On May 14, 2020, the Investor-as-Owner Subcommittee of the Securities and Exchange Commission Investor Advisory Committee (the Subcommittee) issued a recommendation relating to environmental, social, and governance (ESG) disclosures (available here). Specifically, the Subcommittee recommended that the Securities and Exchange Commission (the Commission) "begin in earnest an effort to update the reporting requirements of Issuers to include material, decision-useful, ESG factors."
ESG encompasses a broad set of subjects, including such areas as a company's carbon footprint (environmental), its human capital management practices (social), and its anti-corruption policies (governance). Currently, the disclosure of most ESG factors is voluntary. However, there has been a strong push from investors and other entities over the last few years for companies to release more ESG information, and other jurisdictions (such as the European Union) are preparing to impose ESG disclosure regimes. Several private parties have set forth their own frameworks to assist companies in their disclosure of ESG data. Some of these entities include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Financial Stability Board's Task Force on Climate-Related Financial Disclosure (TCFB). In addition, proxy advisory firms, such as Institutional Shareholders Services Inc. and Glass, Lewis & Co., issue reports that measure the quality of companies' ESG disclosures.
The Subcommittee supported its recommendation by stating, among other things, that investors require reliable, material ESG information to make informed investment and voting decisions. According to the Subcommittee, "[m]ajor business risks, decisions and strategies stand upon ESG factors and investors are not being served or protected by the piecemeal, ad-hoc, inconsistent information currently in the mix." The Subcommittee explained that, because there is a patchwork of available data—such as ESG data released by companies themselves and ESG data released by third parties—such information is both "inconsistent and unreliable." Furthermore, the Subcommittee noted that larger companies with greater resources are able to produce and report more ESG-related data than smaller companies with fewer resources. Accordingly, the Subcommittee concluded that the Commission should establish a "principles-based framework that will provide the Issuer-specific material, decision-useful, information that investors (both institutional and retail) require to make investment and voting decisions." The Subcommittee believes that such a framework will level the playing field between larger companies and smaller companies with respect to ESG disclosures.
The Subcommittee suggested that the Commission look to the standards established by the GRI, the SASB, and the TCFB for guidance in creating the Commission's own ESG disclosure framework. In making this suggestion, the Subcommittee did not recommend or endorse a particular standard or framework. The Subcommittee noted, however, that it is highly likely that "other jurisdictions will impose standards in the next few years that US Issuers will be bound to follow, either directly or indirectly." To prevent confusion among companies and investors, the Subcommittee asserts that the Commission is best positioned to set the framework that companies and investors can rely on.
On May 21, 2020, the Commission's Investor Advisory Committee voted to approve the Subcommittee's recommendation by a vote of 14 to 4. In her remarks at the Investor Advisory Committee meeting (available here), Commissioner Hester Peirce questioned the Subcommittee's recommendation, noting that a "new SEC disclosure framework for ESG information . . . seems an unnecessary response when our existing securities disclosure framework is very good at handling all types of material information" (available here).
It remains to be seen whether the Commission will move forward with the Subcommittee's recommendation. Chairman Jay Clayton expressed skepticism about whether "combining an analysis of E, S and G together, across a broad range of companies . . . would facilitate meaningful investment analysis that was not significantly over-inclusive and imprecise" (available here). In the meantime, however, it is clear that investors will continue to be interested in ESG disclosures, and public companies will continue to publicize their ESG efforts. This point is supported by a recent Nasdaq survey (available here) of 50 S&P 100 proxy statements, which revealed that approximately 92% of those companies included specific ESG initiatives in their proxy statements (up from 82% in 2019).
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