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September 1, 2020 TO: ESG Task Force (Global)ESG Working Group (US) RE: ESG Related Aspects of SEC Regulation S-K Amendments
On August 26, the SEC adopted amendments to modernize the rules requiring issuers to disclose “business descriptions, legal proceedings, and risk factors” under Regulation S-K.[1] Described below are the amendments that affect issuer disclosure of environmental, social, and governance (ESG) matters.
- Compliance with material government regulations, including environmental regulations. Regulation S-K currently requires issuers to disclose the impact of environmental regulations on the issuer’s capital expenditures, earnings, and competitive position. Regulation S-K as amended would require issuers to disclose this information for all material government regulations, including environmental regulations.
- Human capital disclosure. Regulation S-K currently requires issuers to disclose the number of persons the issuer employs. The amendment expands this requirement to further require issuers to describe human capital resources, such as human capital measures or objectives that the issuer focuses on in managing the business.[2]
- Updated disclosure threshold for certain environmental proceedings. The amendment scales back the circumstances under which issuers would be required to disclose environmental proceedings to which the government is a party from those with $100,000 in potential monetary sanctions to those with $300,000 or more.[3]
Commissioners’ Statements. The final amendments were adopted by a 3-2 vote (with Commissioners Lee and Crenshaw voting against the amendments). Chairman Clayton stated that the amendments both achieve tailored disclosure and provide flexibility for issuers while reflecting the “important and multifaceted shift in our domestic and global economy,” such as an increased emphasis on human capital resources. Commissioner Peirce reiterated that disclosure requirements must be “rooted in materiality.” Commissioner Roisman heralded that the amendments incorporate recent priorities among investors and issuers, such as public companies relying more on intangible assets and key employees.
The two dissenting Commissioners, Lee and Crenshaw, stated that the amendments fail to adequately address important ESG matters, including diversity, human capital, and climate change. Commissioner Lee remarked that “ESG investing is no longer just a matter of personal choice,” and the Commission must more directly address investors’ increased focus on ESG risks. Commissioner Crenshaw urged the Commission to form an internal task force to study how investors use ESG metrics to assess a company’s long-term financial performance and an external ESG Advisory Committee to ensure that the Commission is aware of, and responding to, ESG trends affecting the market and is held accountable for taking action.
Dorothy M. Donohue
Deputy General Counsel - Securities Regulation
Linda M. French
Assistant Chief Counsel, ICI Global>
endnotes
[1] Each of these disclosures appear in Item 101(c) of Regulation S-K.
[2] The amendment does not define the term “human capital.” The amendment, however, provides a list of non-exclusive examples of human capital measures or objectives. For example, depending on the nature of the issuer’s business and workforce, this would require disclosure of measures or objectives that address the development, attraction, and retention of personnel. These are proffered as potentially relevant subjects, not mandates, and each issuer’s disclosures must be tailored to its unique business, workforce, and facts and circumstances.
[3] The amendment also allows an issuer to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings as long as it does not exceed the lesser of $1 million or 1% of the current assets of the issuer and its subsidiaries on a consolidated basis.