Article

SEC Asked to Develop Rule on Environmental, Social and Governance Disclosures

October 26, 2018

In a petition letter to the Securities and Exchange Commission (“SEC”) earlier this month, 50 investor groups and 17 law school professors requested that the agency require environmental, social, and governance (“ESG”) disclosures from public companies. The letter’s authors, law professors Jill Fisch (University of Pennsylvania) and Cynthia Williams (York University in Canada), wrote that the SEC should develop an extensive framework related to ESG matters that help investors become better informed on companies’ long-term performance and risks.

According to Fisch and Williams, recent investment studies prove that a good amount of companies’ ESG disclosures are material. A 2017 study they cited revealed that sustainability factors can strongly indicate outcomes like future volatility and bankruptcies. Fisch and Williams also referenced a 2015 analysis of academic studies on ESG reporting, which discovered companies that disclose sustainability information likely have smaller costs for raising funds from investors and an increased stock price. Companies that disclose ESG information are also likely to have higher earnings.

The petition acknowledged large companies for attempting to disclose additional nonfinancial information but noted voluntary efforts fall short of satisfying investors’ needs. Fisch and Williams said investors remain displeased with the comparability of sustainability information, even among companies in the same industry. Additionally, companies that already disclose long sustainability or ESG reports could cut costs by focusing solely on gathering and reporting factors considered material. If the SEC gives issuers clarity on what sustainability disclosures are necessary, Fisch and Williams argued it would produce comparability between companies in the same industry.

The appeal for a new SEC disclosure rule on ESG information comes as investors gradually believe such disclosures are material to investing decisions and shareholder votes. Despite several large companies voluntarily disclosing ESG information, investor advocates state voluntarily-provided information is insufficient and lacks consistency.

Conversely, business groups disagree with adding disclosure rules on social and environmental matters. They would rather the SEC focus on the average investor than catering to special interest groups. In their opinion, sustainability information is specialized data that is irrelevant to most investors.