam Khanna as a Senior Policy Advisor for Climate and ESG, who was appointed on February 1, 2021 to advise the SEC on ESG matters.

For years, environmentalist groups have urged the SEC to tighten regulatory scrutiny in this key area but largely to no avail.[2]  The formation of the Task Force, as well as Mr. Khanna’s appointment, are a signal to environmentalist advocates that the SEC will now play an affirmative role in shining light on the pressing – yet often overlooked – area of environmental and social governance.  Task Force leader, Gibson stated that, “Proactively addressing emerging disclosure gaps that threaten investors and the market has always been core to the SEC’s mission.”[3]

While the creation of the Task Force is an encouraging development for ESG advocates, it is important to note that at this time, the Task Force will be limited to enforcing existing disclosure requirements, rather than formulating additional ESG-related disclosures.  In its 2021 Examination Priorities Report, the SEC noted the rise of Registered Investment Advisors offering strategies focused on sustainability and stated that it will target products that are widely available to investors such as open-end funds, ETFs and qualified opportunity funds offered to accredited investors.[4]  Moreover, the SEC stressed additional priorities, which include (1) reviewing the consistency and adequacy of ESG disclosures, (2) ensuring that actual practices conform with such disclosures, (3) reviewing fund advertising for false or misleading statements, and (4) assessing whether proxy voting policies align with ESG strategies.[5]  Viewed against this backdrop, it is likely that the Task Force will be tapped to leverage its resources to help carry out these initiatives.

Looking ahead, it will be interesting to see whether the SEC will push a step further and  adopt line item disclosure requirements for climate and ESG matters, as has been seen in the European Union and United Kingdom.[6]  Without such a requirement, it is unclear whether the Task Force will be able to achieve its stated mission of filling the gaps in climate and ESG-related disclosure.  That being said, all signs point towards a shift in this direction and demonstrate an agency-wide commitment to ensuring that investors have increased access to this important information when making investment decisions.

*Co-author Brett Uslaner is a law clerk in the Corporate Practice Group in the firm’s New York office.

FOOTNOTES

[1] See SEC.gov | SEC Announces Enforcement Task Force Focused on Climate and ESG Issues

[2] See GAO-18-188, CLIMATE-RELATED RISKS: SEC Has Taken Steps to Clarify Disclosure Requirements (finding that from January 1, 2014 through August 11, 2017, out of more than 45,000 comment letters issued to companies, only 14 letters included comments regarding climate-related disclosures.)

[3] SEC Press Release, supra note 1.

[4] See 2021 Examination Priorities Report (sec.gov), at p. 28.

[5] See id.

[6] See Explaining the EU Action Plan for Financing Sustainable Growth | Reports/Guides | PRI (unpri.org) and U.K. and EU Regulators Move Ahead on ESG Disclosures and Benchmarks (harvard.edu)

Advertisement
Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 67
Advertisement
Advertisement

TRENDING LEGAL ANALYSIS

Advertisement
Advertisement

About this Author

Richard Friedman, Sheppard Mullin Law Firm, New York, Corporate Law Attorney
Partner

Richard A. Friedman is a partner in the Corporate Practice Group in the firm's New York office.

Areas of Practice

Mr. Friedman is principally engaged in the practice of Corporate and Securities Law, with a concentration on public offerings and private placements. His extensive experience includes reverse mergers (both domestic and foreign companies), secured and unsecured private equity financing transactions (PIPEs), as well as initial public offerings (IPOs), registered direct offerings (RDs) and...

212-634-3031
Advertisement
Advertisement