On October 1, 2018, a public petition (Petition) was filed with the US Securities and Exchange Commission (SEC) for a rulemaking on environmental, social and governance (ESG) disclosure. The Petition was authored by two law professors and signed by investors and associated organizations representing more than $5 trillion in assets under management.
- Calls for the SEC to initiate notice–and-comment rulemaking to develop a comprehensive framework requiring issuers to disclose identified ESG aspects of each public-reporting company’s operations;
- Lays out the statutory authority for the SEC to require ESG disclosure;
- Discusses the clear materiality of ESG issues;
- Highlights large asset managers’ existing calls for standardized ESG disclosure;
- Discusses the importance of such standardized ESG disclosure for companies and for the competitive position of the US capital markets; and
- Points to the existing rulemaking petitions, investor proposals and stakeholder engagements on human capital management, climate, tax, human rights, gender pay ratios and political spending and highlights how these efforts suggest, in aggregate, that it is time for the SEC to bring coherence to this area.
The Petition makes the following arguments in support of the proposed ESG disclosure rulemaking:
- The SEC has clear statutory authority to require disclosure of ESG information, and doing so will promote market efficiency, protect the competitive position of American public companies and the US capital markets and will enhance capital formation;
- ESG information is material to a broad range of investors today;
- Companies struggle to provide investors with ESG information that is relevant, reliable and decision-useful;
- Companies’ voluntary ESG disclosure is episodic, incomplete, incomparable and inconsistent, and ESG disclosure in required SEC filings is similarly inadequate;
- SEC rulemaking will reduce the current burden on public companies and provide a level playing field for the many American companies engaging in voluntary ESG disclosure; and
- Petitions and stakeholder engagement seeking different kinds of ESG information suggest, in aggregate, that it is time for the SEC to regulate in this area.
In particular, the Petition argues that there is evident strong support for better ESG disclosure, noting that there were a substantial number of such comments made to the SEC in response to the SEC’s 2016 Concept Release on Business and Financial Disclosure Required by Regulation S-K.1 Also, the Petition notes that investors with $68.4 trillion of capital are committed to incorporating ESG factors in their investing and voting decisions as part of the United Nations’ Principles for Responsible Investing,2 that institutional investors with over $95 trillion of invested capital support the Carbon Disclosure Project’s annual survey3 and that global assets under management utilizing ESG factors and similar screens were valued at $22.89 trillion at the start of 2016 and constituted 26 percent of all professionally managed assets globally.4
The Petition also notes the proliferation of ESG disclosure frameworks that have emerged over the last 25 years’ of voluntary ESG disclosure and states that, of these, the Global Reporting Initiative’s framework has emerged as the clear global benchmark, with 75 percent of the Global 250 using the GRO framework for their related reporting and with 67 percent also having their reports “assured,” often by an accounting firm.5
Finally, in describing the investor need for better ESG disclosure, the Petition quotes both BlackRock, the world’s largest asset manager:
“Environmental, social, and governance issues are integral to our investment stewardship activities, as the majority of our clients are saving for long-term goals. It is over the long-term that ESG factors – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts. Our risk analysis extends across all sectors and geographies, helping us identify companies lagging behind peers on ESG issues.”6
and Michael Bloomberg:
“[F]or the most part, the sustainability information that is disclosed by corporations today is not useful for investors or other decision-makers. . . .To help address this issue, I became chair of the Sustainability Accounting Standards Board (SASB) in 2014, and last year , I agreed to build on that work by chairing the new Task Force on Climate-Related Financial Disclosures (TCFD)….The market cannot accurately value companies, and investors cannot efficiently allocate capital, without comparable, reliable and useful data on increasingly relevant climate-related issues…”
However (and as noted), the Petition is not the first to be made to the SEC on this subject; it follows an earlier 2007 petition (and subsequent 2008 supplemental petition and 2009 second supplemental petition) requesting climate-risk disclosure guidance, which resulted in the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change and other related petitions.
Past experience suggests that even if the SEC acts on the Petition, it may be some time before a formal rulemaking process is commenced. However, the prospect of required ESG disclosure has now been raised. Public companies and others interested in providing better ESG disclosure should probably prepare to do so.