Another day, another statement from the Securities and Exchange Commission about how the agency might approach enhanced ESG disclosures. This time we have a speech from the acting head of the Division of Corporation Finance, getting a bit more specific about how an enhanced ESG disclosure regime might work in practice.
The statement came from John Coates, and we should remember that (a) Coates is only acting director, until a permanent new SEC chairman takes office and appoints a permanent new CorpFin director; and (b) Coate is only offering his own views, not any formal position of the SEC itself. Still, Coates was hired only in February, which means he joined to help the new Democratic leadership further their policy goals.
Which means that his words on ESG disclosure are worth considering, and probably presage more formal ESG policy changes to come.
Perhaps most notably, Coates started from the assumption that ESG factors are important to investors, so therefore the SEC does have a role to play in developing an ESG disclosure regime. His exact words: “The SEC should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost effective manner.”
Coates then listed seven questions about ESG disclosure that need to be answered:
- What disclosures are most useful?
- What is the right balance between principles and metrics?
- How much standardization can be achieved across industries?
- How and when should standards evolve?
- What is the best way to verify or provide assurance about disclosures?
- Where and how should disclosures be globally comparable?
- Where and how can disclosures be aligned with information companies already use to make decisions?
“These are questions that the SEC should be a key part of answering,” Coates said. So clearly he sees a vigorous role for the SEC, where the agency works with numerous stakeholders in the corporate disclosure world to build something enduring and significant: consensus on how to fit ESG factors into corporate reports.
That’s a fair bit further than anything we heard from the Trump Administration, which barely touched ESG issues. The closest those folks got were those wishy-washy human capital disclosures adopted last summer.
ESG Points to Consider
Coates then outlined three major points the SEC and others should consider about greater ESG disclosure.
First, he said, critics of more ESG disclosure requirements should consider the costs of not having ESG disclosure requirements:
For investors, despite an abundance of ESG data, there is often a lack of consistent, comparable, and reliable ESG information available upon which to make informed investment and voting decisions. Investments are being held back in the absence of that information … Companies face higher costs in responding to investor demand for ESG information because there is no consensus ESG disclosure system.
This is a fair point. Some might say a uniform set of rules and standards for ESG is just the government playing Big Brother — but right now the alternative for companies is a gaggle of Little Brothers from the institutional investment world and the Twitterverse, each one bugging the company to meet some specialized ESG demand.
Coates also noted that meeting all those demands is more burdensome for smaller companies, but if those smaller firms don’t belly up to the ESG good governance bar, they can shut themselves out of the trillions of investment dollars poured into ESG-conscious funds; so the firms face a higher cost of capital.
Second, Coates raised the intriguing notion that enhanced ESG disclosure requirements don’t have to be mandatory. Rather, the SEC could push for a “comply or explain” standard that lets a company decline to make such disclosures, so long as the firm can explain its thinking to investors.
“People often think of mandatory disclosure in a way that suggests that there is nothing more than an on/off switch between mandatory and voluntary disclosure,” Coates said. “Our existing disclosure regime, however, is already more nuanced than that, and there is no reason an ESG disclosure system would need to be less nuanced.”
Third, Coates said that any ESG disclosure requirements the SEC might adopt should reflect global consensus on such issues. And really, he staked out an unequivocal position, too:
On the issue of global comparability, arguments in favor of a single global ESG reporting framework are persuasive. ESG issues are global issues. ESG problems are global problems that need global solutions for our global markets. It would be unhelpful for multiple standards to apply to the same risks faced by the same companies that happen to raise capital or operate in multiple markets.
He then specifically praised the IFRS Foundation, which has been working to create a Sustainability Standards Board that would draft ESG reporting standards the same way the IFRS Foundation drafts financial reporting standards. Presumably, the SEC would then try to harmonize any ESG disclosure requirements here with those requirements there.
What Does All This Mean?
In the detailed sense, we don’t know what this means. Above all, the compliance and governance communities need to wait for a new SEC chairman to take office at the agency and set the policy agenda. In all likelihood that person will be Gary Gensler — the Senate Banking Committee approved his nomination Wednesday on a 14-10 vote — but nothing substantive happens until he arrives.
All that said, we can still see where all this talk about ESG disclosure is headed generally. SEC leadership wants more fulsome corporate disclosure of ESG factors, and is ready to use its regulatory power to force that discussion.
Compliance officers, ESG enthusiasts, policy mavens, and anyone else who works in the world of gathering data for corporate reporting should plan accordingly.