ESG refers to the environmental, social and governance criteria that individuals may use to evaluate the impact that a given company may have on society. The topic of ESG has garnered increased attention by investors in recent years and has emerged as an increasingly important and popular metric by which potential investors evaluate investment opportunities. While ESG has increasingly risen to the forefront of investor considerations, public companies demonstrate significant discrepancies in their approach to ESG disclosures. This article investigates the current state of disclosure requirements as well as how companies are approaching ESG disclosure demands and the opponents to such demands.
Beginning with the more global approach, international organizations including the United Nations and the World Economic Forum have called for increased ESG disclosures, demonstrating the international community’s acknowledgement of the importance of ESG in organizational, especially public company, governance and investing. In the United States, the mandates are not so clear. The U.S. Securities and Exchange Commission (SEC) has faced criticism for its failure to compel ESG specific disclosures. Under current SEC regulations, the disclosure of ESG is required only if it is “material,” putting ESG among an assortment of other factors that companies must independently examine to determine what is material to investors. In June 2020, the SEC Investor Advisory Committee approved a recommendation regarding ESG disclosures, stating that the SEC should undertake an effort to update reporting requirements to include “decision-useful” ESG factors. The recommendation highlighted a common complaint of disclosure advocates, that without effective disclosure obligations investors cannot make informed investment and voting decisions. In early July 2020, SEC Commissioner Elad L. Roisman delivered a virtual Keynote Speech to attendees of the Society for Corporate Governance National Conference which focused on the topics of mandated ESG disclosure for public companies and the current state of ESG disclosures by asset managers. Roisman highlighted inherent concerns the SEC faces as it addresses calls for increased ESG disclosure, including that mandated disclosures could potentially blur the lines between personal beliefs about ESG topics and the responsibility of the SEC to regulate the actions of companies and ensure that investors remain adequately informed. With respect to whether increased disclosure is necessary to ensure adequate information is supplied to investors, Roisman argued that materiality is the hallmark of the SEC disclosure framework, requiring that public companies adequately inform investors regarding material factors while minimizing unnecessary and irrelevant over-disclosure.
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