Investors press for SEC rule on ESG disclosure

A coalition of academics, institutional investors and government officials is lobbying the SEC to spell out what and when companies must tell investors about ESG issues.

In a petition sent to the agency on October 1, professors Cynthia Williams of Osgoode Hall Law School at York University and Jill Fisch of the University of Pennsylvania Law School urge the commission to ‘initiate rulemaking to develop mandatory rules for public companies to disclose high-quality, comparable, decision-useful environmental, social and governance information.’

According to the authors, the petition’s signatories represent more than $5 trillion in assets under management. They include CalPERS, New York State comptroller Thomas DiNapoli, Illinois state treasurer Michael Frerichs, Connecticut state treasurer Denise Nappier, Oregon state treasurer Tobias Read and the UN Principles for Responsible Investment. 

A growing number of public companies is, in the face of mounting investor pressure, voluntarily producing sustainability reports designed to explain how they are creating long-term value, the authors note. But without adequate standards, there are substantial problems with the nature, timing and extent of these disclosures, they argue.

In essence, the petitioners argue that the SEC has clear statutory authority to require the disclosure of ESG information, and that doing so would promote market efficiency, protect the competitive position of US public companies and capital markets, and enhance capital formation.

‘By providing more information to investors, giving better information about risks and opportunities, and standardizing what is currently an unco-ordinated and irregular universe of ESG disclosures, the SEC would act to increase confidence in the capital markets,’ Williams and Fisch write. ‘This confidence may well mobilize sources of capital from investors who are currently unwilling to invest given knowledge gaps or information asymmetries.’

Although ESG information is material to a broad range of investors, companies are struggling to provide it in a way that is relevant, reliable and ‘decision-useful,’ the academics say. They note that the SEC already requires companies to disclose detailed information concerning issues such as corporate governance - such as statistics on board members’ attendance at meetings – and executive compensation.

SEC rules would reduce the burden on public companies and provide a level playing field for those already providing voluntary ESG disclosure, they add.

‘In addition to benefiting investors, rulemaking regarding ESG disclosure would benefit America’s public companies by providing clarity to them about what, when and how to disclose material sustainability information,’ Williams and Fisch write. ‘Today companies are burdened with meeting a range of investor expectations for sustainability information without clear standards about how to do so.’

Although several ‘promising frameworks’ have been created, ‘different companies are using different frameworks and multiple mechanisms to disclose sustainability information. Thus, investors are still dissatisfied with the comparability of sustainability information, even between companies in the same industry,’ they add.