Washington, D.C. — The Center for American Progress (CAP) and the Consumer Federation of America (CFA) today released a joint report recommending that the SEC develop and maintain climate and other environmental, social and governance disclosure standards itself rather than delegating such authority to one or more private third parties.
“This report offers a careful review of the SEC’s options regarding pathways to leverage external ESG standard setters,” said Dylan Bruce, Financial Services Counsel for Consumer Federation of America and a co-author of the report, “but in the end the clear consensus was that a standard setting process that is carried out internally by the Commission is the best avenue to ensure decision-useful standards for investors, and importantly, to produce a politically and legally durable ESG disclosure framework.”
“The SEC must write climate and other ESG rules itself in order to avoid the many legal risks of delegating standard setting authority to a third party,” said Alex Thornton, a co-author of the report. “Further, rules developed and maintained by the SEC are more likely to satisfy investors’ demands for information in a timely and fair manner. It just makes sense for the SEC to write its own climate and other ESG standards.”
The primary question this report set out to answer was initially posed by then Acting SEC Chair Allison Herren Lee in her March 15, 2021, request for information on climate-related financial disclosure: “…whether the Commission should designate an external third party to carry out the function of establishing ESG-related disclosure standards.”
The report reflects the thorough analysis of extensive comments filed in response to this question and identifies three principal variations on third party delegation that commenters advanced:
- Full delegation of disclosure standard setting to an external third party, including updating of those standards;
- Partial or hybrid delegation of standard setting in which the SEC would set core principles and designate compliance with one or more third-party standards as sufficient to meet reporting obligations; and
- Incorporation by reference of existing third-party standards into the SEC’s own rules.
After reviewing these options side-by-side with relevant legal and policy precedents, as well as the agency’s own history of delegated standard setting, the report’s authors ultimately determined that none of these options were likely to be as effective or resilient as keeping the ESG standard setting process fully in-house with the SEC and its staff.
The report acknowledges that there is, and will continue to be, a critically important role for the private third parties that have heretofore been the key drivers of ESG disclosure frameworks, through both the continued development of standards above and beyond the SEC’s requirements and ongoing analysis and public comments on SEC-mandated ESG rules.
The report was co-authored by Dylan Bruce, Financial Services Counsel for CFA; Tyler Gellasch, fellow at the Global Financial Markets Center at Duke University School of Law; Todd Phillips, director of financial regulation and corporate governance at CAP; and Alexandra Thornton, senior director of tax policy at CAP.