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ANALYSIS: The Business Roundtable’s New View and ESG Disclosures

Nov. 4, 2019, 12:28 PM

Will corporate America retool its approach to sustainability and environmental, social and governance (ESG) practices and disclosures after a leading industry group released a new vision of the purpose of a corporation? More than 180 CEOs signed on to a Business Roundtable (BRT) statement that corporations should commit to serving the interests of all stakeholders—employees, customers, suppliers and the communities where they do business. For this last stakeholder, they publicly agreed to “protect the environment by embracing sustainable practices across our businesses.”

The BRT’s purpose statement is aspirational, and does not spell out any particular steps for companies to take to achieve these goals. Each company and CEO will implement these objectives as they see fit.

Under the terms of the BRT statement, environmental, sustainability and social concerns should play a major role in corporate decision-making. But the statement also raises some key questions. Will public companies embrace this commitment to sustainability and take active steps to implement the principles set forth in the statement? Will investors willingly look past negative impacts on the bottom line and accept other measures of corporate success, such as social and economic impacts? Will companies provide robust and useful information on ESG measures to their investors?

What to Look For

How will investors, analysts, and others know if the BRT statement is having a significant impact on the marketplace? A commitment to these principles will show up in the integration of ESG objectives into companies’ business models. Over time, companies may also shape the composition of their boards to reflect diversity and experience with ESG concerns, and take steps to improve employee pay and working conditions. Companies are under pressure from their large holders to focus attention on ESG matters. Institutional investor acceptance may drive both corporate behavior and disclosure practices.

Corporate governance expert Nell Minow told me that a meaningful metric of the statement’s impact would be the use of ESG measures in determining executive compensation. She is skeptical, however, about the impact that the BRT statement will have, considering similar statements made in the past with little real impact. She also believes corporations are ill-suited for making public policy and that attempts to embrace the new view may well end up involving a tradeoff between shareholder and stakeholder interests.

The Council of Institutional Investors was more blunt: The BRT statement “undercuts notions of managerial accountability to shareholders,” and, in the Council’s view, “accountability to everyone means accountability to no one.”

ESG Disclosures in a BRT World

It is important to note that the SEC currently has no specific requirements for ESG disclosures, as described here. William Hinman, director of the agency’s Division of Corporation Finance, observed that ESG disclosures have expanded in recent years, and that market standards are evolving. He stated in a March 2019 speech that “substituting regulatory prescriptions for market-driven solutions, especially while those solutions are evolving, in my view, is something we need to manage with utmost care.” In the absence of uniform disclosure standards, however, investors will lack the necessary information to compare companies on the basis of ESG implementation.

What’s Next?

The BRT statement is a useful first step, but it only has value to the extent that companies take real steps to implement its principles. The next year will involve a wait-and-see approach to determine how the marketplace reacts. Public disclosures will not necessarily improve, however, as there are no uniform ESG disclosure standards in place. In the absence of such standards, companies will make their own determinations as to what ESG information they should make available to the public.

Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.