Will We Ever See SEC Rules / Guidance For Corporate ESG Disclosure and Reporting? The Question Hangs in the Wind…
Posted on June 15, 2020 by Hank Boerner – Chair & Chief Strategist#Corporate CSR Reporting #Corporate Governance #ESG Issues #Public Sector Governance #Shareowner Activism #Sustainability Reporting
by Hank Boerner – Chair & Chief Strategist – G&A Institute
People have questions about corporate sustainability / ESG / responsibility / citizenship disclosure and reporting. Such reporting has been on a hockey stick rise in recent years.
Should ESG/sustainability etc reporting be regulated? How? What would be regulated in terms of disclosure and reporting – what should the guidelines for corporate issuers be? Does this topic become a more important part of the SEC’s ongoing Reg S-K (disclosure) revamping? What information do investors want? What do companies want to have covered by regulation? Many questions!
Some answers are coming in the European Union for both issuers and investors with new and proposed regulations.
And in the main will have to come in the U.S.A. from the Securities & Exchange Commission — at some point.
SEC was created with the adoption of the Securities Exchange Act of 1934. The agency was specifically created by the U.S. Congress to oversee behaviors in the 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 subsequent legislation (all providing statutory authority for rulemaking and oversight) provide the essential framework for SEC to do its work.
As Investopedia explains for us, 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. Which brings us to S-K.
In recent months, the SEC staff has been working on the steps to reform and updates segments of Reg S-K and has been receiving many communications from investors to suggest reforms, updates, expansion of, corporate disclosure. (Details are below in the news release from SEC in 2019. The SEC proposed rule changes, still in debate, are intended to “update rules” and “improve disclosures” for investors and “simplify compliance efforts for companies”.)
Regulation S-K provides standard instruction for filing forms required under the 1933 and 1934 acts and the Energy Policy and Conservation Act of 1975.
Especially important in the ongoing initiative to update Reg S-K, we believe: the setting out for SEC staff and commissioners of facts and perspectives so that serious consideration is given to the dramatic sea changes in (1) the growth of sustainable investing and the related information needs; (2) and, the vigorous corporate response, particularly in the form of substantial sustainability / ESG reports issued.
Most of the corporate reports published in recent years have been focused on the recommended disclosures as advanced by popular frameworks and widely-recognized reporting standards (such as those of GRI, SASB, CDP, TCFD, et al).
Will we see SEC action on S-K rules reform that will draw applause from the sustainable investors? Now, we point out, including such mainstream players as BlackRock, State Street and Vanguard Funds, to name but a few owners found in almost every corporate top holder list.
Ah, Depends. Political winds have driven changes in rules at SEC. Then again, it is an election year. (To be kept in mind: There are five SEC commission members; two are appointed and confirmed Democrats, two are Republicans – and the chair is nominated by the president…right now, a Republican holds that position.)
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 or amending the rules have to follow the various statutes passed by the congress related to the issue. Investor and stakeholder input is an important part of the approach to rule-making. Sustainable investing advocates have been making their views abundantly clear in this initiative to update Reg S-K.)
The SEC Investor Advisory Committee formally makes recommendations to the agency to help staff and commissioners be aware of investor sentiment and help to 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 set down 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…” (She is a Republican nominee, a lawyer in academia.)
We have included her comments in the selection of four Top Stories for you. Another of the items – the comments of SEC Chair Jay Clayton along the same lines about ambiguity and confusion of ratings etc. (he is also a Republican appointee).
To which sustainable investing proponents might say – if not now, when, SEC commissioners!
While the conversation may at times be focused on “what do investors want,” there is also wide agreement among corporate boards and executives that guidance and standardization in corporate ESG / sustainability et al reporting would be very helpful.
With the current comments of the leadership of SEC we are not quite there yet.
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 (a Democrat) moving to the White House in March 1933 and swiftly taking action to address important public policy issues. He brought him his “brains trust”, experts in various public policy issues that helped to create sweeping reforms and creation of powerful regulatory agencies — such as the SEC.
The story goes that there was so much to do that the financial markets and corporate oversight legislation had to be divided into two congressional sessions – in 1933 and 1934 (the congress met for shorter periods in those days – the members were part-timers). Thus, the Securities Act of 1933 and the 1934 act.
Regulation overall was then and today is a very complicated topic!
SEC’s Investor Advisory Committee Makes Disclosure Recommendations (Source: Cooley PubCo)
SEC Chair Warns of Risks Tied to ESG Ratings
(Source: Financial Times)
In addition, see:
- Remarks at Meeting of the SEC Investor Advisory Committee
- SEC Proposes to Modernize Disclosures Under Regulation S-K – news release from the agency in August 2019 (“SEC Proposes to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K”.