Earlier this month, the Investor-as-Owner Subcommittee of the SEC’s Investor Advisory Committee (the Subcommittee) issued Recommendation Relating to ESG Disclosure, which was warmly received by Chairman Clayton. After noting that the SEC has periodically contemplated whether ESG disclosures are material and should be incorporated into its integrated disclosure regime for “close to 50 years,” the Subcommittee concludes that “the time has come for the SEC to address this issue.” Recommendations by the Subcommittee are often followed by an SEC release seeking additional information and comments from corporate issuers, preparatory to the SEC’s issuance of proposed rules.
The Subcommittee provides five reasons in support of its recommendation. Three of the supporting reasons are straightforward and reflect an accurate understanding of the current environment. The Subcommittee rightly observes that:
- ESG is no longer a fringe concept. It is an integral part of the larger investment ecosystem of our modern, global, interconnected world. Investors require reliable, material ESG information upon which to base investment and voting decisions.
- The U.S. and the SEC should take the lead on ESG disclosure or other jurisdictions will.
- In time, without the availability of reliable ESG-related material information for all U.S. corporations, capital could be redirected by investors with their own sets of mandated ESG duties to companies outside the U.S. that are required to report ESG data pursuant to disclosure obligations of non-U.S. regulators, rendering U.S. Issuers at a distinct disadvantage to access future international capital.
- It is preferable that issuers provide material ESG information directly to the market. “Currently, there is a patchwork of information in the mix and third-party data sources are filling the void. Varying degrees of data upon which third party sources are based is coming from Issuers themselves, rendering the information in the market inconsistent and unreliable.”
The Subcommittee’s last reason, however, is likely to be controversial. The Subcommittee correctly observes that:
Larger Issuers, or those with greater resources, are currently able to produce more ESG-related data, while smaller Issuers, or those that are capital constrained, are not always able to provide the same amount or level of detail. This can put small, mid-cap, or capital-constrained companies at a disadvantage for investment, particularly when they are unable to build the staffs and/or reporting systems required to reply to numerous requests for ESG data from third-party data providers.
Alas, on this point, the Subcommittee’s solution is to force these companies to build the staffs and/or reporting systems and to make more fulsome disclosures. Not all will agree that mandated ESG would be the best way to “level the playing” field among corporate issuers that are disadvantaged by having less resources to provide such disclosure. The Subcommittee argues that disclosure (and the related processes) will be less costly if it is subject to uniform rules and principles. Maybe that is correct and maybe the SEC will propose and adopt less burdensome rules for smaller reporting companies and EGCs.
As I noted above, recommendations by the Subcommittee are often followed by an SEC release seeking additional information and comments from corporate issuers, preparatory to the SEC’s issuance of proposed rules. Generally, we are in favor of ESG disclosure (see, for example, Should Executive Compensation Professionals Get Involved in ESG Issues?), so let’s hope it can all get resolved in the comment process.