SEC Commissioner Allison Herren Lee recently shared some keynote remarks at the 2021 ESG Disclosure Priorities Event hosted by the American Institute of CPAs & the Chartered Institute of Management Accountants, Sustainability Accounting Standards Board, and the Center for Audit Quality. Speaking to an audience of accountants, auditors, attorneys and other professionals, Commissioner Lee centered her remarks around the following four “myths and misconceptions about ‘materiality’” that she believes have surfaced in the current debate around climate and ESG disclosures:
- Myth #1: ESG matters (indeed all matters) material to investors are already required to be disclosed under the securities laws. Describing this as the “most prevalent” myth, Commissioner Lee discussed disclosure duties under the securities laws and noted that “absent a duty to disclose, the importance or materiality of information alone simply does not mandate its disclosure.” In the context of climate or other sustainability disclosure requirements, Commissioner Lee observed that the current securities laws include few explicit disclosure requirements, with the result being that climate and ESG information may not be disclosed, even though it could be material in some instances.
- Myth #2: Where there is a duty to disclose climate and ESG matters, we can rest assured that such disclosures are being made. Expanding upon perceived limitations of a principles-based disclosure framework, Commissioner Lee discussed instances when lawyers, auditors and managers reach incorrect materiality determinations, whether because of economic or psychological incentives or different perspectives than investors. She concluded, “A disclosure system that lacks sufficient specificity and relies too heavily on a broad-based concept of materiality will fall short of eliciting information material to reasonable investors.”
- Myth #3: SEC disclosure requirements must be strictly limited to material information. Noting that this myth rivals the first in terms of prevalence, Commissioner Lee illustrated the role of materiality in the securities laws and explained that, as a legal matter, the SEC is not required to establish the materiality of each specific piece of information that must be disclosed. Fundamentally, the SEC’s “statutory rulemaking authority under Section 7 of the Securities Act of 1933 gives the SEC full rulemaking authority to require disclosures in the public interest and for the protection of investors.” Neither that section nor Sections 12, 13 and 15 of the Securities Exchange Act of 1934 are qualified by “materiality.” Commissioner Lee pointed to examples of disclosure requirements that may not be material to every company, such as disclosures of related party transactions, environmental proceedings, share repurchases and executive compensation.
- Myth #4: Climate and ESG are matters of social or “political” concern, and not material to investment or voting decisions. This final myth, which strikes at the crux of the debate around climate and ESG disclosures, is one Commissioner Lee has addressed on several prior occasions. She offered the following summary (emphasis added):
- First, the idea that investor concerns with scientifically supported risks like those associated with climate change is grounded in “politics” turns fact-based analysis on its head. If anything, it’s the insistence that science and data must or should be ignored that appears questionable. Second, the fact that a topic may have political or social significance does not foreclose its being material, either qualitatively or quantitatively. To the contrary, we are increasingly seeing all manner of market participants embrace ESG factors as significant drivers of decision-making, risk assessment, and capital allocation precisely because of their relationship to firm value. Finally, investors, the arbiters of materiality, have been overwhelmingly clear in their views that climate risk and other ESG matters are material to their investment and voting decisions.
Commissioner Lee’s remarks continue the ongoing dialogue about the SEC’s next steps regarding climate and ESG matters and offer helpful insights into the Commissioner’s views regarding materiality more broadly. Further discussion on these topics is likely to follow in the coming months as the SEC considers public comments submitted in response to the request for comment on climate change disclosure.