The lack of quality information from companies on their environmental, social and governance practices has been a common complaint of investors in several recent surveys. Indeed, although an RBC survey found that 77% of the institutional investors they surveyed were “somewhat or to a significant degree” using ESG principles in their investment approach, it also found “little satisfaction with the quantity and quality of information from companies on issues such as sustainability and governance.”

That frustration has found an outlet with a recent petition for rulemaking on ESG disclosure sent to the Securities and Exchange Commission, signed by “investors and associated organizations representing more than $5 trillion in AUM.” Signatories include the California Public Employees’ Retirement System (CalPERS); top state financial authorities from New York, Illinois, Connecticut and Oregon; the U.N. Principles for Responsible Investment; and dozens more firms and organizations.

The petition is pushing the SEC to design a framework for companies to disclose “specific, much higher-quality ESG information” than is currently required. “It is time for the SEC to regulate in this area,” the 20-page petition states.

Written by business law professors Cynthia A. Williams and Jill E. Fisch, both of the University of Pennsylvania, the petition was sent in early October to Brent J. Fields, secretary of the SEC. According a letter attached to the petition, it:

  • Calls for the SEC to initiate notice and comment rulemaking to develop a comprehensive framework requiring issuers to disclose identified environmental, social and governance aspects of each public-reporting company’s operations;
  • Lays out the statutory authority for the SEC to require ESG disclosure;
  • Discusses the clear materiality of ESG issues;
  • Highlights large asset managers’ existing calls for standardized ESG disclosure;
  • Discusses the importance of such standardized ESG disclosure for companies and the competitive position of the U.S. capital markets; and
  • Points to the existing rulemaking petitions, investor proposals and stakeholder engagements on human capital management, climate, tax, human rights, gender pay ratios, and political spending, and highlights how these efforts suggest, in aggregate, that it is time for the SEC to bring coherence to this area.

Where We Are

The SEC, states the letter, would ensure U.S. capital market competitiveness by requiring more ESG disclosure. It notes that other countries already require this information, and in fact, a 2015 report from Harvard University found 23 countries had enacted such legislation within the prior 15 years.

In addition, seven global stock exchanges — in Australia, Brazil, India, Malaysia, Norway, South Africa and England — require ESG disclosure as part of listing requirements.

Since 2000, the U.K. and Sweden have required public pension funds to disclose how much they incorporate ESG considerations in investment decisions. Seven more countries have followed this direction. Further, the European Union is developing a taxonomy of ESG activities, as well as “developing benchmarks for low-carbon investment strategies, and regulatory guidance to improve corporate disclosure of climate-related information,” the letter stated.

ESG disclosure also would promote capital formation, Williams and Fisch state, and is financially material and aids in decision making. It quotes a Goldman Sachs research report released in April, concluding that “integrating ESG factors allows for greater insight into intangible factors such as culture, operational excellence and risk that can improve investment outcomes.”

The paper states that global assets using ESG screens were valued at $22.9 trillion in early 2016, comprising 26% of all professional assets globally. Today $68.4 trillion in capital is committed to ESG investments, Williams and Fisch state, and that is despite “poor quality of ESG data.” The report does note that 93% of the 250 largest firms globally report ESG data, and 75% use the Global Reporting Initiative’s voluntary, multi-stakeholder framework. And 67% of the top 250 firms have their reports “assured” by their accountants.

Problem Areas

Nonetheless, large investors have found much of this information lacks in quality and makes comparison difficult. The letter concludes this is largely due to the “weakness of voluntary disclosure: Without a regulatory mandate, the information being produced is often incomplete, lacks consistency, and is not comparable between companies.”

Several large firms have noted this lack of consistency, including BlackRock, which manages more than $6 trillion, and Bloomberg. In fact, CEO Michael Bloomberg became chairman of the Sustainability Accounting Standards Board (SASB) in 2014, and then in 2015 chaired the Task Force on Climate-Related Financial Disclosures, stating, “The market cannot accurately value companies and investors cannot efficiently allocate capital, without comparable, reliable and useful data on increasingly relevant climate-related issues.”

The authors also argue that SEC-mandated ESG disclosure requirements would reduce burdens that companies currently face by producing large sustainability reports, as instead they can focus on what is relevant to their firm and their investors. Further, it would “act to create a level playing field between companies,” Williams and Fisch write.

The authors conclude noting theirs is not the first petition, but believe it along with all the others show “that investors and capital market professionals think the time has come for the SEC to act to develop a mandatory rule for clearer, consistent, comparable, high-quality ESG disclosure by all companies subject to SEC public reporting requirements.”

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