Corporations are starting to focus on ESG (environmental, social, and governance) information, which affects investors. As a result, the SEC indicated it will examine company disclosures more closely. Learn more by reading this blog post.
We know that keeping up with new SEC disclosure developments can intensive. That’s why at Gardner Employment Law we research these developments to keep you informed on matters that may affect your compensation. If you need expertise on how SEC enforcement actions will impact you or your company, give us a call.
The SEC is Scrutinizing ESG Disclosures
More investors and market participants consider Environmental, Social, and Governance (ESG) issues as crucial investment criteria. Investors require more information nowadays to make sound investments. This material information on ESG can range from spring loaded stock options, which we discuss in “How Recent SEC Changes Impact Executives’ Compensation,” to burning forests in the West. The SEC has made a public commitment to scrutinize company disclosures more closely in 2022 and beyond.
Due to this investor demand, the SEC announced its new ESG task force in a public statement on March 3, 2021. This task force falls within the SEC’s Division of Enforcement. The Climate and ESG Task Force’s aim, according to its head Kelly Gibson, is to “coordinate the effective use of Division resources…to identify potential violations.” The task force will focus on these violations in 2022. Particular attention will be paid to “greenwashing,” which is defined as exaggerating climate change disclosure. Some companies will “greenwash” their disclosures by making false or misleading claims about how the company is mitigating climate risk.
While ESG issues have recently stepped to the forefront of company politics, the SEC has emphasized that they are not the “environmental police.” Gibson says their examination priorities are making sure that investors have accurate and timely information about ESG investments and policies. So long as you follow SEC disclosure requirements, you save yourself from the SEC’s magnifying glass and future consequences.
What to Expect from ESG Regulation
Gary Gensler, SEC’s Chair, told House of Representatives in October 2021: “Companies and investors alike would benefit from clear rules of the road. I believe the SEC should step in when there’s this level of demand for information relevant to investors’ investment decisions.”
To reach this regulatory goal, according to Gensler, the ESG Task Force will be looking closely at
- what issuers say in their filings and elsewhere,
- what investment advisors say and do in terms of their stated investment strategies, and
- how investments are labeled.
Gensler’s testimony should give you a heads up on where to refine your company disclosures.
The SEC likely will exercise more oversight by comparing external disclosures made publicly to the internal disclosures given to the SEC. SEC’s Examinations Director Peter Driscoll noted that particular focus will be on any disconnect between what a company represents to the public and its actual trading practices and investment strategies. False statements about achieving ESG goals, omission of material information, or proxy voting policies that don’t align with investor’s interests are some examples of this expected SEC focus.
In addition to potential changes to SEC disclosure requirements and more oversight, ESG issues can impact company success and executive compensation. The Harvard Business Review reports that the ESG focus has spurred changes in how executives earn their compensation. Now, compensation may become based on how well you meet an ESG-related goal.
What is the Best Response to the SEC’s Focus on ESG?
The Harvard Law Forum on Corporate Governance reports that the best way to be proactive regarding the increased SEC scrutiny is to gauge your key shareholders. Find out what is important to them. Some shareholder concerns about ESG policy may be:
- Environmental impact and actions taken to implement sustainable policies
- Supply chain management, particularly suppliers’ environmental impact
- Treatment of employees, especially equity, diversity, and inclusion
- Attention and considerations given to the surrounding community
With more focus given to these shareholder interests comes new company goals and direction. This means that your compensation may be based more on whether and how you reach these ESG goals, rather than just your contribution to the company’s bottom line. Create a plan for meeting stakeholder ESG metrics while still hitting your usual levels of profitability.
Take extra care not to publicly inflate your board’s plans for environmental, social, or governance issues. Since the SEC is particularly concerned with improper disclosures and underwriting, this inconsistency could bring trouble.
Moreover, if your company is thinking of adapting goals to align with ESG issues, consider whether ESG issues outshine operational concerns, such as improving innovation or supply-chain management. It’s important to balance investor wishes with risk assessment. As always, investors are most interested in what will increase the value of their shares. You can achieve this balance by assessing whether your company is able to achieve any new ESG goals while running its business profitably. Thinking of these concerns can also improve your leverage with management in negotiating your promotions and compensation increases. If you strategize company direction to include authentic ESG solutions, you will bring innovation and insight to the table that could improve your bargaining position.
While the SEC has announced no new disclosure rules to date, they definitely are on the horizon. Don’t expose your company to future liability. Follow current disclosure rules and balance any new ESG goals without sacrificing any productivity goals. To keep an eye out for what the SEC plans to examine or what the SEC deems as a potential “compliance risk,” you can review the SEC’s resources at the Department of Examinations. By using caution, any public company can prepare itself for the time the SEC announces any new rules or regulations.
Want to Know More How to Adapt to SEC Changes?
Our firm is well-versed in the current events that can impact your position with your company. If you want to learn more about how you can capitalize on recent trends to improve your compensation and avoid liability, contact us.