Investors continue urging regulators for risk disclosure

U.S. regulators may not be ready or willing to mandate that companies disclose ESG risks, but some institutional investors vow to continue pressing the issue.

An April 2 hearing held by the Senate Committee on Banking, Housing and Urban Affairs highlighted the opposing positions on whether the Securities and Exchange Commission should require a uniform approach to reporting.

Critics of the idea warn that the burden of new reporting could outweigh the benefits, or will further drive companies away from public markets, while others worry about undue influence by groups with social or political agendas.

The White House has also joined in the debate, including in an executive order April 10 aimed at spurring oil and gas pipelines a call for the Department of Labor to review whether retirement plans and proxy firms engaging with energy companies on ESG issues are compromising their ERISA fiduciary duty to maximize returns.

On the other side are institutional investors who say the current approach of getting the information company by company is inefficient.

"We need a bit more specific information presented in a standard format, so we can compare across companies. If it is done well, I really think it will be beneficial to corporations and investors because corporations are being asked by so many players in their own way. A well-founded set of standards could really ease the burden," said John Streur, president and CEO of Calvert Research and Management in Washington.

Washington policymakers and regulators are "honestly trying to learn about this issue, but I do think this is primarily an issue between investors and corporations" for now, Mr. Streur said. While some large companies are leading the way on voluntary ESG disclosure, "90% are still trying to learn," he added.

"As an industry, I think we are moving forward very well" in strengthening companies' ESG disclosure, which helps companies strengthen their operations, said Mr. Streur. "Where we have reached a tipping point is the number of large asset owners and asset managers who are active on this issue."

According to the Forum for Sustainable and Responsible Investment, more than $12 trillion — 26% of professionally managed assets in the U.S. — was invested in strategies with ESG criteria in 2018, a 38% increase from 2016.

In the absence of ESG reporting standards in the U.S., those asset owners and managers say they will continue to rely on independent organizations like the Sustainability Accounting Standards Board. After years of research and market consultation, SASB in November launched 77 industry-specific sustainability accounting standards.

The combination of industry specificity and financial materiality "is an important milestone," said SASB Chairman Jeffrey Hales, because it gives investors and companies "codified, market-based standards for measuring, managing and reporting on sustainability factors that drive value and affect financial performance."

Industry leaders have begun using the standards, and increasingly so have investors, according to SASB, whose Investor Advisory Group and SASB Alliance global members have a collective $29 trillion in assets under management.

To help companies face the increasing and multiple disclosure demands from investors and other stakeholders, the CEO-led World Business Council for Sustainable Development on April 3 released its ESG Disclosure Handbook and library to help companies report ESG information clearly and investors understand those reporting processes. Using these tools "will help ensure that companies who are managing their ESG-related risks and opportunities well are properly rewarded," the organization said.

Investors also see companies that want to stay competitive globally doing more to manage and disclose ESG risks. While just 20% of Standard & Poor's 500 companies reported anything on ESG risks in 2010, today 85% of them do.

Further pressure on U.S. regulators came March 8, when the European Parliament and European Union countries agreed on sustainable investment disclosure rules for institutional investors, requiring money managers, insurance companies, pension funds and investment advisers to integrate environmental, social and governance factors into their portfolios, and disclose investments in a consistent way. The new rules require information about the adverse impact of investments, including assets that pollute water or damage biodiversity, and are aimed at eliminating chances for investment firms to make unsubstantiated or misleading ESG claims, known as greenwashing.

While Mr. Streur thinks European regulators are helping to strengthen companies headquartered there by requiring uniform disclosure, "I do not think the regulators in the U.S. are ready to accept that," he said.

SEC Chairman Jay Clayton made that clear to the agency's Investor Advisory Committee in December. While the voluntary use by some companies of ESG standards developed by organizations like the Sustainability Accounting Standards Board and the Global Reporting Initiative "may allow for comparability across companies, that does not mean that issuers should be required to follow these frameworks in order to comply with SEC rules," Mr. Clayton told committee members Dec. 13. "Each company, and each sector, has its own circumstances, which may or may not fit within a standard framework."

Other SEC commissioners also made their positions known to the investor advisory group in December. For outgoing Commissioner Kara Stein, who noted that 43% of shareholder proposals submitted during the last proxy season focused on ESG matters, it is because those shareholders "believe that there are verifiable links between ESG matters and a company's operational strength, efficiency and management," while Commissioner Hester Peirce said offhandedly that ESG stands for "enabling shareholder graft."

That doesn't deter New York Comptroller Thomas P. DiNapoli, sole trustee of the $197.3 billion New York State Common Retirement Fund, Albany. "Mandated disclosure would bring enormous benefits through consistent and uniform information. There is a growing groundswell of support for mandated disclosure from investors and companies that we hope the SEC does not ignore," Mr. DiNapoli said in an email.

Uniform disclosure would also help everyone sift through the growing number of ESG data analysis and benchmarking products being offered, and give more confidence that everyone is looking at the right measures, investors say.

Deborah Spalding, co-deputy CIO and managing director of Commonfund in Wilton, Conn., an investment manager for endowments and foundations, said she sees the pressure increasing for mandatory ESG disclosure in the U.S., but "still far from formal adoption." Until then, "non-profits continue to seek ways to better incorporate ESG into their investment program, despite data gaps and inconsistencies in reporting," she said, but most continue to "wait it out," and they question whether ESG-specific investments can be measured without mandatory disclosure standards.

Trysha Daskam, associate director and head of ESG strategy for outsourced compliance firm Silver Regulatory Associates LLC, New York, whose clients include private equity firms, hedge funds and venture capital firms, sees the Senate hearing as "a good first step. The investment community is pushing for it. We are currently in a world where that assessment needs to be done."

"Whether or not the investment community is ready for standardized reporting, it is already coming," said Ms. Daskam.

Maritza Adonis, CEO of corporate social responsibility and government relations firm MTA Visions LLC in Washington, said she thinks that actions by other countries' regulators will keep the pressure on the SEC, while companies continue to develop ESG reporting capabilities in response to investor demand and the "ripple effect" of consumer demand.

The current state of ESG disclosure in the U.S. "is not enough yet, we hear investors saying every day," said Mindy Lubber, CEO and president of Ceres, a Boston-based sustainability non-profit working with investors and companies. But with millennials more tuned into ESG issues and "real financial risks, it's about logic. The accounting will eventually catch up with the economics," said Ms. Lubber.