Gensler signals SEC may consider political spending, climate risk disclosures

President Joe Biden's pick to lead the U.S. Securities and Exchange Commission will weigh whether to require companies to disclose new information to investors if he is confirmed.

At a March 2 hearing, Gary Gensler, a professor at the Massachusetts Institute of Technology who has been nominated by Biden as the next SEC chair, told lawmakers on the Senate Banking Committee that investors are increasingly considering nontraditional issues like political spending and climate risk as material to their investment decisions. Wall Street's top regulator should be considering more explicit disclosures around such matters to give investors clear information to use when deciding whether to buy or sell a certain asset, Gensler said.

"It's the investor community that gets to decide what's material to them. It's not a government person like myself. It's all about that reasonable investor and do they think it's significant in the mix of information. So, I'm going to be guided by that," Gensler said at the hearing. "In 2021, there are tens of trillions of dollars of invested assets that are looking for more information about climate risk, and I think then the SEC has a role to play to help bring some consistency and comparability to those guidelines."

Gensler, who previously chaired the Commodity Futures Trading Commission under former President Barack Obama and served as a high-ranking official in the Treasury Department during the administration of President Bill Clinton, is expected to help guide the SEC in crafting a uniform framework for companies in the U.S. to follow when disclosing their climate risks.

It is a step that environmental, social and governance-minded investors, Democrats and some corporate executives have requested for several years, with big names like BlackRock Inc. pushing sustainable investing to the forefront of their investing philosophies.

One of the fiercest headwinds blowing against the adoption of ESG investing has been a lack of standardization in the disclosures.

"When you have a voluntary framework, not everyone discloses, and that means significant gaps. It can mean an unlevel playing field for many businesses and it also means inconsistencies among those who do disclose," SEC acting Chair Allison Herren Lee said at a March 1 event.

Lee, a Democrat who was named by Biden as the agency's temporary head until Gensler can be confirmed and sworn in, has already started the process behind upping the regulator's approach to handling climate issues. Soon after Lee was appointed acting chair, the SEC announced it was bringing on Satyam Khanna, who previously worked as a staffer to former SEC Commissioner Robert Jackson Jr., as a senior policy adviser on climate and ESG issues. Then, on Feb. 24, Lee announced that she had directed the SEC's Division of Corporation Finance to "enhance its focus" on companies' climate-related disclosures.

When asked by Sen. Bob Menendez, D-N.J., whether the SEC should be requiring corporate political spending disclosures, Gensler said the SEC should be considering it as it has become more important to investors.

The question of materiality will end up playing a critical role if the SEC pursues additional climate and political spending disclosures under Gensler, should he win confirmation.

Republicans have long pressed back on the notion that climate risk constitutes a material part of a company's operations and thus needs to be disclosed to investors, with many arguing the issue threatens to politicize the SEC.

"Securities laws are not the appropriate vehicle to regulate the climate nor racial injustice, nor to intimidate companies over political spending," said Sen. Pat Toomey, a Pennsylvania Republican who is the Senate Banking Committee's ranking member, at the hearing.

Toomey went on to press Gensler about a hypothetical situation where a company spends an insignificant amount of money on a political issue ad and whether that would necessitate disclosure. Because it is financially insignificant, Toomey said it should not constitute material information and should be at the company's discretion on whether to disclose.

Gensler responded though by saying it would ultimately depend on the mix of disclosures and what information a reasonable investor would want to help determine whether to buy or sell the stock.

"It's about investors making a choice as to what's significant, or what's material to be more accurate," Gensler said.