The U.S. Securities and Exchange Commission (SEC) recently released its Annual Agenda for 2021. The Agenda provides a list of Rules in the Prerule, Proposed, and Final stages and offers a snapshot of the SEC’s long and short term regulatory priorities.
The information was released as part of the Biden administration’s Unified Agenda of Regulatory and Deregulatory Actions which provides public notice about proposed rulemaking within the Executive Branch.
As highlighted in the press release, notable proposed and final SEC rulemaking areas include disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk.
SEC Chairman Gary Gensler has previously noted the importance of disclosures. In a conversation with FINRA President and CEO Robert Cook at the 2021 FINRA Annual Conference, Gensler stated “At the heart of securities law is disclosure”. He went on to explain that driven by what investors are looking for when making their buying decisions, in the 2020’s that means freshening up the rule set around climate risk and human capital disclosure.
During his testimony before the Subcommittee on Financial Services and General Government of the U.S. House Appropriations Committee on May 26, 2021 Gensler indicated that he anticipated that proposing rules regarding issuer disclosure of climate risks and human capital will be the initial steps in broader efforts from the SEC to update their disclosure regime for modern markets.
At London City Week on June 23, Gensler elaborated on the 50+ item agenda and again discussed the importance of disclosure in his administration. He stated “Disclosure helps companies raise money. It helps the efficient allocation of capital across the market. And it helps investors place their money in the companies that fit their investing needs.”
ESG is a global concern. Read about how it’s time to get serious about SMCR in the context of climate change.
Proposed Rule 325-AM88 considers the recommendation that the Commission propose rule amendments to enhance registrant disclosures regarding human capital management. Human capital management disclosure involves requiring firms to disclose information about their workforces. Gensler has indicated that disclosure could be required for a number of metrics including workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.
SEC staff have been reviewing the ways that funds are marketing themselves to investors as sustainable, green and ESG—and considering what factors back up those claims. Proposed Rule 325-AM87 considers the recommendation that the Commission proposed rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities. Gensler has asked his staff for recommendations for consideration around governance, strategy and risk management related to climate risk, including specific metrics like greenhouse gas admissions to determine the factors most relevant to investors.
Environmental, Social, and Governance (ESG) issues have been an ongoing focus for Gensler and the SEC. Gensler has indicated that ESG will be a priority for his administration in 2021 and well beyond.
In March of 2021, the SEC formed the Climate and ESG Task Force in the Division of Enforcement. The mission of the task force is to develop initiatives to proactively identify ESG-related misconduct, including material gaps or misstatements in the disclosure of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
ESG factors continue to grow in importance to investors as well. According to Morningstar, ESG funds accounted for $51.1 billion of net new money from investors in 2020, more than double than the prior year and the fifth consecutive annual record. Global inflows into sustainable funds were up 88% to $152.3 billion in the fourth quarter of 2020, and a record 196 new sustainable fund products launched in the market in the same period.
Environmental factors that investors might care about include things like greenhouse gas admissions, energy usage or pollution. Social factors include issues like human rights, community investment, and the treatment of employees. Governance issues focus on factors around how the company operates like compliance, ethics, and shareholder rights.
ESG considerations are not going away. So what does this mean for your compliance program?
During the webinar SEC Guidance on ESG: The Impact on Your Compliance and Due Diligence Programs Dana Pointer, Chief Compliance Officer at Preserver Partners highlights the importance of disclosures, and of making sure that those disclosures are absolutely consistent with what you’re doing as a firm. Pointer also recommends conducting ESG compliance training on a regular basis with all of the relevant roles within the firm, so that everyone is up to date on new developments and the latest regulatory guidance.
Hope L. Newsome, Esq., Managing Partner at Virtus LLP provided perspective on firm policies and procedures. She suggests reviewing your policies and procedures, especially your investment committee procedures, and making sure that your ESG approach is fully integrated so you can document that in an examination from a risk management perspective. Newsome also recommends integrating and incorporating ESG factors into your annual review and gap analysis, and then due diligence as well. Due diligence is key from a risk management perspective, because especially if you’re relying on third party ESG advisers you need to be able to prove to regulators that you have the processes in place to meet your obligations.
For more guidance and practical tips on managing ESG compliance and due diligence watch the on-demand webinar here.
Manage ESG Compliance with Confidence
With both SEC activity and investor interest on the upswing, firms need to start taking a closer look at ESG compliance to ensure that they can stand up to coming regulatory scrutiny and prove their commitment to upholding ESG principles. MCO’s ESG Compliance Manager can help.
With ESG Compliance Manager, firms can efficiently and effectively monitor ESG risk and manage the due diligence of both externally managed funds and internally managed investments. ESG Compliance Manager provides an auditable single source for ESG data, allowing firms to score and classify data from across the firm, portfolio companies and outside sources and streamline the ESG risk assessment process.