Modernizing ESG Disclosure

Nearly a decade ago, the U.S. Securities and Exchange Commission (SEC) began a comprehensive effort to “modernize and simplify” the disclosure rules that apply to U.S. public companies. In that period, investor demand for the SEC to standardize how companies disclose climate-related risk and other “environmental, social, and governance” (ESG) information has risen, and private standard setters, international organizations, and financial regulators outside the U.S. have already introduced ESG reporting frameworks.

The SEC, and indeed, the U.S. capital markets themselves, are now at a crossroads. The Biden administration has prioritized a coordinated response to climate change, and the SEC has committed to move forward rapidly to reform ESG disclosure. As a result, the SEC and Congress must now engage with difficult policy debates as they consider how to implement corporate ESG disclosure reform and whether to pursue a sustainable finance transition. These issues include questions about the rationale for ESG disclosure reform, its potential costs and benefits, and the precise form any new reporting rules should take.

This Article presents a roadmap for modernizing ESG disclosure that can be undertaken directly by the SEC, as well as more ambitious proposals that are a necessary foundation for sustainable finance reform and that could proceed with Congressional authorization. While there is growing consensus about the core goals of both of these paths, this Article is the first to address the key issues that must be resolved in order to transform how ESG information reaches the capital markets. Going beyond prior proposals, this Article advocates a tiered approach that will promote greater transparency and comparability of ESG information and also better align the regulatory framework for ESG reporting under the federal securities laws with emerging international standards.

a. Professor of Law, City University of Hong Kong School of Law. The author is grateful to Don Langevoort, Jill Fisch, Lisa Fairfax, Michael Vandenbergh, Barnali Choudoury, Amelia Miazad, Tom Lin, Hilary Allen, Arthur Laby, Madison Condon, George Georgiev, Stephen Park, Alex Platt, James Coburn, and participants at the 2017 University of Sheffield Conference on Law, Finance, and Sustainability, the 2017, 2019, and 2020 National Business Law Conferences, the 2021 SRP Sustainability Conference of American Legal Educators, and faculty workshops at Washington & Lee, Villanova, the Chicago-Kent College of Law, Texas A&M School of Law, as well as various panels of the American Association of Law Schools (AALS) for insights on these themes. This article was supported by research funding from the University of Kansas School of Law.

The full text of this Article is available to download as a PDF.