The SEC recently received a petition to mandate rules for climate change and other Environmental, Social and Governance (ESG) disclosures. The petition reflects a growing trend in shareholder and market expectations for increased transparency of ESG issues, arguing it ultimately affects a company’s bottom line.
The request, submitted by two academics and underscored by BlackRock, contends the following points:
(1) The SEC has clear statutory authority to require disclosure of ESG information, and doing so will promote market efficiency, protect the competitive position of American public companies and the U.S. capital markets, and enhance capital formation;
(2) ESG information is material to a broad range of investors today;
(3) Companies struggle to provide investors with ESG information that is relevant, reliable, and decision-useful;
(4) Companies’ voluntary ESG disclosure is episodic, incomplete, incomparable, and inconsistent, and ESG disclosure in required SEC filings is similarly inadequate;
(5) Commission rulemaking will reduce the current burden on public companies and provide a level playing field for the many American companies engaging in voluntary ESG disclosure; and
(6) Petitions and stakeholder engagement seeking different kinds of ESG information suggest, in aggregate, that it is time for the SEC to regulate in this area.
“Materiality” is a term used in reporting by public companies to determine the threshold of information disclosed. It is often a vague term though set by each company: what is “material” information can vary based on the investor and a company’s unique circumstances. This petition asserts that ESG disclosure is very material and essential for clear reporting and investor analysis.
Complimentary to the petition, Broadridge Financial Solutions and PwC’s Governance Insights Center recently released a report that found while institutional investors are more concerned about ESG proposals, companies would be wise to participate in ESG initiatives which many retail investors also find critical. For the 2018 proxy season, institutional shareholder support of ESG proposals stood at 29%, up from 19% five years ago, while retail shareholder support was 16%, up from 13%.