Demand grows for SEC rule on ESG disclosure

As investors routinely push public companies to address ESG in terms of long-term shareholder value, a determined group of institutional investors and ESG advocates think the time is right for the Securities and Exchange Commission to mandate a uniform approach to how companies disclose and manage potential risks.

On Oct. 2, a sizable group of institutional investors and asset managers, state treasurers and ESG advocates petitioned the SEC to mandate standardized disclosure of environmental, social and governance information by publicly traded companies. As the effort to get that information company-by-company becomes increasingly time-consuming for all parties, investors and advocates say that standardized data will provide a better way to review companies' risk management and long-term performance while saving everyone time and trouble.

Signers of the petition include:

• The $361.6 billion California Public Employees' Retirement System, Sacramento.


• New York state Comptroller Thomas P. DiNapoli.


• Illinois Treasurer Michael W. Frerichs.


• Connecticut Treasurer Denise L. Nappier.


• Oregon Treasurer Tobias Read.


• The $2.6 billion Seattle City Employees' Retirement System.

Mr. DiNapoli is the sole trustee of the $209.2 billion New York State Common Retirement Fund, Albany, and Ms. Nappier is principal fiduciary of the $34 billion Connecticut Retirement Plans & Trust Funds, Hartford.

Asset managers signing the petition include Aberdeen Standard Investments, Calvert Research and Management, Legal & General Investment Management America and Trillium Asset Management LLC. ESG advocates include the United Nations-supported Principles for Responsible Investment, U.S. SIF: The Forum for Sustainable and Responsible Investment, and Ceres, as well as Morningstar Inc.

It is not about personal value, but simply a fiduciary issue about maximizing returns, said Mr. Frerichs of Illinois. By seeking more information about how companies manage potential ESG risks, "we are trying to create values for public companies."

There are no illusions that getting a response to the petition, not to mention companies' acceptance, will take time.

"Companies are not jumping at the chance to have a new regulation on them, but at the same time, if there was a unified approach, it could help them," said Bryan McGannon, director of policy and programs with US SIF in Washington, who said that companies report that the demand for ESG information "is coming from all directions."

While many companies already do sustainability disclosure, "the biggest challenge to investors is consistent data so you can do apples-to-apples comparisons," Mr. McGannon said. The broad base represented in the petition "makes it hard to put it aside," he said.

The SEC could start the process by bringing in stakeholders.

"We realistically believe that we need to build a case and demonstrate that there is a need for this," said Mr. McGannon, who finds it encouraging that some of the world's largest asset managers, including BlackRock Inc., State Street Global Advisors and Vanguard Group Inc., are also putting pressure on companies to explicitly address ESG risks. "It's beneficial to the wider investment community," he said. The three managers are not part of the investment group.

Betty Moy Huber, co-head of the environmental and sustainability practice at Davis Polk & Wardwell LLP in New York, advises public companies and private fund clients on ESG disclosure and corporate governance matters. Clients "are definitely getting questionnaire fatigue" from shareholders, asset managers and third-party ESG raters, she said.

Ms. Huber advises her clients to analyze whether it is a good use of corporate resources to engage with shareholders on key ESG matters, or risk facing a high-stakes ESG shareholder proposal. She does not see a new disclosure requirement as the solution. "Many corporations and other publicly traded entities would posit that SEC disclosure requirements, which generally require disclosure of material risks (whether they be ESG-related are not), are sufficient," Ms. Huber said.

If the SEC does consider another requirement, one place that the petition suggests to start is the Financial Stability Board's Task Force on Climate-related Financial Disclosures guidelines recommended in June 2017.

A status report by the TCFD last month found that many firms disclose information aligned with global climate-change recommendations, yet few describe the financial impact of associated risks on their company. While many companies have put forth these analyses, "the question is whether for each and every publicly traded company the items described in the TCFD guidelines are material for securities law purposes? The answer may be 'no,' " Ms. Huber said.

Officials at the U.S. Chamber of Commerce, which is doing its own analysis of ESG reporting, also believe that it is a conversation that should stay between companies and stakeholders, rather than adding another layer to an already cumbersome reporting regime that is dampening the appetite for companies to go public, said Thomas Quaadman, executive vice president of the U.S. Chamber Center for Capital Markets Competitiveness.

Advocates for a new SEC requirement on ESG disclosure point to a 2016 SEC concept release on Regulation S-K, the agency's principal regulation governing corporate disclosure. A concept release is an open-ended solicitation for comment. Of the more than 26,500 comments from investors and the public, ESG disclosures "were overwhelmingly and persuasively favored," said a report from the progressive think tank Center for American Progress in Washington. The concept is part of the SEC's division of corporate finance's ongoing review process to consider ways to improve the effectiveness of public company disclosure requirements.

The Task Force on Climate-Related Financial Disclosures platform, developed by industry experts including operating companies, investors, insurance companies and accounting firms, would provide a starting point for the SEC to promulgate its own framework, the report said.

Without uniform disclosure, "it's very, very difficult for even large institutional investors to get the information they need to assess risk," said petition signer John Hoeppner, head of U.S. stewardship and sustainable investments at Legal & General Investment Management America, Chicago. The lack of uniformity today "directly impacts our clients."

Ms. Huber and her colleague Michael Comstock noted in a 2017 Harvard Law School Forum on Corporate Governance and Financial Regulation blog post that most public companies and many private ones are being evaluated and rated on their ESG performance by numerous third-party providers, including Bloomberg ESG Data Service, Dow Jones Sustainability index, Institutional Shareholder Services Inc. and MSCI ESG research.

"Institutional investors, asset managers, financial institutions and other stakeholders are increasingly relying on these reports and ratings to assess and measure company ESG performance over time and as compared to peers," Ms. Huber and Mr. Comstock said in their blog post.

The results often lead to shareholder engagement with companies on ESG matters, they said, yet the report and ratings methodology, scope and coverage "vary greatly among providers."

To Mr. McGannon of US SIF, Morningstar's signature on the SEC petition is a recognition that "there is a need for this consistency."