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ESG Reporting Top Priority for SEC Director on Leave From Harvard (1)

Feb. 24, 2021, 6:12 PMUpdated: Feb. 24, 2021, 8:17 PM

A Harvard Law School professor who has pushed the SEC to update its corporate disclosure requirements on climate change and other ESG issues is now poised to turn his words into action as an agency insider.

John Coates, who joined the Securities and Exchange Commission on Feb. 1 as acting director of its Division of Corporation Finance, will play a leading role in any agency action to boost companies’ environmental, social, and governance disclosures, following his work on the issues at Harvard and on an SEC advisory panel.

SEC Acting Chair Allison Lee on Wednesday directed Coates’ division to focus on climate-related disclosures as it reviews public company filings. The division will use its findings to update 2010 guidance that encouraged more robust reporting from companies about how climate changes affects their operations. Coates also may play a role in requiring disclosures on companies’ political spending and on other ESG matters.

“If I were to pick a single new thing that I’m hoping the SEC can help on, it would be this area,” Coates said about ESG in an interview with Bloomberg Law.

‘Useful to Investors’

Coates from 2017 to 2020 led an SEC Investor Advisory Committee group behind a recommendation asking the SEC for “relevant, material, decision-useful ESG disclosure.”

The full committee approved the non-binding recommendation last year, with encouragement from Lee, who was an agency commissioner at the time but has since been named acting SEC chair.

The submission came a year after Coates helped spearhead another advisory committee recommendation that the SEC should mandate more detailed disclosures on companies’ workforces.

Lee regularly called for more ESG reporting before becoming the SEC’s interim leader last month. Less than two weeks into her new job, Lee brought on Coates, who she said has “a depth of expertise in corporate governance and disclosure.”

“We are fortunate that he is willing to help lead the SEC’s critical efforts to bring much-needed transparency on climate and ESG issues,” Lee said in a statement to Bloomberg Law.

Coates, who is on leave from Harvard, spent much of his career researching and lecturing on finance and corporate governance before joining the SEC. Coates has written several pieces on companies’ political activity and spending, and has called on the commission to require public disclosures.

“He’s thought clearly about how this fits into the current materiality framework,” said Barbara Roper, director of investor protection for the Consumer Federation of America, who served on the Investor Advisory Committee with Coates. “He will want to be sure that the information is reliable and comparable and useful to investors.”

ESG Advice

The Investor Advisory Committee’s recommendation didn’t provide a framework for new ESG reporting, but emphasized the importance and benefits of SEC action. The agency could start by reaching out to companies, investors, and others about ESG disclosures, according to the recommendation.

The decision to issue the advice wasn’t unanimous, however.

Stephen Holmes, a general partner emeritus at InterWest Partners and a committee member at the time, said in a dissent it’s “highly unrealistic” to expect the SEC to develop broadly useful ESG reporting and should leave that work to the private sector.

Some people might not realize the importance of ESG disclosures to investors, Coates said.

“There’s a gap in what people understand about how important this information already is that needs to be filled,” he said.

Climate Disclosures

An early test for Coates on ESG will be how he handles Lee’s directive to increase his division’s climate disclosure focus.

The division will look at how companies are using the 2010 climate guidance and consider ways to upgrade it, Lee said. But investors, environmental groups, and others have pushed the SEC to go further and create new rules that mandate climate reporting.

Coates said he has been talking to companies, investors, standard setters, and others about how the SEC can improve ESG disclosures.

The agency can help create a cost-effective and flexible disclosure system, he recently told financial industry members at a conference on climate.

“Something like that is clearly increasingly necessary to the capital markets at the center of our global economy to adequately price climate and other ESG risks and opportunities,” Coates told them.

Political Spending

Coates, in his current role, also would help lead any SEC rulemaking on corporate political activity disclosures.

Lee has spoken about how information on a company’s political spending is increasingly important to shareholders. And Senate Banking Committee Chairman Sherrod Brown (D-Ohio) said he expected the agency to act after some companies stopped political contributions in the wake of the Capitol riot.

The SEC has faced calls for years to mandate political spending disclosures, but Congress has used legislation that funds the commission to bar it from acting. A 2011 petition to require the reporting has brought more than 1.2 million comments.

Several studies have shown that corporate political activity generally doesn’t serve investors’ interests, Coates said in 2013. Political activity can cause reputational harm, dilute a company’s strategic focus, and lead to other problems, he said at the time. But Coates declined to tell Bloomberg Law what he may do if Congress allows the SEC to work on political spending disclosures.

Former SEC Commissioner Robert Jackson, who signed the 2011 petition, said he learned from Coates about the need for transparency on companies’ political spending. Coates was Jackson’s corporate law professor at Harvard.

“Under his leadership, I expect the SEC to finally give the issue of shining light on corporate political spending the rigorous, thoughtful attention that American investors have been asking for,” said Jackson, a professor and co-director of the Institute for Corporate Governance and Finance at the New York University School of Law.

(Updates with additional background throughout)

To contact the reporter on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com

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