The Investor Perspective: ESG Disclosure and the SEC

By Lisa N. Woll Since the 1990s, US SIF and other investors and advocates have been pushing for enhanced environmental, social and governance (ESG) disclosure.  The push began with the Corporate Sunshine Working Group (CSWG), and soon after, the Government Accountability Office reinforced the need for greater ESG disclosure. The movement for enhanced disclosure has continued, and after persistent pressure from sustainable and responsible investors -- and from Congress -- the Securities and Exchange Commission (SEC) is beginning to respond to demands for companies to provide enhanced ESG disclosure.  With recently announced changes in the agency’s leadership, it is critical to continue making the case for ESG disclosure. Investors are increasingly recognizing that these issues are material to financial performance and sustainability over time.  However, most U.S. companies are not required to report ESG disclosure, resulting in a lack of publicly available comprehensive, comparable data.   Our ESG disclosure agenda is meant to address that void. In 2009, US SIF approached the SEC about mandating broad ESG disclosure.  US SIF then submitted a proposal to the SEC to require issuers to report annually on a comprehensive, uniform set of sustainability indicators and suggested that the SEC define these as the highest level of the Global Reporting Initiative guidelines. More than 80 major investment firms and professionals joined US SIF in signing the letter, representing more than $500 billion in assets under management. Similarly, the Investor Network on Climate Risk and other global investors asked the SEC to improve disclosure of climate change and other material sustainability risks in securities filings. Importantly, the UN Environment Program Finance Initiative argued that integrating ESG considerations into investment decisions is a legal responsibility. An earlier report by Freshfields Bruckhaus Deringer concluded that “…integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.” Progress is being made – in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law and included several important provisions relating to ESG disclosure, such as requiring public companies to disclose CEO-to-worker pay ratios. Recently, the SEC issued two important disclosure rules under the Act regarding companies using conflict minerals in their products and requiring resource extraction issuers to disclose payments to governments. The issuance of these rules represents an important step forward in providing greater clarity on ESG disclosure to millions of investors. Additionally, demands for disclosure on corporate political spending are growing. The U.S. Supreme Court’s 2010 decision Citizens United has resulted in a flood of more than 290,000 comments to the SEC, as well as a number of pending legislative responses, including the Shareholder Protection Act and the DISCLOSE Act. Fortunately, there are other efforts which also address the need for providing better information to investors, including growing interest in integrated reporting, which links a company’s strategy, governance and financial performance with the ESG context in which it operates. The newly created Sustainability Accounting Standards Board (SASB) is establishing standards for integrated reporting and an understanding of relevant and material issues to 35,000 publicly-listed companies through disclosure in standard filings, such as the Form 10-K and 20-F. The SEC has also re-launched an Investor Advisory Committee, which includes in its mandate advice on the effectiveness of disclosure and initiatives to protect investor interests and promote investor confidence. Though it is clear we have been making progress, there is still more to do to drive forward a disclosure agenda. US SIF believes that it is critical that the SEC pick up the pace on disclosure and promulgate broader ESG disclosure rules. Lisa Woll is the Washington, DC-based CEO of US SIF:  The Forum for Sustainable and Responsible Investment, the U.S. membership association for SRI professionals and institutions. E-mail: lwoll@ussif.org [Image credit: chrisjohnbeckett, Flickr]