SEC Shifts into High Gear on Climate Risk as Republicans Push Back

March 26, 2021

Following the announcement of an ESG task force, SEC Acting Chair Allison Lee has signaled rapid developments on several ESG issues, including potential climate and other disclosures prompting pushback from Senate Republicans. 

The 2-2 split on the Commission effectively halts new rules.  Republicans will look to avoid major changes as long as possible, especially as Senate Democrats have called on the SEC to draft new rules regarding lobbying and political donations disclosures. 

Republicans are beginning to push back on the emerging financial regulatory agenda.  Senator Pat Toomey (R-PA), ranking member of the Senate Banking Committee, wants a briefing about the agency’s newly created climate and ESG enforcement task force by April 5, 2021.  The SEC “should not use enforcement actions as a back door for imposing new regulations on ESG and climate change issues,” the senator wrote in a letter to Ms. Lee.  He emphasized that the “changes would be premature” given that Mr. Gensler has not been confirmed.  Further, Sen. Toomey has requested additional information regarding the potential for mandatory corporate disclosures on a range of issues, including political donations.

Acting Chair Lee has quickly implemented several initiatives: 

  • Exploration of reform to Form N-PX. While investment managers are required to use this form to disclose how each of their funds voted at portfolio companies, the SEC will investigate methods to standardize disclosures across firms and funds to allow for easier comparisons.  Arguably, this would allow stakeholders to more easily raise questions about support for certain shareholder resolutions.

  • A request for comments from companies, investors and market participants on potential climate disclosure rulemakings, including a list of 15 questions for SEC staff to use in considering new potential rules.

  • The creation of a 22-member climate and ESG task force in the agency’s Division of Enforcement to “proactively” identify misconduct, gaps, omissions, and misstatements in climate risk disclosures. 

Outlook:  Mr. Gensler is not likely to unwind recent actions once confirmed, although he has only broadly acknowledged that he believes enhanced disclosures would benefit investors.  Nor is it likely that Ms. Lee’s actions would meaningfully hinder Mr. Gensler’s confirmation prospects.  However, he may seek to moderate the pace or address other concerns such as price volatility, cryptocurrencies, and the rise of special purpose acquisition companies (SPACs)/blank-check IPOs.