A subcommittee of the Security and Exchange Commission’s Investors Advisory Committee is recommending that the agency update its reporting requirements for public companies to include material information related to environmental, social and governance (ESG) factors.
“The time has come for the SEC to address this issue,” notes the recommendation of the Investor-as-Owner Subcommittee.
“ESG is no longer a fringe concept,” according to the subcommittee report. “It is an integral part of the larger investment ecosystem of our modern, global, interconnected world.”
There is currently a patchwork of information available to investors and investment advisors about an issuer’s ESG profile — some coming from the issuers themselves; some from third-party data providers, which base their ESG data on the information that issuers provide.
The data provided by issuers is inconsistent and doesn’t always focus on material factors that investors and investment advisors need, and the ratings systems of ESG data providers vary in how they determine materiality issues for companies.
The result is “a lack of consistent, comparable, material information in the marketplace and everyone is frustrated — issuers, investors, and regulators,” according to the subcommittee committee report.
Time for an ESG Update
The subcommittee is proposing that the SEC “begin in earnest an effort to update the reporting requirements of issuers to include material, decision-useful ESG factors,” with input from investors and issuers that SEC staff could then evaluate.
It contemplates a principles-based framework that would require issuers to disclose directly to investors and third party data providers material information related to ESG factors.
Also, the report doesn’t identify a single standard to use, but mentions the Global Reporting Initiative, Sustainability Accounting Standards Board and Task Force on Climate-related Financial Disclosures as standards that could “help shape” the SEC’s thinking.
“The U.S. should take the lead on disclosure of material ESG disclosure” because “U.S. capital markets are the largest and deepest in the world,” according to the report. If it doesn’t “other jurisdictions will impose their own standards in the next few years that U.S. issuers will be bound to follow.”
European regulators have already had a head start.
The European Union has adopted rules that require investment managers to disclose how they integrate sustainability risks into their investment decision-making processes by early 2021, and the UK will be requiring all large asset owners and listed companies to provide disclosures in line with the Task Force on Climate-Related Disclosures (TCFD) by 2022.
The UK already requires UK public companies with 250 more employees to disclose pay ratios between CEOs and average employees.
“Without the availability of reliable ESG-related material information for all U.S. issuers, capital could be redirected by investors with their own set of mandated ESG duties to companies outside the U.S. that are required to report ESG data … rendering U.S. issuers at a distinct disadvantage to access future international capital,” according to the subcommittee report.
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