The Biden administration has accelerated the push for enhanced environmental, social and corporate governance (ESG) disclosures. While climate disclosures are the most highly publicized, the trend goes beyond that to include disclosures of the broader social impacts of a company’s or industry’s operations. These recent broad and diverse Biden administration ESG initiatives related to climate suggest that the United States is following in the path of the European Union in requiring public companies to provide enhanced disclosure of not just climate-related risks — but also to disclose on a broader set of ESG topics.
Biden Administration Signals Potential for Enhanced ESG Disclosures
In March of this year, then Acting Chair of the Securities and Exchange Commission (SEC) Allison Herren Lee requested public input on whether climate change disclosures are providing enough information to investors. The request is primarily focused on whether requiring more robust climate related disclosure is warranted, but it also seeks input on whether the SEC should require broader ESG disclosure. Although the comments and feedback received will inform any proposed rulemaking, both SEC Chair Gary Gensler and SEC Division of Corporation Finance Acting Director John Coates have indicated that the SEC is prepared to act quickly to propose both new climate and human capital management-related disclosure rules.
Acting Chair Lee’s March request came before President Biden issued his Executive Order on Climate-Related Financial Risk on May 20. The Executive Order calls for a sweeping review of both federal activities that could be impacted by climate change and current climate disclosure requirements for publicly regulated companies. The Executive Order specifically calls for an examination of how public and private investments can play “complementary” roles to meet the financing needs necessary to address climate change. Although it’s clear that the Executive Order primarily focuses on assessing and applying actions the federal government should take, its reference to public private partnerships to finance programs and projects signals future opportunities. The Executive Order also asks the Financial Stability Oversight Council to determine the risk to the financial stability of the federal government from climate change and requires an analysis of other government programs.
Congress and the Climate Risk Disclosure Act
Earlier this year, the Climate Risk Disclosure Act was again introduced in both the U.S. House and Senate. It would require the SEC, in consultation with other federal agencies, to issue rules no later than two years after enactment requiring public companies to disclose:
- direct and indirect greenhouse gas emissions.
- the total amount of fossil-fuel related assets owned and managed.
- the impact on its valuation if climate change continues its current trajectory or, alternatively, if it is held to 1.5 degrees Celsius.
- risk management strategies related to climate change.
It is unclear if this legislation will be considered this year. However, it’s clear that the Democrats in Congress share the Biden administration’s urgency when it comes to increasing public disclosure of the impact public companies are having on climate change and how they are managing the associated risks.
What’s Next?
To date, federal action has focused on climate impacts related to the operation of the federal government — and on greater disclosure of ESG issues by public companies. The federal government has not yet addressed disclosure requirements for participants in public-private partnerships and borrowers and grantees of federal money. It is foreseeable that Congress will start requiring ESG materiality assessments as part of the application process for certain federal contract, grant and loan programs, and for participants in certain public-private partnerships.
The question is no longer if public-traded U.S. companies will face additional climate and ESG-related disclosure requirements in private markets. The question is whether the federal government is willing to make additional non-financial disclosures a requirement for doing business with Uncle Sam? The recent climate-related actions by the Biden administration strongly suggest that may soon be the case.
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Elizabeth Lange (LAW ‘09) is a partner at Faegre Drinker Biddle & Reath LLP in Philadelphia, Pennsylvania. She represents public and private clients in mergers and acquisitions, governance, and other corporate and securities matters. She has written extensively on legal and regulatory issues relating to social enterprise legal forms.
Douglas Benevento is counsel at Faegre Drinker Biddle & Reath LLP in Denver, Colorado. He leverages 25 years of experience in government and the private sector addressing entergy and environmental policy and legal issues to support clients.
Christopher Berendt is a partner at Faegre Drinker Biddle & Reath LLP in Washington, D.C. He is an energy and environmental market transactional and regulatory attorney who works with clients on advanced transactions.
Elizabeth Diffley is a partner at Faegre Drinker Biddle & Reath LLP in Philadelphia, Pennsylvania. She co-leads the firm’s full-service ESG practice. She is an adviser to public and private clients on corporate and securities matters.
James Spaanstra is senior counsel at Faegre Drinker Biddle & Reath LLP in Denver, Colorado. He draws from extensive experience to drive solutions for energy, natural resources and environmental services clients operating in complex regulatory environments.