A Sustainable Future: SEC Commissioner Allison Herren Lee on Disclosure, Materiality and Enforcement

Listen to Jason Mitchell discuss with Commissioner Allison Herren Lee of the US Securities and Exchange Commission how regulatory change is reshaping ESG investing.

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How is regulatory change reshaping ESG investing? Listen to Jason Mitchell discuss with Commissioner Allison Herren Lee of the US Securities and Exchange Commission, about the SEC’s evolving views around disclosure and materiality; its enforcement efforts; and the need to work towards greater harmonisation given the multitude of global disclosure frameworks.

Recording date: 31 August 2021

Allison Herren Lee

Commissioner Allison Herren Lee was appointed and sworn into the U.S. Securities and Exchange Commission in 2019. While Commissioner Lee served as Acting Chair of the Commission by President Biden earlier this year, she was responsible for establishing the Climate and ESG Enforcement Taskforce. She brings to the SEC over two decades of experience as a securities law practitioner. Commissioner Lee served for over a decade in various roles at the SEC, including as counsel to Commissioner Kara Stein, and as Senior Counsel in the Division of Enforcement’s Complex Financial Instruments Unit.


Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell (00:01):

If there’s a predominant theme in sustainable investing right now, it’s regulation. And in the broadest sense, regulation is taking on a number of forms: from driving the transition to a low carbon economy to reporting on the impacts of biodiversity; from enforcing anti-greenwashing protections to even steering private sector investment.

It’s also clear that we’re talking about different global regulatory approaches that will increasingly need to harmonise. While the EU’s legislation-driven approach has already delivered a number of investor frameworks, the US SEC’s regulatory approach to climate and ESG is evolving under the new Biden administration. In my mind, this provides a fascinating view of the arguments for how to world-build around issues like disclosure, materiality and enforcement.

And for followers of the regulatory discussion, you can’t have missed the incredibly thoughtful speeches and statements delivered by the US SEC Commissioners. Their views don’t necessarily align ideologically, but they always prove provocative and push the discussion forward.

One of the views I always look forward to reading is from Commissioner Allison Herren Lee. Her writing examines many of the fundamental elements of ESG through the prism of case law, and she is not afraid to challenge its myths and misconceptions.

It's why I’m so excited to have Commissioner Lee on the podcast. We talk about the SEC’s evolving views around disclosure and materiality; its enforcement efforts; and the need to work towards greater harmonisation given the multitude of global disclosure frameworks.

Commissioner Allison Herren Lee was appointed and sworn into the U.S. Securities and Exchange Commission in 2019. While Commissioner Lee served as Acting Chair of the Commission by President Biden earlier this year, she was responsible for establishing the Climate and ESG Enforcement Taskforce. She brings to the SEC over two decades of experience as a securities law practitioner. Commissioner Lee served for over a decade in various roles at the SEC, including as counsel to Commissioner Kara Stein, and as Senior Counsel in the Division of Enforcement’s Complex Financial Instruments Unit.

Welcome to the podcast commissioner, Allison Herren Lee. It's great to have you here and thanks so much for taking the time.

Allison Herren Lee (02:47):

Thank you, Jason. It's a pleasure to be here and I'm looking forward to the discussion today.

Jason Mitchell (02:49):

So Commissioner Lee, we've got a lot to talk about, but I think it'd be useful to start out with scene setting. The SEC is 2010 climate guidance seems like a natural entry point into the whole disclosure discussion. That 2010 guidance was, it was important for introducing the notion of climate change risk, but it didn't mandate it as an issue to be disclosed or discussed by itself unless the issuer considered the risk material. So fast forward to today. And there's certainly been some Reg S-K modernisation over the last two years, but it continues to overlook climate risk and diversity disclosures, areas that both you and Commissioner Crenshaw had both pushed for context. Why is this so controversial when disclosures generally promote fair inefficient markets?

Allison Herren Lee (03:38):

Well, that's actually a very good question. You know, why controversial, but I think I want to start with just laying the backdrop. You mentioned the 2010 guidance. That was a very important step forward at the time, thanks to the leadership of the chair at the time Mary Shapiro. But of course there have been significant developments since 2010. And what we know about the risks and the opportunities that are related to climate change. And I think that now requires us to go further than the 2010 guidance. We, you mentioned that we adopted amendments to Reg S-K and we did over the last couple of years, we've actually purported to modernize four different sections of Reg S-K the one being MD&A what's, which is management discussion and analysis that is supposed to be a lens into how the business is operating kind of through the eyes of management.

Allison Herren Lee (04:37):

There's the description of the business, which is the first thing you see when you open up an annual report, there's legal proceedings, there's risk factors, all four of those topics have been purportedly modernised over the last couple of years, but there was not even a mention of climate in any of those let alone imposing any kind of, you know, specific requirements. So why the resistance you know, I think it reflects some philosophical differences in an approach to disclosure kind of amongst the commissioners. So broadly over the last, you know, three years or so, there's there's been a preference or a leaning toward what they call principle based rules that sort of lean heavily on the principle that, you know, that management should decide if something is itself is decide if a topic or an issue or, or, you know, whatever it may be is material to their business and then disclose what they think is material about it.

Allison Herren Lee (05:35):

Many times that results in simply a, a risk factor that doesn't provide a lot of information beyond just saying, Hey, this creates a risk to our business. I think we need to reassess that balance. It's always been a balance between principle-based requirements where we say, you know, if it's material, you should disclose it. And then what we kind of think of it more as a item disclosures where we say, for example, disclose in executive comp the you know, certain, certain metrics applicable to the top five earners in your business. You know, we don't say if the top five earners are, you know, salaries and other comp is material disclose that we just say disclose it because we know that topic is material. So, so we're always trying to find the right balance. And I think that's where the philosophical potential disagreements have arisen. I think we have leaned too heavily on a principles based regime, and it's very clear that, you know, there's very little disclosure out there in in Regus K that has arisen pursuant to that 2010 guidance and the demand has become overwhelming. So it seems quite clear to me at this point that we need to step in and assist by helping both issuers and investors get at what's really important and make sure it gets disclosed consistently and reliably.

Jason Mitchell (06:58):

I would say that sort of being in Europe and in certainly kind of involved on the EUs, SFDR the sustainable finance disclosure regulation. I've become much more of a fan of the prescriptive approach, which has given sort of the, the wide margin of ambiguity when it comes to principles based approaches. But I do want to ask though, how does the commission think about addressing what could be an inevitable litigation risk that comes with such sweeping new disclosure requirements? I guess, you know, in other words, is there a worry that any new disclosure regime will lead to an explosion in securities litigation? Commissioner Roisman had said he had mentioned this before, but to what degree would safe harbor statements or furnishings be a useful middle ground between differing views of mandatory disclosure?

Allison Herren Lee (07:48):

Sure. I mean, I, I think you know, when you refer to furnishings, meaning as opposed to having it be filed with us, they still provide it to us, but they do it under this rubric known as furnishing, which doesn't create the same level of liability that it does when it's filed. Those are sort of technical terms. It just to explain that somewhat for the audience, but, you know, I do think we need to look at and think about that. There are a lot of ideas that, that we've discussed that are there in the comment file that I've been looking at and researching that I've been talking to various market participants about safe Harbor is one of them safe. Harbor is simply, you know, if you meet certain conditions and it's a forward looking statement, I think it needs to be something forward looking.

Allison Herren Lee (08:34):

You know, I could be convinced that maybe we need a specific one for climate. Although I will say there is an existing, safe Harbor for forward-looking statements already written into our rules. So I would need to think about, you know, what may be lacking there that would be insufficient to cover anything that we might create with respect to climate. And, and the difference between furnished and file. That's another one that we're going to have to look at and think about. But I do think we need to be prepared to say that, you know, if we're going to have these requirements, they need to be reliable and companies need to pay close and careful attention to ensure that they get it right. That's not to say we want to set it up so that it's some sort of gotcha attempt to trip them up.

Allison Herren Lee (09:19):

We want to let them you know, we want them to have time to learn, to learn from their peers, to learn from the research, to learn from their their ongoing disclosures and the internal systems that they set up. It needs to be safe because we need to you know, the goal is to get to good accurate disclosure, not to create liability for issuers, but, you know, when, when, if they, if they don't make a good faith attempt to get it right, if they do engage in greenwashing, if they do you know, which we've certainly seen enough of out there, then there should be, there should be some you know, some consequences in some way to make sure that we can pull that back and, and get it right, and make sure that the folks who are playing by the rules are not competing with those who are not that's, that's an unfair and on level playing ground. And I think that's something that is something that the private litigation can address and times in a much more thorough way than, than we can as regulators. So it's a complimentary scheme we need to, we need to make sure that we, that we give them the time and the space to get it right, but they also have a responsibility to get it right. And that needs to be policed both by regulators and the private markets

Jason Mitchell (10:41):

In response to the recent request for input on climate change disclosures. I've seen feedback from the institutional sample that indicates significant corporate and investor support, you know, effectively 75% of those largest respondents for mandatory disclosure, which is great to see. Within that, though how do you think about taking a more pragmatic climate first approach relative to him much more ambitious, broader disclosure framework?

Allison Herren Lee (11:11):

Sure. I mean, you know, obviously I think it's, it's pretty plain that there are many ways in which climate is unique. It's uniquely pressing, it's unique potentially, and its systemic implications. And, and it's unique in the broad recognition of the need for mandatory disclosures. So, you know, I can understand the thinking behind and the reasoning for taking a climate first approach, but I, you know, I think it's equally as important as we go forward with this rulemaking. I think it would be a mistake to lose sight of the broader spectrum of ESG issues because it's quite plain that, that ESG the rubric you know, which encompasses a broad, broad spectrum of, of issues and metrics and risks and opportunities is in fact what investors are basing their decisions on now you know, over the last 10 years, you know, some would say 20 or 30, but certainly over the last 10 years, many, many investors have come to conclude that this presents a, you know, a much, a much more solid foundation on which to price risk and allocate capital.

Allison Herren Lee (12:25):

So we can't lose sight of that. Investor interest certainly doesn't stop at climate and neither do the risks and opportunities. So neither should the regulatory focus. We can, you know, as we, as we look at climate, we're also looking at, you've probably seen from our regulatory agenda from additional kind of rule makings that are connected to ESG like human capital management essentially board diversity, those kinds of things. So we can do some additional maybe standalone rules, but we, I think also need to consider whether there's a need for a body that can more comprehensively look at sustainability or ESG issues more broadly like the IFRF is doing through the sustainability standards board initiative. I think we should give, you know some, some real thought to that. You know, because even with respect to climate, we're going to face real challenges in keeping a climate rule updated. And I don't have any doubt that the sec can put out the good rule, but we need to keep it updated when there are developments in this space and they happen very rapidly. So something like a sustainability standard setter, that's more nimble and can focus more exclusively on these issues I think would be helpful. And I hope that will follow close on the heels of any kind of climate initiatives that may come out of the SEC.

Jason Mitchell (13:46):

That makes sense. Just given the SEC request for input revealed a preference towards the TCFD disclosure framework and the Saxby materiality framework, but I do wonder, I mean, have you identified sort of that sweet spot between, you know, market-driven solutions and regulatory frameworks, if market-driven initiatives are reaching a point of diminishing returns, I think there's an argument for that. How do regulators pick up from there? You know, from a European perspective, at least my involvement in FYI, the European financial reporting advisory group, it was sort of interesting to sort of examine their strategy that went about essentially cherry picking qualities from a number of different frameworks.

Allison Herren Lee (14:27):

Yeah, no question that it's, that's a huge advantage that so much great work already been done, you know, under this largely voluntary regime by TCFD, and many others. So we have the luxury of learning from, and building off of that work. I think we've clearly reached a point where regulatory intervention is needed or regulatory involvement. I suppose you could say as needed because as you know, there are plenty of companies that still are not disclosing and there is of course, a lack of comparability and consistency, not to mention questions around the reliability of the disclosure. So I think a required regime can help cure those, those informational gaps and it's time. I mean, you know, I think it's, the market has done a lot of work up to this point. We're going to learn from and leverage that work.

Allison Herren Lee (15:22):

But there are certain things that cannot be achieved in my view through market driven solutions. And that is the reason that we're seeing this demand and it's not just investors demanding, it it's issuers as well. They've been, you know, just battered with this competing and sometimes conflicting demands for information from all manner of market participants. So, you know, we have the chance now and the opportunity, and I think the time is right for us to come in help organize the, the thinking around one standard alleviate some of the pressure that's on issuers and get some certainty around what's required of them. So I think as we do that, of course, we're going to build on, it makes sense for us to look at these existing standards to see what's worked, what's being disclosed, how, how well that's working for issuers, how well that's working for investors. We also get to see what doesn't work on the flip side. Are there limitations? Are there deficiencies? How can we improve on that? So, you know, it's, it's clearly been a loan process to get where we are now, but we need to I think take the final step and help, help bring some consistency to the space.

Jason Mitchell (16:33):

Yeah, it's a, it's a fascinating issue. It's not just what this disclosure standard framework looks like. It's, it's also sort of a sequencing issue. I get, you know, how do you think about that sequencing behind corporate ESG disclosures? Should it be linear and bottom up starting at the corporate level which would seem to be intuitive or are there lessons to be gained from the ease approach, which effectively inverted the sequencing? So that pressure from big institutional investors ends up driving better and wider corporate reporting specifically amongst small to medium enterprises.

Allison Herren Lee (17:09):

Sure. I, I, and I can see the thinking behind that. I'll start by saying, I don't think there's only one right way to go about it. And I certainly take your point that the EU's approach of kind of doing the taxonomy first, have the effect of putting pressure on issuers through large investors to disclose the information that those funds are going to need to comply with it taxonomy obligations. On the other hand, of course, I've heard from some observers of the EU process that, you know, there are some, we think maybe that puts the cart before the horse in the sense that the funds are responsible for a degree of consistency under the taxonomy. That's challenging given the degree of inconsistency and issuer disclosure. So I personally tend to think that issuer disclosure is more likely the best place to start here in the US I, I think there's something to the argument that the degree of regularity and issuer disclosure is what's needed to facilitate greater regularity in the way that funds and advisors can actually disclose what it is that they're offering.

Allison Herren Lee (18:10):

So, you know, as we go about the process of implementing a climate disclosure rule, w we can, and we should also look at ESG issues and how they impact funds and advisors. So we will, we will focus on that too, but I think that focus will be aided by the progress that we make on the, on the building blocks of issuer disclosure. I, you know, again, I, I can't say that I think there's one and only one right way to do it. And, you know, perhaps we learn from one another as we go forward, but it has been my, my considered view that we might that starting with, with gaining some common common usage, common con, some consistency and approach some reliability, all of that at the basic standard of, of the you know corporate issuers is a good place to start here in the US.

Jason Mitchell (19:05):

The sec has traditionally been a regulatory leader where other regulatory bodies then adopt comparable or consistent rules. How do you see the SCCs role among global regulators when it comes to climate and ESG in the likelihood for harmonization around that? Or is it more realistic to expect to see the kind of looser harmonization that exists between international accounting standards already, like, like gap and ifrifrst

Allison Herren Lee (19:32):

That one that's been an interesting saga to watch with GAP and IFRS and all the various ways in which we've converged and not converged. And, you know, I, I'm not sure, I'm not sure whether I would call that a success at some level. I don't, I'm not, I, you know, I, I have to say, I think the jury's still out a little bit on that. But I will say with the issue of climate and ESG first and foremost it's global climate is a global problem. So it's a global challenge and we need a global solution. So the need, in my view for harmonization is more, even more compelling in, in this, in this particular area now. I mean, so, and in that sense, I think jurisdictions and regulators all around the world need to work together. I think that's what they're doing.

Allison Herren Lee (20:23):

We're seeing tremendous cooperation. We're seeing regulatory cooperation, you know, jurisdictional, cooperation, public private type cooperation, and in the U S and the sec in particular, we have an important role to play in that cooperation. I think part of our role is to move forward with the right requirements on climate, in ESG for our specific jurisdictional needs, but we've gotta be very mindful of the extent to which those might influence or affect international efforts and be very mindful in my view of the need for harmonization. So part of our role here is supporting and guiding, hopefully helping to guide efforts like the sustainability standards board, because you know what I think others, but certainly we are in my view need to do is support the effort to achieve an international baseline. All the jurisdictions are not going to look the same. We have unique differences in needs but, but a baseline isn't, I think it's a very important concept for us to all stay focused on as opposed to what you could think of as more of a buffet where you sort of take what you want off the buffet and leave the rest.

Allison Herren Lee (21:34):

I think we really need to, to work together to establish a baseline that that folks can build on as they need and see fit.

Jason Mitchell (21:45):

I'd like to change lanes a little bit and talk about materiality, something you've spent a good deal of time writing about thanks to a number of legal precedents of the last 30, 40 years. Even up to the Supreme court, the definition of materiality appears pretty clear, at least to me, you know, it, it is a matter of a matter is material. If there's a substantial likelihood that a reasonable person would consider it important end quote, the fact that so many institutional investors now regard climate and ESG information as material would seem at least in my mind to settle this issue. Why do you think this debate persists and what's it going to take to resolve it?

Allison Herren Lee (22:24):

So I'll start by talking about that definition. You're right. That's, that's the full, you know, the definition that's been in Supreme court case law, it's, it's very clearly stated how clearly it's applied is a different question. Everybody's view of what's, what's a substantial likelihood, what's a reasonable person, you know, all of those kinds of issues come up in, in each and every case, but understand that that definition applies in the context of fraud. In other words, those are not definitions that, that arose in, in examining the STCs sort of jurisdictional role in policy-making, but rather the, those cases analyze the concept of materiality in determining whether, if someone has failed to disclose something or has disclosed something has sort of misstated something, does it rise to the level of fraud? So as an initial matter, you know, in our rules, we tell companies what to disclose, or we help set standards for what companies disclose if it's material.

Allison Herren Lee (23:37):

So we do that, we'll say, you know, we'll use materiality as a qualifier and say, you know, if it's material disclose and that puts the onus on them to sort of decide what information is, is material they're doing that within the context of will it rise to the level of fraud if I don't do this. And so you know, companies are meant to look at that determination through the lens of investors, as you mentioned, they're the ones that, that, you know, the Supreme court says, it's their view that that matters. So, but it's management that has to decide what their view is. And it's possible that they arrive at a different conclusion that investors would, it definitely is, and they frequently do. So that's a, that's a source of tension. But what I will say is, you know, when it comes to our policymaking and our, in our disclosure rule, making process materiality is, is relevant, but not necessarily from the legal standpoint that, that, that people seem to want to apply that case law definition deals with anti-fraud.

Allison Herren Lee (24:42):

That is not the standard that we employ in rulemaking it's relevant. Of course, as we decide what investors need and what's in the public interest in other words, whether a certain kind of topic or area is material or, or decision useful to investors, that's an important driver for us to consider. And investors have been very clear as you mentioned, that, that in fact, this is a topic that's relevant, that's decision useful that, that we need. So, so once we've made that determination that the topic is material, we may decide to lay out what items accompanies should disclose thing, for example, executive comp. And I, I mentioned this earlier, we don't just say if comp is a material part of your business, disclose it, as you see fit, we say, we say, we hear you investors, executive compensation is extremely important and materials. So here, we're going to lay out for, for companies, what items they need to disclose.

Allison Herren Lee (25:40):

They have to tell us the top five you know, earners in their, in their business. And here are the specific things we need to know about their comp. So our, our rulemaking is, is full of examples of that. And, and anytime that we make a specific line item or tabular disclosure, that is us saying disclose, we're not, we're not asking you to make a materiality analysis here. We've already decided to stop fixing material. We're saying, here's what we need to know about that topic. And you know, so again, sometimes it makes sense for us to qualify our disclosures requirements by saying disclose only that, which is material. But but here in this context, I think it's quite clear that we need to move beyond that. That is what has been out there since 2010 is just simply saying if it's material disclose it and investors have been very clear, they're not getting the information they need

Jason Mitchell (26:32):

Talk about this notion of double materiality. It's I find it interesting that it's finding wider adoption among new reporting frameworks, like the EU corporate social reporting directive, and even the new task force on nature related financial disclosure, which diverges even from the TCFD focus only on financial materiality of climate impacts on the company itself. So, I mean, how do you think about, you know, the, the arc from materiality to an outside in inside out perspective, or was it simply a temporal issue kind of some would even say a false dichotomy

Allison Herren Lee (27:07):

That is actually exactly the term that I've used to describe that debate at some level a false dichotomy. I think there is something of a false dichotomy when you try to think about traditional financial materiality as though it's something completely different from what has been referred to as double materiality, meaning sort of the impacts that the company has on, on the outside, as opposed to the, the outside impacts that and how they manifest inside. You know, we, we traditionally think about financial materiality as being those issues that bear on the current financial risks and opportunities. And so the so-called kind of double materiality that takes into account the external effects of a company's actions, rather than just how, you know, for instance, climate risk bears on the company's financial financial at present. But those external effects are, are only external for so long.

Allison Herren Lee (28:04):

So you mentioned, you know, is it, is it just a matter of time? Yes, I believe it is. You know, it's just a matter of time before those externalities are internalized, that can happen in a number of ways, including through regulation. So I do think in that sense, the risks exist on a spectrum and the question is not you know, do we, do we have double materially? The question is what time horizon are we looking at? What is the appropriate time horizon for the particular types of disclosures that we may issue in that may be different depending on whether we're talking about targets or metrics or scenario analysis or the like so I don't get too bound up in the questions of doubled materiality. And instead I like to look at and think about what are the time horizons for the risks and the opportunities that that companies need to disclose. And that is just a, that's a way of harmonizing the two, I think, without, without making that kind of false distinction,

Jason Mitchell (29:04):

I want to move it a little bit to the investor product disclosure space. And, you know, obviously the sec launched in March at the climate and ESG enforcement task force which soon followed chairman Gensler's efforts to tamp down on greenwashing, which you've mentioned, I think, you know, with the recent DWS Deutsche probe now in the news, how does the task force go about investigating greenwashing activity when clear ESG definitions, much less climate change, risk disclosure requirements don't yet formally exist? What, what should sustainable fund managers be aware of as these efforts evolve?

Allison Herren Lee (29:42):

Sure. I want to start there by saying of course I can't comment on any specific investigation but I will instead speak just broadly about climate and ESG enforcement. And what I had in mind when I set up that task force. You know, also just a quick note, let's just fund greenwashing that we need to focus on. The task force is meant to cover. It's also corporate issue or greenwashing, or sort of failures to disclose material information by corporate issuers. So we have work to do in our disclosure, we'll making in terms of providing all improving the quality of disclosure and achieving consistent, comparable, and reliable climate related disclosures. But that doesn't mean we don't have rules on the books. You know, when you say that ESG definitions aren't clear or don't yet formally exist, there's a lot already in our rulemaking framework, some in that 2010 guidance that stated quite clearly that there are existing requirements in place that may require issuers to, to disclose certain climate related, both risks and opportunities.

Allison Herren Lee (30:54):

And you know, for phones and advisors, there's nothing new about the fact that disclosures need to match their actual business practices. So of course, it's true that we can't enforce standards that we haven't promulgated yet, but it's not the case that we don't have existing standards to enforce. And so enforcement staff doing what it, what it always does here it's is in forcing the rules that are already on the books. And, you know, that doesn't suggest that we don't need to go further in our rule making and create more specific standards. That'll provide more certainty for issuers and simplify enforcement and elicit better disclosures, but there are rules on the books. We've had the 2010 guidance out there. We've had plenty of people say, it's sufficient. It's too, you know, it's, it's, it's there. And so you can't be both. It can't be both there and sufficient, but also unenforceable.

Allison Herren Lee (31:47):

It is enforceable. And so what I would say, you know, what, what fund managers need to be aware of, of course, this is the same, the same principles that have applied since the 1940 act, which is, you know, make sure that you do what you're saying, disclose clearly what you're required to disclose, and then make sure that you act consistent with those disclosures. And then what companies need to do is take a look at and think about that 2010 guidance and ask themselves whether in fact they're, they're meeting the standards you know, that, that arise by virtue of that guidance. And they can also get some, some clues about that from looking at what it is that investors are demanding, the places where they stay is lacking. But this, but that, you know, that the taskforce is only going to, and it only can enforce The existing rules on the books. So I, you know, I, I have high hopes for that, but I also have high hopes for us getting some, some better, more thorough disclosure rules out there for the taskforce to focus on.

Jason Mitchell (32:53):

I wanted to ask another question just around international disclosure, regimes, the EU sustainable finance disclosure regulation. It explicitly aims to offer protections against greenwashing, as well as steer capital towards sustainable investments in a way from unsustainable investments through product level, disclosures, us regulators, at least in my experience, you know, sort of avoid this top-down approach, because it often results in picking winners instead of those in the process of transitioning, how do you think about the virtues of disclosure while avoiding the potential unintended consequences? I guess what I'm saying is, you know, information's new tool, but there's already, I think some degree of evidence that sustainability disclosure regimes are driving capital flows for better, for worse. W w what are the lessons you've learned in thinking about how to architect a US disclosure regime?

Allison Herren Lee (33:46):

Sure. it has been interesting to see the evidence that you, that you mentioned, and I follow it pretty closely. As you know, the sec, we don't generally involve ourselves or seek to steer capital either toward or away from any particular type of investment. For the most part I'll note. You know, we do indeed focus for example, in trying to get capital to small businesses. So that's not without its exceptions, but for the most part, we're not looking to steer capital one way or the other. What we do is perform, you know, the very important function of, of helping to facilitate disclosures that allows investors to do that and allows them to make the decisions in an informed fashion. And we know that investors are interested in having adequate information because they want to steer capital towards sustainable solutions. So we also know that disclosure requirements may influence corporate behavior as issuers, that they adjust to what they think investors want.

Allison Herren Lee (34:47):

So take, for example, in the diversity context on and on, it's mentioned this before, we know that requiring enhanced diversity disclosure may influence the attention that companies give to managing their diversity practices. And with respect to climate, you know, it's going to be a huge step forward just to enhance the data that's available so that investors can make the choices that they clearly wish to make when it comes to steering their capital. So that's something that we can and should do at the sec is get the data out there. But, but whether, you know, US policymaking either, either will or should go further than that potentially mandating greenhouse gas, reducing behaviors, or any number of other substantive policy approaches that remains to be seen. But my own view is that markets alone will not solve the issue. And I think there's plenty of evidence to suggest that that that's the case. What we, what we have to do is enable markets to function optimally in this effort. That's our job at the sec. And, and it's an important one, but I, you know, I think we can benefit greatly from the miss sort of the, an all of government approach to this, so that, so that, you know, the legislature, the policymakers, all of us are looking, working together and thinking about how to get there.

Jason Mitchell (36:08):

I've got one last question, which is the SEC is constrained by the fact that it currently does not have a legislative mandate to make rules for the US financial industry to advance ESG and climate outcomes. We know that in that context, how do you think about the legacy of the SEC and its tactical abilities to regulate through ESG and climate issues, absent legislation, you know, as opposed for instance to the EU, which is taking a much longer term legislative kind of effort to reinforce and progressively tighten their ESG standards over time.

Allison Herren Lee (36:43):

Yeah. That kind of dovetails with what we were just talking about. It's an all hands on deck effort here in my view, every legislative and policy-making arm of government needs to be looking at this and working toward a solution. We're not constrained at the SEC by the, the lack of a specific legislative mandate on climate area. She, we have the rule-making authority to get the information out into the markets, and we have a tremendous opportunity and responsibility as a commission, I think to do something here of great potential significance in terms of the, of the global effort and our, you know, our mission, particularly as it relates to protecting investors, amply supports us engaging in climate and ESG disclosure rulemaking, but I, my, myself, as I mentioned before, you know, I welcome the the attention of Congress and other policymakers that, you know, their, their work in this space is critical as well. We need to harmonize with them. We need to coordinate with them. Their work will inform our efforts and vice versa. So I welcome, you know, input from the rest of the kind of policymaking universe here in the U S and then we need to harmonize carefully and mindfully with global regulators, including the EU on these issues as well.

Jason Mitchell (38:08):

Great. That's a great way to sum up. So it's been fascinating to discuss the SEC's evolving views around disclosure, materiality. It's increasing disclosure related enforcement efforts and the need to work towards greater harmonization, given the multitude of global disclosure frameworks out there. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, co-head of responsible investment at Man Group here today with Commissioner Allison Herren Lee of the US Securities and Exchange Commission. Many thanks for joining us on A Sustainable Future. And I hope you'll join us on our next podcast episode. Thank you so much Commissioner Lee.

Allison Herren Lee (38:43):

My pleasure. Thank you, Jason.