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This Advisory is the third in a series concerning environmental, social and governance (ESG) considerations for the financial services industry and other companies. Arnold & Porter's ESG advisories reflect the combined effort of the firm's Environmental Practice Group, Financial Services Group, and Securities Group, with insights from other practice areas at the firm. Arnold & Porter will be publishing additional ESG advisories over the next several months.

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Since our last two advisories in February and early March 2021, additional ESG developments have continued to make industry headlines on a near-daily basis, reaffirming that climate-related disclosures and other ESG considerations should be an increasingly critical focus area for financial regulators, federal and state lawmakers, and investors. Although there has been some governance-based and political pushback, the focus on such disclosures and considerations has continued, largely unabated.

In the last few weeks alone, Acting Chair of the US Securities and Exchange Commission (SEC), Allison Herren Lee1 has made a number of public statements, including speeches at the Center for American Progress and the ICI Mutual Funds and Investment Management Conference on March 15 and 17, 2021, respectively, that highlight concrete steps taken by the SEC towards a more comprehensive and standardized disclosure framework aimed at generating consistent, comparable, and reliable data for investors. These SEC initiatives address a number of ESG-related themes, including a call for public comment, innovations to the shareholder proposal and proxy voting process, a focus on fostering corporate accountability, and global engagement.

The SEC Calls for Public Comment on Policymaking for Climate-Related Disclosures

On March 15, 2021, Acting Chair Lee solicited public input on future SEC policymaking regarding climate-related disclosures and whether and how they should be modified. She asked that comments be submitted by June 13, 2021, and she encouraged commenters to include empirical data and other information in support of their comments. In the request for public input, Lee stated that the SEC staff is currently undertaking an evaluation of disclosure rules with a particular focus on facilitating disclosure of "consistent, comparable, and reliable information on climate change." In particular, Lee's statement includes a list of fifteen groups of questions for staff and commentors to consider across a number of issues, including, among others, the following:

  • The types of climate change information that should be disclosed, including how climate-related information can be quantified and measured, specifically for Scope 1, 2, and 3 greenhouse gas emissions.2
  • The advantages and disadvantages of allowing investors, registrants and other industry participants to develop mutually agreed-upon standards, and whether such standards should have to satisfy minimum disclosure requirements established by the SEC.
  • The development of a single set of global standards, versus multiple standards, applicable to companies around the word, including registrants under the SEC's rules.
  • The advantages and disadvantages of establishing distinct climate change reporting standards for different industries (e.g., the financial sector, oil and gas, transportation, etc.).
  • The advantages and disadvantages of existing frameworks that rely on voluntary disclosure frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), and the Climate Disclosure Standards Board (CDSB).
  • Whether climate-based disclosures should be incorporated into existing rules such as Regulation S-K or Regulation S-X, or whether a new regulation should be devoted entirely to climate risks, opportunities and impacts.
  • The possible creation of a broader ESG reporting framework in which one component involves climate-related disclosures.
  • How disclosures made under the reporting standards should be assessed, including whether they should be subject to audit or another form of assurance.
  • How SEC rules should address climate-related disclosures by private companies, such as exempt offerings or oversight of certain investment advisers and funds.

Lee also made clear in recent public comments that, in addition to digging into what the contours of a comprehensive climate-related disclosure framework would look like, the SEC is considering diversity-related disclosures in tandem, including related to board and workplace diversity, which were a hot topic during the prospective SEC Chair's recent nomination hearing.

The SEC is Evaluating the Shareholder Proposal and Proxy Voting Processes

During recent speeches, Acting Chair Lee has identified a number of SEC initiatives aimed at innovating the shareholder proposal and proxy voting process to improve corporate governance in light of recent ESG-related shareholder proposals. For example, Lee has expressed her view that the SEC should revisit—and perhaps enhance, supplement, or replace—its August 2019 guidance on the proxy responsibilities of investment advisers that exercise voting authority for clients' securities. While speaking to institutional investors at the recent ICI conference, Lee explained that proxy voting "is a central component of our corporate governance system" which has become more important than ever because of the shift in the makeup of investors—specifically the increase in retail investors—and a "soaring" demand among millennials for opportunities to invest in vehicles with ESG strategies. She explained that reforms may be necessary to ensure that fiduciaries understand how to weigh competing concerns of "all types" in deciding whether and how to cast votes on behalf of their beneficiaries so that they do not undermine the foundation of how shareholders engage with corporate management to maximize the long-term value of their holdings.

Lee has also called for reforms for Form N-PX, the annual report of proxy voting records of a registered management investment company. Lee characterized the current Form N-PX as "unwieldy, difficult to understand, and difficult to compare across fund complexes." She stated that "retail investors need more meaningful insight into how their money is voted, and that insight is more important than ever with the growth of interest in ESG shareholder proposals." She said that it is "high time" to revisit this form to "make it useful in creating needed transparency around the fundamental exercise of shareholder voting." To that end, Lee proposed that the SEC consider rulemaking to implement a mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that has remained outstanding for nearly a decade, which requires that certain institutional investment managers report on Form N-PX their votes on executive compensation. Lee also has suggested taking this opportunity to more broadly update Form N-PX to make it more useful. She has suggested reforms that would, for example, "standardize voting disclosures, structure and tag the data, provide more clarity in the description of issues voted on, provide the number of shares voted versus shares available to vote, and facilitate more timely disclosure so investors can act quickly to reward fund managers that best match their needs and expectations." Lee has asked SEC staff to begin preparing options for updating Form N-PX.

In addition to these initiatives, Lee has called for the SEC to develop proposals for revising guidance on the no-action process that would include potentially revising Rule 14a-8 that governs shareholder proposals. This initiative by Lee is significant because, while shareholder resolutions (requests from investors to management that are usually voted on by shareholders at a company's annual meeting) are not legally binding, and the SEC does not formally block shareholder proposals, it does respond to requests by companies asking whether it would recommend enforcement action if a proposal is left off the ballot. The SEC responds with a "no-action letter" when it would not recommend an enforcement action. The SEC's efforts in recent weeks include steps to monitor ESG-related initiatives on ballots and to reaffirm that such proposals should not be excluded if they concern socially significant issues like climate change.

The SEC to Leverage its Divisions of Examinations and Enforcement to Foster Corporate Accountability

Acting Chair Lee also recently discussed the list of examination priorities for 2021 that was published earlier this month by the SEC's Division of Examinations.3 These priorities include an enhanced focus on "growing physical and other relevant risks associated with climate change." Further, as discussed in more detail in our last Advisory, Lee continues to tout the newly-created Climate and ESG Task Force in the SEC's Division of Enforcement that is focused on developing initiatives to proactively uncover ESG-related misconduct, including by identifying any material gaps or misstatements in companies' disclosure of climate risks under the existing framework.

Governance-Based and Political Pushback on ESG Disclosures

Despite the momentum as of late by the SEC to analyze the parameters of what an ESG disclosure framework should look like and to build out a strategy to make that happen, there has been some practical, governance-based pushback by market participants as well as some efforts by Republicans on the Senate Banking Committee on Banking, Housing, and Urban Affairs (Banking Committee) to tap the brakes on regulating climate risk, most of which has failed to quell the tide of ESG and climate disclosure reform.

Similarly, in a recent letter to the Federal Reserve Chair Jerome Powell, members of the Banking Committee led by Ranking Member Pat Toomey (R-PA) wrote: "We question both the purpose and efficacy of climate-related banking regulation and scenario analysis, especially because the Federal Reserve lacks jurisdiction over and expertise in environmental matters." A few days later, Federal Reserve Governor Lael Brainard reiterated her recent push for the Federal Reserve to better understand and manage global warming threats to the financial system. Specifically, she stated that the pursuit of financial system climate-change preparedness, though "imperfect," must move forward: "Despite the challenges, it will be critical to make progress, even if initially imperfect, in order to ensure that the financial system is resilient to climate-related risks and well positioned for the transition to a sustainable economy." Brainard further disclosed that the Federal Reserve is establishing a Financial Stability Climate Committee that will identify, assess, and address climate-related risks to financial stability from a macroprudential perspective, which considers the potential for complex interactions across the financial, international system. On March 29, Ranking Member Toomey continued the back-and-forth by sending a letter to the Federal Reserve Bank of San Francisco (FRBSF) in which he criticized the FRBSF's recent publications on ESG and accused the Federal Reserve of engaging in mission creep by inserting itself into this "emotionally-charged political arena."


The nature and scope of any future framework for climate-related and other ESG disclosures remains uncertain. Nonetheless, stakeholders should consider various actions now in order to be proactive on these issues. This includes evaluating whether advocacy on future SEC policymaking is prudent at this time, particularly in light of the questions recently identified by the SEC in its call for public comment.

Arnold & Porter's Financial Services and Securities Groups will continue to work with the Environmental Practice Group to monitor climate-related and other ESG developments in the financial services sector and to develop best practices for the firm's financial institution clients. If financial institutions or other companies are seeking advice on how to incorporate ESG factors—including climate-related consideration—into their business strategy, risk management, or disclosure processes, please contact any author of this Advisory, or your regular Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. President Biden's nominee for Chair of the SEC, Gary Gensler, is likely to be confirmed by the Senate on April 12, 2021.

  2. <>Scope 1 emissions are direct emissions from sources a company owns or controls directly. Scope 2 emissions result from the generation of electricity, heat, or steam purchased from a utility provider. Scope 3 emissions are as emissions from activities a company does not own or directly control, like emissions associated with a company's supply chain and investments, e.g., financing a capital project.

  3. On December 17, 2020, the SEC unanimously supported the decision to rename the Office of Compliance Inspections and Examinations (OCIE) as the "Division of Examinations."