There has been mounting pressure on mandatory ESG disclosure in recent years that may reach a precipice in 2021 with a new SEC Chairman. The forces driving this pressure include institutional investors, fiduciary duties, proxy advisers and demographic changes. With President Biden having nominated Gary Gensler as SEC chairman, it appears ESG disclosures may become common place.
The ‘Push’ and ‘Push-Back’ Within the SEC
The SEC has faced conflicting views on whether the current regulatory framework is sufficient for ESG disclosures. Former SEC Chairman Jay Clayton has defended the idea that the existing materiality threshold adequately addresses concerns for ESG disclosures. During a meeting of the SEC Investor Advisory Committee in December 2018, Mr. Clayton noted that “what is important is that investors have full and fair disclosure of the material facts about the investment strategy their fiduciary is following so that they are in a position to make informed investment choices.” Mr. Clayton has also defended the current flexible approach over uniform ESG disclosure requirements across all industries, noting at a different SEC Investor Advisory Committee in November 2019 that “(1) not all companies in the same sector use the same or comparable data in their decision making and (2) investor analysis also varies widely.” However, this approach has been met with some resistance within the bounds of the SEC.
Acting chair of the SEC Allison Herren Lee previously wrote in August 2019 that “[i]t’s time for the SEC to lead a discussion—to bring all interested parties to the table and begin to work through how to get investors the standardized, consistent, reliable, and comparable ESG disclosures they need to protect their investments and allocate capital toward a sustainable economy.” Moreover, last May, the SEC Investor Advisory Committee recommended that the SEC adopt a uniform ESG disclosure regime among public companies. ESG disclosure has also faced competing factors outside the realm of the SEC.
Outside Factors Pushing ESG
Beyond the SEC, a number of factors have been pushing for ESG disclosure requirements. Some of the largest institutional investors, for starters, have proclaimed their support for certain ESG reporting regimes by adopting voting guidelines with respect to ESG disclosures. In 2020, State Street Global Advisors indicated that it would use its “proxy voting power to ensure companies are identifying material ESG issues and incorporating the implications into their long-term strategy”. Similarly, early last year, BlackRock joined Climate Action 100+, a network of investment managers dedicated to ensuring that the largest corporate polluters take necessary action to clean up their practices. As a signatory of Climate Action 100+, BlackRock and other investors commit to ensure the companies they engage with take action to reduce greenhouse gas emissions, ensure board accountability and oversight of ESG issues, and provide detailed ESG disclosures.
In addition to institutional investors, ESG risks and disclosures are increasingly discussed as a part of the duties of a fiduciary. A 2017 global survey conducted by Harvard University found that 46% of respondents driven by fiduciary duties cited mitigating ESG risk as a part of fiduciary duty, suggesting that “mitigating ESG investment risks and shaping a sustainable economy are viewed as key responsibilities to their beneficiaries—two different drivers but with the same effect.”
Proxy Advisers have also played a part in pushing for more ESG disclosures. Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC this year have each revised their voting guidelines on board oversight of ESG issues. As an example, Glass Lewis indicated in its 2021 Proxy Voting Policy Guidelines that in 2022, it will begin recommending voting against the governance committee chair of S&P 500 companies “who fails to provide explicit disclosure concerning the board’s role in overseeing [ESG] issues”, recognizing the importance of overseeing these issues at the board level.
Demographic changes of recent years have also provided a certain force behind requiring more ESG disclosures, with an increase in investing by millennials and women. With millennials now encompassing the largest part of the work force, according to Pew Research, their motivation to be sustainable as a consumer is bleeding into their investment strategy. A 2019 Morgan Stanley study showed that 95% of millennials are interested in impact investing, and that 90% of millennials tailored their investment choices around sustainability.
Women, just like millennials, now make up a larger part of the work force than before. And just like millennials, women tend to take ESG issues into concern when investing. In fact, according to a 2017 Morgan Stanley study, women are more likely to take part in impact investing than male investors (84% women compared with 67% men), which is illuminating considering how much wealth is now in the hands of women.
Outside Factors Pushing Back on ESG
The road to requiring ESG disclosures, however, is not without its speed bumps. Just over a year ago, State Street Corporation published research highlighting the factors for and against the adoption of ESG principles across 300 institutional investors globally. It found that the top inhibitor of requiring ESG disclosure is the unreliability and inconsistency of ESG data, with 44 percent of surveyed institutional investors citing these as a primary concern.
The research also found that certain inhibitors were weighted differently depending on the type of institution. For example, pension funds (about 47 percent) were found to be most likely to cite an availability of reliable ESG data as their top concern, whereas sovereign wealth funds (69 percent) were found to cite internal resource costs as a deterrent. Internal resource constraints and costs (43 percent) and a lack of expertise (40 percent) were also found to be some of the largest inhibitors of adopting ESG principles.
Insight into 2021 and Beyond
One of President Biden’s campaign platforms was to combat climate change by establishing “an enforcement mechanism to achieve net-zero emissions no later than 2050.” With President Biden’s pick of Gary Gensler as new SEC Chairman, the SEC will likely begin requiring public companies to disclose a range of particular ESG-specific risks beyond the current, general materiality standard.
