SEC Urged to Establish ESG-Based Disclosure Framework
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In tandem with BlackRock’s groundbreaking climate change letter earlier this year, as with other prominent enterprises coming forward with significant measures to address the climate crisis, the Securities and Exchange Commission (SEC)’s Investor Advisory Committee is again urging the SEC to establish disclosure policies regarding environmental, social, and governance (ESG) topics for the benefit of investors’ access regarding related issues when making investment and voting decisions.
Announced on Thursday, May 21st, the committee approved a 10-page recommendation for the Commission (SEC) to review when considering whether ESG matters should be folded into the existing disclosure regime for public companies. The release of these recommendations during a global pandemic cannot be mere coincidence; many advocates point to the outbreak of COVID-19 as an example of why the Commission should act sooner rather than later. It is strikingly apparent that any company’s response to a crisis such as this dramatically demonstrates the interconnectivity of many ESG issues and will substantially influence performance and long-term viability.
Strong Investor Interest in ESG Disclosure
The streamlining and integration of ESG issues into annual reporting is not news to the SEC; the Commission has long been contemplating whether ESG disclosures should be included in its disclosure protocol for public companies. The SEC Investor Advisory Committee has historically held three sessions on the topic of ESG Disclosure – in 2016, 2018, and 2019. In this most recent recommendation released last month, the committee relayed its extent of outreach to market participants, investment advisors, asset managers and asset owners, third-party data providers, NGO’s, and advocates of third-party disclosure frameworks. From their conversations amongst these groups, the committee has consistently heard that investors take ESG-related information very seriously as material to their investment decisions.
Investor Advisory Committee – 5 Recommendations:
The Investor Advisory Committee provided five explicit recommendations for the SEC’s consideration regarding why and how the Commission should update its reporting requirements for companies to include material, decision-useful, ESG factors:
Investors require reliable, material, ESG information upon which to base investment and voting decisions.
Major business decisions and strategies are based upon ESG factors and investors are currently not being provided consistent information. Stated in the report, “ESG is no longer a fringe concept. It is an integral part of the larger investment ecosystem of our modern, global, interconnected world.”
Companies should directly provide material information to the market relating to ESG issues used by investors to make investment and voting decisions.
Investors and third-party data providers should have accurate, comparable, and material primary-source information upon which to base decisions, and there should be a consistent strategy to disclose the data.
Requiring material ESG disclosure will level the playing field between companies.
There is a gap in the quality and quantity of data that companies can provide based on their size and resources. Smaller companies or those that are capital-constrained are put at a disadvantage compared to their counterparts when it comes to disclosure, thereby also putting them at a disadvantage for investment opportunities. A consistent single standard of information would level the playing field between large and small companies.
Ensure the flow of capital to the U.S. markets and to U.S. companies of all sizes.
“In time, without the availability of reliable ESG-related material information for all U.S. Issuers, 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 US Issuers at a distinct disadvantage to access future international capital.”
The U.S. should take the lead on disclosure of material ESG disclosure.
The SEC should take lead on this issue by establishing a principle-based framework that will provide company-specific information that investors require to make decisions. The committee recommends that this disclosure should be based on the same information that companies use to make their own business decisions.
Though the committee clarifies that it is not endorsing a particular standard, it closes its recommendations by saying that there are still many effective standards, including the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and Task Force on Climate-related Financial Disclosures (TCFD), that may help shape SEC’s thinking when developing an ESG disclosure framework.
Speculation and controversy still strongly remain regarding the “best” way for issuers to disclose their ESG matters. Some still dispute the lumping of environmental, social, and governance issues together, while others believe that the three topics could not be more interconnected.
The committee’s recommendations will undergo review by the SEC.
How can KERAMIDA help?
KERAMIDA offers expertise on planning and policy development for sustainability programs through an audit of the efficiency and efficacy of the policies and practices employed. We can help you map out a reporting process of your choice, including GRI, SASB, and/or TCFD, establish an editorial calendar, and assign roles and responsibilities with deadlines for content creation and data gathering. KERAMIDA’s experienced sustainability professionals can also do the heavy lifting on content creation and data gathering, if needed. If you already have an established reporting process, we can work alongside your team in a support role to review draft content for standard conformance and technical accuracy.
KERAMIDA provides an online FSA Level II Credential-led SASB Standards reporting training course. This course is for organizations that intend to publish a sustainability report or are currently in the process of drafting a report. We offer both individual and group training. Sign up for the next SASB Reporting Training course here.
Contact us today or call (800) 508-8034 to speak to our experts about how we can best serve your sustainability needs.
Contact:
Becky Twohey, Ph.D.
Vice President, ESG Strategy, Planning and Reporting
KERAMIDA Inc.
Contact Becky at btwohey@keramida.com
