Economy and Society: SEC commissioner addresses costs of new ESG disclosure rules

ESG Developments This Week

In Washington, D.C.

SEC commissioner on costs of new ESG disclosure rules 

On June 3, Elad Roisman, one of two Republicans commissioners on the SEC, gave a speech in which he appeared consigned to what he calls the inevitability of new mandatory environmental and workforce disclosure rules:

“There have been several calls for the SEC to require public issuers to include granular disclosure on ESG topics in their SEC filings. As you have probably heard me say before, I have reservations about the SEC issuing prescriptive, line-item disclosure requirements in this space, particularly in the areas typically designated as environmental (“E”) or social (“S”) disclosure, although I know people’s categorization of ESG information can vary….

I feel like a broken record, but our disclosure framework already requires public issuers to provide information that is material to investors, including information one might categorize as “E,” “S,” or “G.” The Commission has explicitly interpreted our rules to require disclosure of the material effects of climate change on a business. We also amended Regulation S-K last year to require disclosures regarding human capital. To the extent that other material risks to a company can be categorized as “E,” “S,” or “G,” I do not see a legal justification for failing to disclose that information under our existing rules.

But, the SEC Chair has made clear that further ESG disclosure is an area that the agency will pursue….

Today, I want to talk about potential costs of any new ESG disclosure regime and ways to mitigate them because I realize that the agency has such rules in process, and I believe this discussion is relevant, regardless of how the Commission approaches the other questions I have asked.

So, let me now proceed to put the electric cart before the horse and talk about the various costs and difficulties that would inevitably come from new line-item disclosure requirements in the areas of ESG and how the SEC might address them to make the regime workable for companies and to benefit investors.”

Roisman proceeded to make the case that, in his view, costs to companies must be minimized on a variety of fronts, before concluding that:

“In summary, any new ESG disclosure rules will inevitably come with costs…. I hope the Commission can predict these costs clearly enough to mitigate them in our rulemaking process. From my perspective, this can only help meet the stated objectives of any potential ESG disclosure proposal—that is getting this new information to investors.”

In response, Commissioner Allison Herren Lee, an advocate for new disclosures, appeared to acknowledge Roisman’s concerns about costs to companies and agreed that the new rules should be as inexpensive to implement and as flexibly implemented as possible. At a June 7 event for the Wall Street Journal’s CFO Network, Commissioner Lee said that she would like any new disclosure requirements to be applied carefully and judiciously. According to Bloomberg Law, Lee said that she wanted to ensure that the new rules were not implemented as “some kind of gotcha where we come up with a rule, and two months later, we’re knocking on your door.” She also said she wanted companies to “be given time to learn from their peers and get their ESG reporting right,” and for the SEC to phase in compliance slowly and/or “deploy a safe harbor to help companies with compliance.”

ESG and litigation risks

ESG has set off a boom in litigation, according to a story in the National Law Review, and the fear is that, without a safe harbor to help companies with compliance, the boom will grow much louder and more powerful:

“More than 95% of the Fortune 50 now include some ESG disclosures in their SEC filings. The topics on the rise in 2020 included Human Capital Management, Environmental, Corporate Culture, Ethical Business Practices, Board Oversight of E&S Issues, Social Impact and Shareholder Engagement.

While the increased attention on ESG presents an opportunity for companies to showcase their good work, it also creates increased litigation risk. These new challenges primarily fall into three areas: misrepresentations, unfair and deceptive trade practices, and securities fraud.”

Of particular concern, according to the story, is the fact that, after years with no perceived consistency of standards and several different bodies providing several different reporting guidelines, that many companies may find themselves with gaps in past reporting or inconsistencies with new mandates.

SEC disclosure push prompting rise in corporate lobbying

According to Bloomberg Law, the SEC has been meeting with lobbyists and other corporate representatives at an increasing pace so far this year:

“More than 20 companies, business groups, and other organizations have met with the SEC this year as the agency considers mandatory disclosures on climate risks and other environmental, social, and governance matters.

Uber Technologies Inc., Walmart Inc., and the World Economic Forum support corporate ESG disclosures and are among those that have spoken directly with the Securities and Exchange Commission in recent months, according to a Bloomberg Law review of agency records. Walmart and Uber are already releasing information about their greenhouse gas emissions and sustainability goals.

Skeptics are lining up, too. The U.S. Chamber of Commerce, which has publicly warned against expansive ESG disclosure requirements, also met with SEC officials recently, records show.

The stakes are high…. A mandatory reporting system from the SEC could be a “seismic shift” in corporate disclosure, said Keir Gumbs, Uber’s deputy general counsel and deputy corporate secretary, who met with commission officials on climate disclosures….

“A lot of people see how important this topic of discussion is and want to be part of the process,” said Gumbs, a former SEC counsel….

Most, if not all, of the SEC’s meetings so far with private-sector interests have included Kristina Wyatt, the agency’s new senior counsel for climate and ESG in its Division of Corporation Finance, which will take a leading role in any disclosure rulemaking. She’s often joined by John Coates, the division’s acting director. Sometimes, Satyam Khanna, the SEC’s senior policy adviser for climate and ESG, is there, too.

Public records from the meetings don’t provide detailed descriptions about what was discussed. But they show SEC officials spoke with a variety of company executives, lawyers, and other advocates, sometimes communicating with several representatives at multiple organizations in a single day.”

On Wall Street and in the private sector

Citi calls ESG unstoppable

On June 9, various members of Citi’s investment businesses held a virtual media briefing in which they argued that the forces driving ESG investment are, in their words, unstoppable and will, thus, propel global investments for some time to come. CNBC reported on the briefing and the Citi commentary as follows:

“Alternative and green energy are “very productive right now” where global trends are concerned, said Ken Peng, head of investment strategy for Asia-Pacific at Citi Private Bank, during a virtual media briefing on Wednesday.

“Governments from around the world from China to Europe to US are focusing on sustainable development and they are putting money where their mouths are,” he said….

David Bailin, chief investment officer at Citi Global Wealth, also said that over the next five to 10 years, investors — especially younger ones — will place an “enormous emphasis” on sustainable and responsible investing, and not just focus on profits.

They will look at how companies treat the environment, employees, and even politics will form part of their investment decision….

He said the most important will be the “unstoppable trends” like climate change and social justice, including providing equal access to education and technology.

“All of those are areas that I think are going to have unusual growth in the next five to 10 years,” said Bailin, who is also the firm’s global head of investments. “So these two things will converge and I think, create an opportunity for investors to make money by doing good.””


ESG ratings confusion

On June 11, The Wall Street Journal published an analysis of positive-ESG stocks, their performance relative to negative-ESG stocks and to the market more broadly, and the perceived discrepancies in ESG ratings between the three largest ESG data and ratings firms. According to the Journal, general ESG stock performance appears highly dependent on the firm doing the ratings, which produces confusion and can affect perceptions of ESG and its overall viability:

“Money is pouring into stocks that get good grades on issues like building a diverse workforce and reducing carbon emissions. But figuring out how high- and low-rated companies perform is nearly impossible because of inconsistencies in the way they are rated.

A close look at the ratings and performance of stocks ranked by the three major providers of data on environmental, social and governance criteria shows that companies can have widely different ratings.

Depending on the time period and the provider, top-ranked ESG stocks either beat the market or lag behind it. Low-ranked stocks, which are generally deemed to pollute more and treat their workers less well, can outperform top-ranked ESG stocks, and the market overall.

Since company rankings vary widely depending on the provider, which groups win and which lose is inconsistent….

The Wall Street Journal analyzed nearly 500 U.S. companies rated by all three providers and examined their 2020 and 2021 stock performance.

The Journal sorted companies into three groups—ESG leaders, average performers and laggards—based on ratings assigned by Refinitiv, a data provider owned by the London Stock Exchange Group, index provider MSCI Inc., and Sustainalytics, a unit of Morningstar Inc. The Journal analyzed their performance by calculating an equal-weighted index for each category….

Shares of companies considered by Refinitiv to be poor performers on ESG metrics have jumped 26% since the beginning of this year. Companies with top marks rose by 14% during the same period.

At Sustainalytics, the top-ranked companies for ESG rose 26% during the same period, beating those with lower ratings. At MSCI, the average companies based on ESG scores were the winners, beating both the laggards and the leaders….

The reason for the disparity is that each rater creates scores using different data sources and procedures, often emphasizing different aspects of the companies’ behavior. Some methodologies assign scores relative to competitors in the same industry and others assess absolute risk based on a firm’s material exposure to ESG issues….

Monica Billio, a professor at Ca’ Foscari University of Venice, Italy, who co-wrote a paper on ESG rankings last year, said “the strong disagreement in the market does not allow the ESG relevance to be understood by the market.”

“Scores can create confusion because a company is rated highly by one agency and given a very low grade by another,” she said.”

In the spotlight

World Economic Forum disclosure standards adopted in Australia

With the SEC poised to approve new ESG disclosure requirements and with various external groups vying for the opportunity to be the provider of those standards, the World Economic Forum’s Stakeholder Capitalism Metrics appear to have taken a foothold as the new benchmark for disclosure. The metrics, developed by the WEF’s International Business Council, were officially released in September 2020 and, since the beginning of this year, have been adopted by at least 19 companies traded on the ASX (the Australian Securities Exchange):

“At the start of 2021, the first six ASX-listed companies began improving their Environmental, Social, and Governance (ESG) credentials and reporting their progress against the World Economic Forum’s 21 universal ESG metrics, using “ESG on-ramp” technology platform Socialsuite….

An additional thirteen ASX-listed companies recently signed on to ESG on-ramp and are leading the way globally by committing to ESG reporting.

The initial six companies to sign up to Socialsuite’s ESG-on-ramp have now completed their baseline ESG report, first quarterly ESG action plan, and continue to report their progress to stakeholders….”