SEC commissioner, Jaime Lizárraga, outlined the three proposed disclosure laws for the US in a speech at The Future of ESG Data conference
It is a pleasure to be here with you today. I look forward to learning from today's discussion, and appreciate the opportunity to participate in this important exchange of ideas and perspectives.
It's an exciting time for ESG. You are working in a dynamic, fast-growing sector of our capital markets that is grabbing headlines and continuing to generate enormous interest among investors and the general public.
You're directly involved with some of the most consequential scientific challenges of our time – from climate change, to artificial intelligence, to big data analytics.
As active participants in this space, your contributions and innovative ideas can enrich the conversation.
I'd like to share with you a snapshot of what's happening in the U.S. ESG has become a lively topic that has moved beyond strictly financial circles. Several states are making headlines for their push against ESG investing, while other states are proactive in their ESG investments.
Against this backdrop, the SEC issued three rule proposals that would each help facilitate comparable ESG disclosures and focus on ensuring statements made to investors are not false or misleading:
- Enhanced climate risk disclosures by issuers.
- Enhanced ESG disclosures by registered funds and investment advisers.
- Modernized rules governing ESG-related fund names.
The common thread that binds these proposals and that guides my work as Commissioner is ensuring investors receive the information they need to make the most informed investment decisions.
We are in the process of reviewing thousands of comments submitted. None of us yet know what the final versions of these rules will look like. We continue to meet with stakeholders and to receive robust public feedback that informs our economic analysis.
To me, the SEC's disclosure framework is most effective when investors benefit from objective, quantitative metrics that provide the highest degree of comparability. I believe the proposed rules are a significant step forward in getting investors this information. I look forward to working to ensure that the final rules are as robust as possible.
The SEC proposed these rules prior to my swearing in. Had I been a Commissioner at the time, I would have voted in favor of them.
Which brings me to the first of the SEC's disclosure initiatives, on climate. Last year, for the first time, the U.S. Financial Stability Oversight Council identified climate change as an "emerging and increasing threat to U.S. financial stability."
A recent climate risk assessment from the Office of Management and Budget found that the U.S. government will need to spend an additional $25 billion to $128 billion annually for policies to mitigate climate-related financial risks. And, an analysis by the Network for Greening the Financial System estimated that, under current policy pathways, climate change could reduce U.S. GDP by 3 to 10 percent by the end of this century.
It is thus not surprising that there's been strong investor demand for climate-related disclosures. Investors with $130 trillion in assets under management have requested that companies disclose their climate risks. And 5,000-plus signatories to the UN Principles for Responsible Investment—a group with a core goal of helping investors protect their portfolios from climate-related risks—manage more than $121 trillion as of June 2022.
The corporate issuer proposed rule would require public companies to disclose climate-related risks that have a material impact on their business, operations, and financial condition. It would also require the disclosure of certain related quantitative information in a company's financial statements, as well as disclosure of a company's greenhouse gas emissions using the widely used GHG Protocol. It's important to understand that a company's greenhouse gas emissions – in particular, emissions from sources that are owned or controlled by the company or that are consumed through the generation of purchased energy – is a widely-used metric by investors.
I would note that on the data front, the climate rule as proposed provides for the use of reasonable emissions estimates. While some may argue that this makes the metric of limited utility, it is not clear to me why this would be different from the assumptions and estimates that companies make in preparing their financial statements today. Investors rely extensively on financial statement disclosures to make informed investment decisions. These quantitative metrics are essential for investors to understand the operations and performance of a company, and the same can be said for climate-related metrics.
More broadly, the data that investors want, and that is available, is always evolving. It would not be possible for the SEC to require disclosures in this area unless there was both demand for climate-related data, and an available supply of it. But due to advances in technology, such as emissions modeling, artificial intelligence, and big data analysis, over the past several years, we are today at a point where this information is both in demand and available. And, that is why the moment is ripe for the SEC to again step in, consistent with precedent, to ensure that investors have the most relevant information for their investment decisions.
The SEC complemented its corporate issuer proposals with rule proposals for asset managers and funds. The Forum for Sustainable and Responsible Investment found that sustainable and impact investing by money managers grew from $178 billion in 2005 to almost $17 trillion in 2020.
These SEC rules were designed to provide investors with decision-useful qualitative and quantitative information on how a fund takes into account ESG factors in its decision-making. Similarly, advisers would be required to disclose information about their ESG factors and strategies, which can help an investor make a decision on whether or not to engage that adviser. These rules would help provide comparability and consistency, but most importantly, would require funds and advisers to stand behind their ESG claims.
The third SEC proposal is often referred to as truth-in-advertising and would focus on how a fund labels itself. When the Commission's rule was proposed, it estimated that approximately $364 billion assets were invested in funds with names suggesting an ESG-focused strategy. This proposal would prohibit funds that consider ESG factors alongside other non-ESG factors from using ESG-related terms in their name. A fund's name can be critical to an investment decision. And, this can help ensure that investment decisions are aligned with financial goals.
As ESG investment continues to grow, there is greater need for accurate and reliable data to support ESG-related claims and assertions. And that's where quality data comes in.
The principle of transparency underpins the U.S. federal securities laws. The extensive disclosure regime it comes with provides an effective regulatory framework that, for nearly a century, has resulted in the world's largest and most liquid capital markets. This ensures the availability of quality, investor-useful information that benefits all market participants.
That said, markets change, whether driven by technology or other factors, and investor needs and practices evolve. Our challenge and responsibility is to keep up with rapid change and to update our regulatory framework so that it continues to meet investor needs without compromising investor protections. Your challenge and responsibility is to ensure that claims made to investors are supported by verifiable information so as not to make disclosures misleading. The best way to get there is with meaningful disclosures that incorporate the highest quality, reliable, and verifiable data in a standardized and investor-useful format.
My hope is that the Commission's rules will help move market participants forward in producing high-quality data that will allow for more rigorous due diligence, enable investors to more easily differentiate between market participants on ESG-related claims, and ultimately, help investors make more informed investment decisions.
All of us face the challenge of ensuring investors receive disclosures to allocate their assets consistent with their financial goals. Yet, doing so will mean that our rules will serve the public interest best when they're appropriately tailored to an investor's needs, using our regulator toolbox of quantitative, qualitative, prescriptive, or principles-based disclosures.
Thank you for the invitation to speak today and I look forward to engaging in a dialogue on these important issues going forward.
