SEC Commissioner Lee on materiality myths and misconceptions
Commissioner Allison Herren Lee of the US Securities and Exchange Commission (SEC) recently spoke on ‘Living in a Material World: Myths and Misconceptions about “Materiality.”’ She addressed, among other topics, the important role of the investor in determining what is ‘material’ to disclosure, particularly around environmental, social and governance (ESG) topics.
Her speech notes a certain misconception that materiality works “almost preternaturally,” with no need for regulatory involvement, leading to myths that disclosures on all matters material to investors, including ESG matters, are already required and being made effectively. There is also a belief that SEC disclosure requirements must legally be strictly limited to material information, which she disputes.
Lee’s final myth is the idea that climate and other ESG matters are of social or political concern rather than material to investment. She observes that “we are increasingly seeing all manner of market participants embrace ESG factors as significant drivers of decision-making, risk assessment, and capital allocation precisely because of their relationship to firm value,” adding that investors, the arbiters of materiality, have been overwhelmingly clear that ESG concerns are important factors in their decisions.
She concludes: “We must not operate under the false assumption that the securities laws already effectively elicit the information investors need. We must not be diverted by mistaken views regarding the SEC’s rulemaking authority. And we must not be persuaded to ignore scientific evidence or other decision-useful data on the grounds that it intersects with issues of political or social concern. I hope we can dispense with these misnomers as we continue the important debate on how best to craft a rule proposal on climate and ESG risks and opportunities.”
Read the speech here.
Another interesting recent speech from Lee took up the issue of private markets – identified by Commissioner Crenshaw as an important data gap – and how the SEC might reform disclosure requirements to elicit better information.