Will We Ever See SEC Rules/Guidance for Corporate ESG Disclosure and Reporting? The Question Hangs in the Wind...

G&A's Sustainability Highlights (06.08.2020)
Jun 9, 2020 10:30 AM ET

Questions:  What about the dramatically-increasing corporate ESG / sustainability / responsibility / citizenship disclosure and reporting?  Should it be regulated?  How? What would be regulated in terms of disclosure and reporting – what should the guidelines for issuers be?  Does this topic become an important part of the SEC’s ongoing Reg FD (disclosure) revamping? What do investors want?  What do companies want?  Many questions!

The answers are coming in the European Union for both issuers and investor.  And in the main have to come in the U.S.A. from the Securities & Exchange Commission -- created with the adoption of the Securities Exchange Act of 1934.  The SEC was specifically created by the U.S. Congress to oversee securities and markets and the conduct of financial professionals. 

Publicly-traded company reporting oversight is also an important part of the SEC mission. The 1933 and 1934 acts and other legislation (statutory authority) provide the essential framework for SEC rule making.

As Investopedia explains, the purpose of the 1934 act is “to ensure an environment of fairness and investor confidence.”  The ’34 act gave SEC broad authority to regulate all aspects of the securities industry and to enforce corporate reporting by companies with more than US$10 million in assets and shares held by 500 or more shareowners.

An important part of the ongoing SEC’s mission, we should say here, is to protect investors and be open to suggestions “from the protected” to improve the complicated regimes that guide corporate disclosure. So that investors have the information they need to make buy-sell-hold decisions.

In recent months, the SEC has been working on the reform of Reg FD and receiving many communications from investors to suggest reform, update, expansion of, corporate disclosure.  (Details are below in the news release from SEC. The SEC proposed rule changes, still in debate, are intended to “update rules” and “improve disclosures” for investors and “simplify compliance efforts for companies.)

Especially important in these ongoing initiative, we believe:  the setting out for SEC staff and commissioners by key stakeholders of the importance of the dramatic sea changes in (1) the growth of sustainable investing and the related information needs; (2) the vigorous corporate response, particularly in the form of substantial reports issued – most focused on the recommended disclosures as advanced by popular frameworks and standards (GRI, SASB, CDP, TCFD, et al).

Will we see SEC action on rules reform that will draw applause from the sustainable investors…now including such mainstream players as BlackRock, State Street and Vanguard, to name a few in almost every corporate top holder list?  Depends.  Political winds have driven change at the SEC over many years.

Investor input is and should be an important part of SEC rule making. (All of the steps taken by the Commission to address such items as corporate disclosure and reporting in adopting rules have to follow the various statutes passed by the congress related to the issue.  Investor and stakeholder input is an important part of that approach to rulemaking.) 

The SEC Investor Advisory Committee formally makes recommendations to the agency to help staff and commissioners be aware of investor sentiment and guide the process through the advice provided.  Recently the committee voted to make recommendations to the SEC on three topics: (1) accounting and financial disclosure; (2) disclosure effectiveness; and, (3) ESG disclosure.

The committee said they decided that after 50 years of discussion on ESG disclosure it is time to make a move, now that ESG / sustainability are recognizably important factors in investing.  Given the current political environment in Washington, there probably won’t be much movement at SEC on the issue, many experts agree. 

But the marker has been strongly provided in the committee’s recent report, one of numerous markers set down by sustainable investment champions.  

Commissioner Hester M. Pierce addressed the Investor Advisory Committee, and shared her perspectives on ESG reporting.  “The ambiguity has made the ESG debate a difficult one…”  She thinks “the call to develop a new ESG reporting regime…may not be helpful right now…”

We have included her comments in the selection of four Top Stories for you.  Another of the items – the comments of the SEC chair along the same lines. To which sustainable investing proponents might say – if not now, when, SEC commissioners!

Interesting footnote:  The October 1929 stock market crash helped to plunge the nation into the Great Depression.  The 1932 presidential elections resulted in New York Governor Franklin Delano Roosevelt moving to the White House in March 1933.  He brought him his “brains trust”, experts in various issues that helped to create sweeping reforms and creation of powerful regulatory agencies such as the SEC. 

There was so much to do that the financial markets and corporate oversight legislation was divided into two congressional sessions – in 1933 and 1934 (the congress met for shorter periods in those days).  Thus, the Securities Act of 1933 and the 1934 act.

Regulation overall is a very complicated topic!

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.