ESG Data, ESG Scores, SEC

SEC Recommends Disclosure for ESG Investments

On May 14, 2020, the Investor-as-Owner Subcommittee, a subcommittee of the SEC’s Investor Advisory Committee (IAC), issued a recommendation that the SEC update its reporting requirements for environmental, social and governance (ESG) disclosures.

The current ESG investing environment has grown significantly among investors and has about 2300 global asset managers representing $80 trillion signed the UN Principles for Responsible Investment, committing them to incorporate ESG issues into their investment process.

“The time has come for the SEC to address this issue… ESG is no longer a fringe concept, it is an integral part of the larger investment ecosystem of our modern, global, interconnected world” notes the recommendation of the Investor-as-Owner Subcommittee.

The Subcommittee calls out the following as major issues:

  • There is currently “a lack of consistent, comparable, material information in the marketplace and everyone is frustrated — issuers, investors, and regulators”
  • Given the plethora of ESG data providers, ESG related data reported by issuers is inconsistent and does not focus on the factors that investors and investment advisors need
  • ESG ratings systems vary depending on data provider and how they determine materiality issues
  • Issuers themselves have taken a variety of approaches to providing the ESG related data as well – some using long stand-alone reports while others provide according to third party standards or report the data in their annual reports

Proposed Solution

The Subcommittee proposed that the SEC update all reporting requirements of issuers to include “material, decision-useful ESG factors” with input from investors and issues that the SEC could then evaluate.

Addressing ESG disclosure now will:

(a) provide investors with the material, comparable, consistent information they need to make investment and voting decisions

(b) provide Issuers with a framework to disclose material, decision-useful, comparable and consistent information in respect of their own businesses, rather than the current situation where investors largely rely on third party ESG data providers, which may not always be reliable, consistent, or necessarily material

(c) level the playing field among all US Issuers regardless of market cap size or capital resources

(d) ensure the continued flow of capital to US Issuers, and

(e) enable the SEC to take control of ESG disclosure for the US capital markets before other jurisdictions impose disclosure regimes on US Issuers and investors alike.”

Without the standards from the SEC, the Subcommittee noted that capital could be redirected from the U.S. to entities overseas in nations that have already imposed ESG standards – all of this would place domestic companies as at “distinct disadvantage” when accessing foreign capital.

“Investors are demanding (quality ESG disclosures), but there is a patchwork approach. There is a lot of not material information out there,” said the author of the recommendation, Allison Bennington, former chief global affairs officer at ValueAct Capital, an investment firm with over $16 billion AUM for investors.

EU Leading the Example

Regulators in the European Union have already adopted rules that require investment managers to disclose exactly how they integrate sustainability risks into their investment decision-making processes by 2021. The UK will also be requiring large asset managers and publicly listed companies to provide appropriate disclosures in line with the Task Force on Climate-Related Disclosures (TCFD) by 2022. At the present time, the UK already requires public companies with 250+ employees to disclose pay rations between CEOs and other lower tiered employees.

Bottom Line

The broad recommendation from the Subcommittee is just the first stab at a potential reform. It will take some take though before the SEC moves on a potential ESG disclosure build out but this time is quickly approaching with the rapid growth and spotlight on ESG investments in the U.S. markets.

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