SEC Chairman Criticizes Required Disclosures on Environmental and Social Matters

January 18, 2019

Expressing his opinions last month about environmental, social and governance (“ESG”) reporting, Securities and Exchange Commission (“SEC”) chairman Jay Clayton declared that public companies should not have to disclose ESG information in a standardized format. Clayton particularly opposed public companies’ use of ESG standards from organizations such as the Global Reporting Initiative. He said while third-party ESG standards may allow for comparability among companies, they should not require issuers to follow such frameworks to comply with SEC rules. Clayton noted each company and sector has its own situations unlikely to fit within a standard framework.

Clayton shared his thoughts in front of the SEC’s Investor Advisory Group. Highlighted in his remarks were two principles for the investor advisory panel to remember. First, to comply with SEC disclosure rules, Clayton said companies should focus on providing material disclosures to help investors make sound investment and voting decisions based on a company’s particular situation. Second, investment advisers have a fiduciary duty to act in their clients’ best interest.

Despite Clayton’s arguments against requiring ESG disclosures, he stressed that such standards have value. Clayton remarked that sometimes, ESG standards add value similarly to non-GAAP financial measures and key performance indicators.

Business groups that oppose disclosure requirements about ESG issues are likely to support Clayton’s viewpoints. Such groups want the SEC to concentrate on providing the average investor material information and not placate special interest groups. They also consider sustainability information as specialized data irrelevant to most investors and has no impact on financial performance.