On May 21, in an open virtual meeting the SEC’s 23-member Investor Advisory Committee debated and endorsed the Investor as Owner Subcommittee’s long-awaited recommendations that the Commission begin in earnest an effort to update the reporting requirements of Issuers to include material, decision-useful, environmental, social and governance (ESG) factors. That same day, BlackRock shareholders debated in a virtual annual meeting whether the world’s largest asset manager is living up to CEO Larry Fink’s much ballyhooed commitment to sustainability as BlackRock’s new standard of investing and investment stewardship (as previously detailed in this blogpost). While the path forward on possible new principles-based SEC disclosure rules around ESG factors may be long and uncertain, the Subcommittee’s recommendations offer useful considerations for companies in preparing currently required SEC filings and voluntary sustainability reports.

Key points from the recommendations include:

  • Investors regard ESG information as material, but cannot get consistent information. After recounting that the Investor Advisory Committee has addressed the topic of ESG disclosures in three prior meetings in 2016, 2018 and 2019, the Subcommittee noted, “we have heard consistently … that investors consider certain ESG information material to their investment and voting decisions, regardless of whether their investment mandates include an “ESG-specific” strategy” and “that this information is material to investors regardless of an issuer’s business line, model or geography, and is different for every issuer. Yet, despite a plethora of data, there is a lack of material, comparable, consistent information available upon which to base some of these decisions.”
  • The unregulated market of third party ESG data providers is burdensome, confusing and does not satisfy investor or issuer needs. The Subcommittee added, “[b]ecause of the patchwork approach to disclosure outside of the US and the lack of clear disclosure obligations in the US, third party ESG data providers, many of whom provide a scoring or ratings system, have sprung up to fill the void between what companies disclose publicly and the information investors seek to make investment and voting decisions. … The plethora of ESG data providers, all with different standards and criteria, has led to a significant burden on US Issuers. Each data provider uses different information sources to conduct its analysis and produce its work product. … Companies are inundated with requests for ESG information from multiple data providers compounding the burden to sometimes-geometric proportions. Companies that ignore these reports, do not complete them fully or are unable to answer a given query with a “yes or no” answer, risk being rated poorly or being issued with low ESG ratings or scores. This can have a direct impact on their stock price and ability to access capital when being evaluated by investment managers with or without ESG-related investment mandates. We have learned that Issuers that do not allocate enough time or resources to these extensive reporting requests by multiple data providers do so at their peril.”
  • Issuers vary widely in their approaches to ESG disclosure. The Subcommittee also observed, “Issuers themselves have taken a variety of approaches to providing ESG related information. Some publish lengthy stand-alone reports; others include ESG related information in their annual reports or SEC ’34 Act filings; some provide information according to third party standards such as GRI , the Sustainability Accounting Standards Board (SASB), the Task Force on Climate Related Financial Disclosures (TCFD), etc. Others do not report directly but reply to third party surveys requested by ESG data providers, which in turn provide ESG information or scoring systems to investors. Some Issuers engage in a combination of all of these and other methods. The point is that, despite a great deal of information being in the mix, there is a lack of consistent, comparable, material information in the marketplace and everyone is frustrated – Issuers, investors, and regulators.”
  • The SEC is aware of the problem and the need to act carefully. The Subcommittee reported, “[r]ecent statements by SEC Chair Jay Clayton and SEC Director of Division of Corporation Finance, William Hinman, on the topic of ESG disclosure make clear that they understand both the emergence of ESG factors in investment decision making, the presence of ESG data providers in this ecosystem, and the call by many for a regulated, uniform approach by Issuers to ESG disclosure. … When addressing this Committee in November of last year, Chair Clayton stated that: As I have mentioned to many of you, key points of interest for me in virtually all matters of disclosure regulation include (1) what data do companies use to make decisions and (2) what data do investors use to make investment decisions… I also recognize that even these two questions can lead to complex answers, including because (1) not all companies in the same sector use the same or comparable data in their decision making and (2) investor analysis also varies widely. In the areas of “E” and “S” and “G,” in particular, the approach to investment analysis appears to vary widely, in some cases incorporating objectives other than investment performance over a particular time frame or frames. … Director Hinman [also] recognized investors’ interest in sustainability or ESG disclosures and the breadth of topics that could be covered under these broad terms. In particular, he noted that, “the very breadth of these issues illustrates the importance of a flexible disclosure regime designed to elicit material, decision-useful information on a company-specific basis.”
  • Establishment by the SEC of integrated ESG disclosure reporting requirements would yield multiple benefits. The Subcommittee then offered five reasons for the recommendation that the Commission take timely action to address investor needs for relevant, material, decision-useful ESG disclosure:
  1. Investors require reliable, material ESG information upon which to base investment and voting decisions.
  2. Issuers should directly provide material information to the market relating to ESG issues used by investors to make investment and voting decisions.
  3. Requiring material ESG disclosure will level the playing field between Issuers.
  4. ESG disclosure requirements will ensure the flow of capital to the us markets and to US Issuers of all sizes.
  5. The US should take the lead on disclosure of material ESG disclosure

The subcommittee concluded by noting,

“[w]e recognize that any new reporting regime is difficult and comes with related litigation risk. But well-constructed, principles-based reporting that enables each Issuer, regardless of industry or business line, to set out its risks, strategies and opportunities in relation to material ESG factors should be no different than current disclosure of business risk, strategy and opportunity. ESG matters are part and parcel of the business of every Issuer and are unique to every Issuer. To the extent that such disclosure would require forward-looking analysis, where material, we note that material forward-looking disclosure is already embedded into the SEC’s disclosure regime, for example, in the context of MD&A discussions, M&A transaction disclosures around projected synergies, and pro forma financial statements.”

SEC Chair Clayton said he would review the committee’s recommendations, but stopped short of endorsing the creation of definitive regulatory policy on ESG matters. In his prepared remarks to the committee, Chair Clayton reiterated his November thoughts regarding the utility of combining E, S, and G matters noting that, “E, S and G are quite different baskets of disclosure matters and that lumping them together diminishes the usefulness, including investor understanding, of such disclosures.” Commissioner Hester Peirce expressed deeper reservations with the committee’s recommendations and the general advisability of adopting a new ESG disclosure framework. Commissioner Peirce argued that the current securities disclosure framework is already appropriately structured to present material information to investors, but invited the committee to bring to the attention of the Commission “discrete pieces of information for which disclosure mandates are necessary.”