There’s a raft of revisions to regulations and oversight emerging worldwide on company ESG disclosures – according to one study, 'at present, 29 countries and territories maintain some degree of mandatory ESG disclosure regulation' – but will all this work improve the quality of ESG reporting (a challenge you have as values investors that we’ve covered in prior posts)?
Recent analysis of expected regulatory changes to company ESG-related filing requirements in the US by the CFA Institute – “SEC Scrutiny of ESG-Related Disclosures: What to Expect” suggests don’t expect much to benefit ESG investors in the near-term.
Background and Issues
Overall the US Securities and Exchange Commission (SEC) has a goal to 'ensure that companies provide investors with material information to make informed investment decisions'. As part of this process, the SEC reviews all company public disclosures at least once every three years. If the SEC has questions, or finds issues with disclosures, they issue a comment letter to the company which is available to the public. The authors note two issues with the process – the SEC does not disclose reviews that lead to no comment letters, and the SEC may not review all a company’s disclosures, and will not reveal this publicly. Further, the authors note two additional problems:
US companies publish ESG-related information in their required proxy filings, which 'the SEC may or may not review', and
For ESG or sustainability information published by the company on their website, 'the SEC may have no responsibility' to review these disclosures.
'…stakeholders should not assume that ‘no news is good news’…
and even if it did review some ESG-related information, the SEC states that this does not guarantee the disclosures were complete or accurate'.
Ultimately – 'Securities law [currently] does not require that companies disclose their material ESG matters'.
For Investors, the authors find:
'SEC is better at enforcing compliance with bright-line accounting and disclosure rules but is less likely to issue a comment letter when disclosures rely heavily on a company’s professional judgment. Given the subjective nature of many ESG-related disclosures and the lack of a generally accepted reporting framework, it is not clear from a compliance-monitoring perspective how rigorous SEC oversight of ESG disclosures can be'.
How might the SEC’s activities impact ESG disclosures? They find that current academic research on ESG reporting and SEC effectiveness 'suggests that the public dissemination of SEC comments and company responses could help companies reach consensus and converge on disclosure norms'. But further caution that this more organic and bottom-up approach will take-time, and likely fall behind the needs and expectations of ESG investors.