The SEC is moving—slowly—toward including environmental, social, and governance (ESG) disclosures in public company filings. Although the U.S. House of Representatives’ Financial Services Committee in July 2019 rejected a bill that would have aligned ESG reporting standards closer to those found in the EU and required climate change risk factor disclosures, ESG is an issue only likely to gain in prominence in the near future.
Companies may have dodged increased ESG disclosure regulation for the moment, but pressure is mounting on companies to provide ESG information. As recently as Oct. 15, credit ratings agency Moody’s warned that asset managers face growing credit risk if they fail to address ESG concerns by investors. Whether by legislation, SEC rule, or simply to satisfy the growing demands of investors for more and clearer information of this type, public reporting companies in 2020 will increasingly find they need to provide ESG disclosures.
Europe is ahead of the U.S. in responsible investing. And it’s far ahead of the U.S. in mandating disclosure of ESG risks and opportunities by financial market participants and financial advisers. The EU’s ESG disclosure regime works to harmonize disclosures across both sectors and financial market operators. It does this by requiring ESG risks and opportunities be disclosed in a consistent, standardized way that enables comparison.
Around the world, ESG data is increasingly in demand. Bloomberg partnered with the CFA Institute and Principles for Responsible Investments to analyze Bloomberg’s ESG company disclosure scores. Reports of their findings are available for ESG Integration in the Americas, Europe/Middle East/Africa, and Asia Pacific. These reports found that the main drivers of ESG integration are risk management and client demand. They also suggested that “[i]t would be helpful for issuers and investors to agree upon a single ESG reporting standard that could streamline the data collection process and produce more quality data.”
Currently, the SEC does not have any ESG disclosure rules or reporting standards—only some guidelines issued in 2010 regarding how its existing rules might apply to climate risks. According to Bill Hinman, Director of the SEC’s Division of Corporation Finance, the agency plans to continue taking a principles-based, wait-and-see approach to evolving and complex ESG topics. He stated that the market is still evaluating what additional ESG-related disclosures might be needed, and that the SEC is monitoring ESG corporate disclosures voluntarily provided by companies.
Increasingly, investors would like the ability to compare companies around the world and across industry sectors via standardized disclosures and ESG ratings harmonized across jurisdictions. In October 2018, institutional investors representing over $5 trillion in assets petitioned the SEC to mandate standardized disclosure by public companies identifying the ESG factors that affect their businesses. According to a 2015 report by the Initiative for Responsible Investments of the Hauser Institute at Harvard University’s Kennedy School, 23 countries already require public companies to issue reports that include ESG information. The U.S. risks becoming an outlier if U.S.-listed companies continue to withhold ESG information, and the SEC risks effectively ceding the regulatory space if the EU’s ESG disclosure rules become the world’s benchmark.
For those looking for guidance on how the SEC might approach rulemaking in this area, Hinman has suggested the SEC may use its 2018 cybersecurity guidance as a model. When a matter such as cybersecurity, extreme weather, or sustainability presents a material risk to a public corporation, Hinman explained, “disclosure about a company’s risk management program and how the board engages with the company” can provide salient information to investors so they can better evaluate how well the board is overseeing risk.
Even without formal SEC rules on ESG disclosures, companies are likely to feel increasing pressure from investors and the non-U.S. jurisdictions in which they operate to provide ESG information. A growing number of companies are already voluntarily making this data available to investors and disclosing the ESG impact on its operations. It seems only a matter of time before the SEC’s wait-and-see approach will end and its rulemaking begins.
Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.