Thought Leadership

ESG is Coming Down the Regulatory Pipeline

As published in MicroCap Review Magazine

ESG is Coming Down the Regulatory Pipeline

By Corey Fischer

I’m often asked by clients what they can expect in the way of new financial reporting regulations that may be in the regulatory pipeline. This question is mostly asked around year end, but more often and with greater intensity in an election year when there is a change in presidential administrations.

A change in administrations obviously comes with a new president and vice president, but it also comes with new agency heads. With new agency heads come a reshuffling of priorities.

When Gary Gensler took the helm as Chairman of the Securities and Exchange Commission on April 17, 2021, he wasted no time in setting new priorities for his agency. By June, the SEC disclosed a list of 49 proposed rule changes that were on the Commission’s agenda.


That agenda, which is continually updated, can be found in the SEC’s Agency Rule List. The list includes some notable proposed rules including:

  • Disclosures relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk.
  • Market structure modernization within equity markets, treasury markets, and other fixed income markets.
  • Transparency around stock buybacks, short sale disclosure, securities-based swaps ownership, and the stock loan market.
  • Investment fund rules, including money market funds, private funds, and ESG funds.
  • 10b5-1 affirmative defense provisions.
  • Unfinished work directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including incentive-based compensation arrangements, and conflicts of interest in securitizations.
  • Enhancing shareholder democracy.
  • Special purpose acquisition companies.
  • Mandated electronic filings and transfer agents.


Clearly, regulators are addressing a wide swath of areas, and its regulatory footprint may increase even wider. In a recent CNBC interview Chairman Gensler said his staff is reviewing new rules that would require more transparency from private companies as well.

If such new rules are approved, it likely would affect large private companies which have opted to seek growth capital through private capital markets. The SEC may consider tightening the qualifications of investors who participate in private funds and may change rules on how those investors are counted.

Existing federal rules require companies with more than 2,000 shareholders “of record” to provide financial disclosure with the SEC, regardless of whether they have gone public. Under the current rule, an unlimited number of individuals can own shares through the same broker dealer or investment vehicle and still be counted as one shareholder. That could change, with each shareholder in an investment vehicle or fund counted individually. If that number exceeds 2,000 shareholders, those private entities may be required to comply with the same disclosure requirements as their public company counterparts.


The one item on the proposed regulatory agenda that looms largest for CFOs involves the still to be defined disclosures relating to Environmental, Social and Governance (ESG).

For the uninitiated, the “E” in ESG deals with such things as energy efficiencies, carbon footprints, greenhouse gases, and climate change; in essence, what is the company doing to be a steward of nature. The “S” involves how a company manages its relationships with employees, suppliers, customers, and the communities it serves, and covers such things as labor standards, wages, benefits, board diversity, racial justice, and pay. The “G” stands for governance – or more to the point, governing over the “E” and “S”, and includes such items as corporate board composition, executive compensation, audits, internal controls, shareholder rights, and even political contributions.

Currently, there is no requirement for U.S. companies to provide disclosures on ESG matters, but there  is increasing social pressure, more legal challenges, and a desire by a growing number of corporate stakeholders.

Financial rewards have been growing for early adopters of ESG. Global investment in funds that feature companies committed to ESG was $35.3 trillion in 2021, compared to $22.8 trillion in 2016, a 55% increase, according to the Global Sustainable Investment Alliance. Such investments are predicted to exceed $50 trillion by 2025.

Currently, there isn’t a clear path for companies who want to be more environmentally and socially responsible. Consulting firm Accenture reports that about half of large company CFOs, and other financial leaders it surveyed, said that they are unable to determine the best metrics to measure ESG performance. So far, the regulators haven’t been much help either.

CFOs seeking to embrace ESGs must choose from more than 15 competing sustainability reporting frameworks that vary in detail and scope. For U.S. companies that have attempted to address ESG risk factors in their 10-Ks, the biggest questions and headaches have revolved around the lack of clarity regarding what is considered “material” by investors, and what is not. Extrasensory perception (ESP) should not be required to comply with ESG.

It was initially thought that the European Union, which was an early proponent of creating and adopting ESG standards, would by now have a framework in place that U.S. regulators could adopt for U.S. companies. Not so. Chairman Gensler has said that while SEC staff will take into consideration the vast array of global ESG standards, his agency is working on a U.S. version for mandatory disclosures. Staff-proposed ESG rules will be considered by SEC commissioners sometime this year. It is anticipated that these SEC rules will likely parallel, but not duplicate, global standards. Gensler also has asked staff to propose workforce disclosure rules.

Gensler said companies may need to report on metrics such as greenhouse gas emissions, financial impacts of climate change and progress towards climate-related goals. Such reports, he indicated, may be required in an expanded Form 10-K and describe a company’s direct and indirect carbon emissions, including those by suppliers and partners in its “value chain.” Once risk factors are identified, companies will be required to quantify the potential financial impact on the company and the timing of when those risks likely will occur.

The regulatory pipeline may be full, but it is ESG compliance that will most challenge public company CFOs, finance executives and accounting professionals.

Corey Fischer, CPA, is Firm Managing Partner of Weinberg & Company, a PCAOB and CPAB-Registered firm specializing in the audit, assurance, and tax needs of micro and small cap companies. He has more than 25 years of experience, having worked with Big 4 accounting firms, and as an SEC reporting officer for a number of NASDAQ-listed companies. Based in Los Angeles, he is an expert in financial reporting, SEC compliance, raising debt and equity, mergers and acquisitions and structuring accounting operations.