With Increased ESG Disclosure Comes More Regulatory Focus

Sonia Barros and Lara Mehraban talk us through a rapidly evolving landscape in which the SEC has begun to actively wield its rulemaking, interpretive, and enforcement capabilities in the area of ESG disclosure.

In recent years, public and investor interest in ESG has continued to grow in the U.S. Institutional investors have updated their investment policies to incorporate ESG considerations, including by calling on companies to make ESG disclosures, and to take into account the board’s overall governance and oversight of climate risk. In 2023, we expect ESG to play an increasingly important role for investors in life science companies. With increased ESG disclosure, will come an increased regulatory focus on this area and a heightened risk of litigation. 

Investors and companies have been ahead of the SEC on ESG matters for years. However, in 2022, the SEC began to actively wield its rulemaking, interpretive, and enforcement capabilities in the area of ESG disclosure. In March 2022, the SEC issued a 490-page proposed rule for the Enhancement and Standardization of Climate-Related Disclosure for Investors. This proposed rule, which may be finalized as early as the beginning of 2023, would require public companies to disclose climate-related risks that are reasonably likely to have a material effect on the business or its financial statements. It would also require the disclosure of matters including internal climate-related risk management, greenhouse gas emissions, and oversight of climate-related risks by the board and management. 

The SEC issued another rule proposal in May 2022, this time focused on encouraging disclosures about ESG investment practices by investment advisers and investment companies. If finalized, this proposed rule could have a collateral effect on life sciences companies because advisers increasingly factor ESG into investment decisions. ESG rulemaking is expected to continue in 2023; the SEC’s current agenda identifies forthcoming proposals on human capital management disclosures and corporate board diversity. 

Current SEC rules and regulations do not mandate a specific framework for ESG disclosures. In thinking about current disclosures, life sciences companies should therefore consider the climate change disclosure guidance issued by the SEC in 2010. They should also look at a September 2021 sample letter that the SEC released and that illustrates the types of comments the SEC has recently been issuing to companies regarding climate-related disclosure (or the absence of such disclosure) in companies’ Form 10-Ks. For example, life sciences companies may wish to consider adding disclosures around material risks related to climate change, such as from the physical effects of climate change on operations, facilities, research, manufacturing, inventory, and results due to severe weather; from the use of natural resources or raw materials in production; or from risks of climate-related health crises such as outbreaks and pandemics. Life sciences companies might also consider climate change disclosures related to other sector-specific dependencies, such as the effects of new disease patterns and shifts in disease geographic distribution, or risks related to pharmaceuticals in the environment, including antimicrobial resistance and pharmaceutical supply chain issues, if such issues are likely to have a material effect on the business. They might also consider covering transition risks from policy and regulatory changes or market trends that may alter business opportunities, such as around access to healthcare, pharmaceutical pricing, or ethics and diversity in clinical trials. 

Scrutiny of ESG disclosures by the SEC remains heightened and will continue to ramp up in 2023. In March 2021, the SEC’s Enforcement Division created a 22-person ESG Task Force to proactively identify ESG-related misconduct. In 2022, the SEC brought five enforcement actions for ESG-related disclosure issues.

In 2023, there will be a greater risk of litigation stemming from ESG issues. Recently, claims have been filed under federal securities laws for allegedly misleading ESG disclosures, for example around the areas of a company’s commitment to diversity and compliance with antidiscrimination laws. There is also an increased risk of shareholder derivative litigation, including where a board fails to attend to important ESG matters in a way that harms the company.  


  • Life sciences companies should be thinking about their ESG disclosures and the internal controls they use to assess them.
  • Publicly listed life sciences companies should start to prepare for potential SEC rules on ESG-related disclosures.
The views expressed in these articles are exclusively those of the authors and do not necessarily reflect those of Sidley Austin LLP and its partners. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.
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