The SEC has been active in February in the environmental, social and governance (ESG) space.
The long-awaited Issuer Proposal finally has its date set to be voted on, and the SEC has provided more context into what it’s looking for in public-facing disclosures. Additionally, one of the SEC’s directors has provided his insights into the current state of the ESG disclosure landscape, best practices for companies, and a recap of recent enforcement actions.
What are the Key ESG Updates for February 2024?
SEC Issuer Proposal –Â The SEC has filed a Sunshine Act Notice indicating that a vote will take place on the proposed legislation on Wednesday, March 6th at 9:45 AM EST. No additional details about modifications to the rule were included, but the rumor mill indicates that Scope 3 will be removed entirely, and Scope 1 and 2 will require disclosure under the auspices of materiality.
This accomplishes a few things- first, it allows the legislation to proceed under a timeframe that the current administration can implement prior to the possible end of its tenure. Second, the scaled-back ambition makes it more likely that the ruling will survive legal battles.
Finally, the legislation creates a steppingstone for companies to be assured that their disclosures on Scope 1 & 2 in addition to ESG items in their financial statements have a framework to rely on.
SEC Enforcement Actions – In a February 23rd speech to the Ohio State Law Journal, Director Gurbir S. Grewal gave his thoughts on best practices for companies in the ESG disclosures space in addition to recapping enforcement actions that were brought about in 2023 against companies.
What Best Practices did Director Grewal Outline for Companies’ ESG Disclosures?
The Director outlined the need for companies to do the following:
- Practice proactive compliance
- Self-reporting potential violations to the SEC
- Evaluate public-facing statements for exaggerations or misleading content
- Ensure there is not purposeful omission of negative disclosures
- Review ESG investment strategies for end-to-end integration of the guiding ESG principles
What Were the Significant ESG Enforcement Actions in 2023?
- Vale – the company was fined $55.9 million related to a dam collapse that occurred in 2019, resulting in the deaths of 270 people. Within SEC filings and ESG disclosures, Vale insisted that the dam was safe while downplaying the potential risks related to the dam’s stability.
- McDonalds – the company’s CEO was fired in 2019 ‘without cause’ for an inappropriate personal relationship. The company failed to disclose that it had exercised discretion in determining his firing ‘without cause’, which allowed him to retain stock-related compensation worth about $40 million.
- Deutsche Bank – the Firm indicated publicly that ESG considerations were integrated into its investments. Upon SEC review, it was found that employees responsible for integration of those factors were not following through in its investment processes. The Firm paid a $19 million fine as a result.
What Should Companies Do Right Now?
- Determine which public-facing disclosures you have the in-house knowledge to verify, and which will require third party qualitative and quantitative expertise.
- Identify an SME and a control person internally for each data point and material ESG topic.
- Perform a gap assessment of your current practices relative to regulatory expectations and leading ESG frameworks.
- Substantiate your data collection and data governance processes in areas where you’re disclosing facts and figures in your ESG report or in general financial statements.
- Review your governance structure and associated process of compiling, approving, and publishing your ESG disclosures.
Related Links
Related Resources
- Schneider Downs ESG Consulting Overview
- Schneider Downs ESG Infographic – Putting the ESG Puzzle Together
- Schneider Downs ESG FAQ
About the Author
Tony Ielase leads the firm’s Risk Advisory Services (RAS) practice for the Columbus market and has over 25 years of experience providing risk advisory and compliance services to a diversified number of retail, manufacturing, higher education, healthcare, technology, utilities and financial services clients. His areas of expertise include internal audit strategic planning, internal audit co-sourcing, enterprise risk management, compliance assessments, fraud risk assessments, business process improvement and SOX program implementation and optimization, among others. Tony can be reached at [email protected]
About Schneider Downs ESG Consulting
With our industry expertise and extensive knowledge of the ESG landscape, the Schneider Downs team can help your organization prepare for the proposed disclosure requirements and additional ESG-related risks and opportunities.
Learn more about our ESG consulting services at www.schneiderdowns.com/esg or contact the team at [email protected].
