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SEC Focuses on Improving Climate Disclosures

The U.S. Securities and Exchange Commission is expanding its reach to address companies’ environmental, social, and governance issues on all fronts. Various SEC agencies have announced actions to enforce and improve climate and other disclosures by corporations and financial institutions.

In March, commissioner Allison Herren Lee opened a platform seeking public input and questions on the current disclosures. It specifically seeks to understand if the disclosures adequately inform investors and, therefore, would like to hear from investors, registrants, and other financial firms.

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SEC’s original guidance dates back to 2010 when it required companies, depending on the circumstances, to disclose climate-related risks and opportunities. The disclosure would cover business type, legal proceedings, management discussion, and ecological risk factors.

Lee also directed the Division of Corporation Finance to improve its focus on the disclosures made in public company filings. As such, the staff will look at how companies address the requirements outlined in 2010, review their compliance with disclosure obligations under the federal securities laws and engage with public firms on ESG issues.

The insights gained from this analysis will serve to learn critical lessons on how climate-related risks are currently managed by corporations. They will also serve as guidance to make updates to the 2010 recommendations.

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Another branch of the SEC, the Division of Examinations, also announced in March that it would examine conflicts of interest for brokers and investment advisors as it relates to climate. FinTech firms will also be looked at more closely.

“This year, the Division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change,” said Acting Chair Allison Herren Lee in the announcement.

“Through these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework.”

Commissioner Lee outlined the priorities. To help retail investors, including seniors and those saving for retirement, the division will examine whether firms are adequately handling conflicts of interest. It will review whether appropriate disclosure is made to enable informed consent by retail investors prior to investing in various securities. These cover the most common investments, such as mutual funds, ETFs, bonds, variable annuities, municipal securities, private equity, and microcap securities.

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Another facet of its review will look at whether firms’ disaster recovery plans specifically address physical risks stemming from climate change. The goal is to make sure companies have enacted effective measures to respond to large-scale climate events. Appropriate measures include safeguarding customer accounts, preventing unauthorized account access, addressing malicious emails, and responding to incidents. Also, operational risks stemming from work-from-home situations and ransomware attacks will be addressed.

Other focus areas include whether financial technology (fintech) firms are operating consistently with their representations and compliance with anti-money laundering requirements.

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The division’s reach spans many players in the financial industry, such as mutual funds, ETFs, registered investment advisors (RIAs), private funds, broker-dealers, and municipal advisors. There are also clearing agencies, transfer agents, national securities exchanges, as well as regulation systems compliance and integrity.

The SEC also announced the creation of a Climate and ESG Task Force as part of its Division of Enforcement. This task force will focus on proactively identifying ESG-related misconduct.

This includes material gaps or misstatements in the disclosure of climate risks by companies, investment advisors, and funds.

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“Climate risks and sustainability are critical issues for the investing public and our capital markets,” said Lee. “The task force announced today will play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.”


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