With the recent momentum in the U.S. for more environmental, social and governance (ESG) transparency, it comes as no surprise that a group of investors have petitioned the Securities and Exchange Commission (SEC) to require mandatory ESG disclosure.
While no one expects this to happen any time soon, the SEC has now been put on notice that investors are clamoring for more clarity on ESG disclosure.
The petition, filed on October 1, calls for 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. The Commission is under no legal obligation to act upon the petition, and an SEC spokesperson declined comment.
The petition was written by business law professors Cynthia A. Williams and Jill E. Fisch, both of the University of Pennsylvania, and signed by investors and associated organizations representing more than $5 trillion in assets under management, including the California Public Employees’ Retirement System (CalPERS), the U.N. Principles for Responsible Investment; and dozens more firms and organizations.
“It’s time to bring coherence”
The petition’s authors make a case for the “clear materiality” of ESG issues, emphasizes large asset managers’ existing calls for standardized ESG disclosure and underlines the importance of such standardized disclosure for companies and the competitive position of US capital markets.
Pointing to the existing rulemaking petitions, investors proposals and stakeholder engagement on human capital management, climate, tax, human rights, gender pay ratios and political spending, the message from the investor community is clear: “it’s time to for the SEC to bring coherence to this area.”
“Today, investors, including retail investors, are demanding and using a wide range of information designed to understand the long-term performance and risk management strategies of public-reporting companies,” the petitioners wrote.
“Without adequate standards, more and more public companies are voluntarily producing ‘sustainability reports’ designed to explain how they are creating long-term value. There are substantial problems with the nature, timing, and extent of these voluntary disclosures, however. We respectfully ask the Commission to engage in notice and comment rule-making to develop a comprehensive framework for clearer, more consistent, more complete, and more easily comparable information relevant to companies’ long-term risks and performance.”
Such a framework, they say, would better inform investors and “provide clarity to America’s public companies on providing relevant, auditable, and decision-useful information to investors.”
A muddled world of ESG information
Both companies and investors will attest to the struggles of the current muddled world of ESG disclosure: companies are often perplexed about what ESG information investors find relevant, reliable, and decision-useful, and investors find the voluntary disclosure episodic, incomplete, incomparable and inconsistent.
And it is no longer niche investors who want this kind of information. BlackRock, the world’s largest asset manager, wrote in the Petition, “Environmental, social, and governance issues are integral to our investment stewardship activities, as the majority of our clients are saving for long-term goals. It is over the long-term that ESG factors – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts.”
Yet the clarion call for bringing clarity to ESG disclosures is clear: as TriplePundit reported recently, 24 percent of U.S. investors now say that an ESG integrated portfolio will outperform a non-ESG portfolio, five times the number who agreed in 2017.
Investors grow impatient
Regulators in other countries have been heeding that call. The United Kingdom and Sweden require public pension funds to disclose how much they incorporate ESG considerations in investment decisions and the European Commission plans to introduce a regulatory framework supporting sustainable investment. In addition, seven global stock exchanges — in Australia, Brazil, India, Malaysia, Norway, South Africa and England — require ESG disclosure as part of their listing requirements.
U.S regulators have been lagging behind, and investors have grown impatient. Whether there is appetite for mandatory ESG disclosure in the Trump administration or Republican-led Congress is doubtful. But the momentum seems to be pointing towards not whether ESG disclosure will become a matter of law—but when.
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