SEC committee discusses ESG disclosure requirements and D&I
On March 19, 2021, the SEC’s Asset Management Advisory Committee (AMAC) held a meeting to discuss the December 2020 potential recommendations that its ESG Subcommittee provided to the SEC on ESG disclosure requirements. During the meeting, the Diversity & Inclusion (D&I) Subcommittee of AMAC also made potential recommendations to improve D&I in the asset management industry. AMAC is comprised of a diverse group of industry participants, and its views are more important than ever because the SEC is currently assessing, and seeking public input on, how to best regulate, monitor, review and guide ESG disclosures, including on climate risk and D&I.
Background. On December 1, 2020, the ESG Subcommittee issued potential recommendations to the SEC. The potential recommendations stated that the SEC should:
- Adopt standards by which corporate issuers disclose material ESG risk
- Use standard setters’ frameworks to require disclosure of material ESG risks
- Require that material ESG risks be disclosed in a manner consistent with the presentation of other financial disclosures.
ESG Subcommittee Comments and Next Steps. The SEC Commissioners opened the meeting with prepared remarks. Acting Chair Lee and Commissioner Crenshaw’s remarks show an interest in exploring additional ESG mandates, while Commissioners Peirce and Roisman’s remarks were more cautious. Specifically, both Commissioners Peirce and Roisman expressed the need to ensure that any ESG disclosure mandates stay within the rule of law, that is, rules must mandate disclosures of “material” information. Commissioner Peirce reiterated that she would be willing to support a narrow set of bright-line ESG disclosure requirements – and not an overarching standard – so long as those topics are universally material for every issuer in every industry. Commissioner Roisman raised the idea that these disclosures be furnished, rather than filed with the SEC, as well as the idea of a safe harbor for these disclosures to address liability concerns.
The ESG Subcommittee did not issue new or updated recommendations to the SEC in this meeting despite some expectations that it might. The ESG Subcommittee’s panel discussion instead consisted of various issuers and two asset managers providing their views on how they prepare, disclose or use ESG disclosures. Collectively, the remarks addressed or related to the themes highlighted in the fifteen questions Acting Chair Lee asked in her March 15, 2021 request for public input on ESG disclosures. While views diverged among the panelists, there were some consistent themes. Several panelists described the need to ensure that any required disclosures be material. Additionally, panelists discussed the merits of SASB and TCFD, and whether they are appropriate for mandatory disclosure. In particular, one of the issuer-side panelists described the costs and complexities of preparing these disclosures. Many of the speakers also seemed to believe that providing issuers a safe harbor for forward-looking disclosures was a wise idea. A key takeaway from the issuer panel is that they do not have one uniform view on ESG disclosures. Their comments may provide legitimacy to the concern that ESG disclosure requirements may well need to be scaled for issuer size or industry.
The comments from the two asset managers, BlackRock and Wellington Management, were compelling regarding the question of materiality. Both asset managers expressed the importance of ESG and the merits of SASB and TCFD disclosures. They urged the SEC to ensure that private companies are subject to a similar standard, in part to help avoid carbon migration to private companies and to avoid disincentivizing companies from going public. They each touched more directly on the merits and practicalities of a global ESG disclosure standard, while recognizing the difficulties in creating a flexible standard. BlackRock noted that disclosures are different based on issuer size and sector, and both discussed the wisdom of a safe harbor.
This discussion will inform the ESG Subcommittee’s final recommendations to the SEC. What seems clear is that AMAC’s ESG Subcommittee is focusing more on issuer disclosures, with any mandates on asset managers, similar to the European Union’s Sustainable Finance Disclosure Regulation, or SFDR, taking a backseat.
D&I Subcommittee Potential Recommendations and Next Steps. The universal themes of the previous D&I panels, two of which we discussed here and here, were centered around the need for increased transparency and disclosure in the asset management industry. Garcia, who leads the D&I Subcommittee, concluded that efforts cannot merely be voluntary if the SEC wants to see improvement. Before delivering the potential recommendations, Garcia acknowledged that some may stretch the SEC’s scope of authority. Nonetheless, the D&I Subcommittee wanted to offer them for consideration, as the D&I Subcommittee believes the recommendations could improve diversity in the industry, help guarantee that investors receive advice without conflicts of interest and help ensure that diverse managers are not disregarded. The D&I Subcommittee set forth the following potential recommendations:
- The D&I Subcommittee may propose two additional goals for the SEC’s D&I strategic plan. These goals would specify that (1) D&I should be elevated to a core value and material fact for consideration throughout all of the SEC’s activities and (2) the SEC should promote business diversity practices among SEC registrants.
- The D&I Subcommittee may suggest that the SEC issue a policy statement (a) discouraging use of parameters in manager selection processes that have the result of excluding diverse-owned firms and (b) stating that inclusion of diverse-owned firms, even if they have fewer assets under management or a shorter track record, does not violate fiduciary duty. Garcia further suggested that excluding diverse-owned firms, for no other reason than their diversity, could be considered a violation of fiduciary duty as it eliminates many high-performing managers from consideration.
- The D&I Subcommittee noted that the Commission has clear authority through Form ADV disclosures, which investment advisers use to register with the SEC and state securities authorities, to achieve more transparency on diversity and business practices. The D&I Subcommittee is likely to suggest that the Commission require additional demographic data of the workforce of SEC-registered investment advisors, including transparency of ownership and transparency of workforce demographics, to help provide insight into gender and racial diversity at the ownership, board, officer and employee levels.
- For SEC-registered advisors who operate as consultants, asset aggregators and asset allocators, the D&I Subcommittee is likely to recommend enhancing Form ADV disclosure on the consultant and selection process for registered investment advisors.
- Garcia noted that the D&I Subcommittee’s previous panelists discussed pay to play and questioned whether conflicts of interest persisted through indirect means such as PACs and other political campaign contributions. The D&I Subcommittee is considering recommending to the Commission that it study whether political contributions have allowed for activity that the pay to play rule sought to prohibit. Garcia argued that it is important to ensure that pay to play policies have not disadvantaged small firms, which include many minority-owned firms who lack resources to utilize company PACs, engage in lobbying or staff an internal legal department.
- Garcia noted that there is no avenue for firms to bring complaints to seek relief when they are the victim of discriminatory practice in the investment management business. As such, the D&I Subcommittee may recommend that the SEC develop a forum for complaints that can be directed through the SEC to other appropriate federal agencies.
What’s Next? AMAC and its subcommittees are expected to meet in June 2021 to continue the conversation on ESG and D&I. Committee Chairman Ed Bernard expressed his sense that those subcommittees would aim to reach recommendations at the next meeting.