Most institutional investors want more information from companies on ESG risk, but even when disclosed, it "wasn't always clear or useful," according to a Government Accountability Office report released Monday.
GAO interviewed seven public pension funds and seven private-sector asset managers, as well as market observers. Of the 14, 12 said they use ESG information to understand risks that could affect company financial performance over time and use company disclosures to monitor management of those risks, inform their vote at shareholder meetings, or make stock-purchasing decisions. The investors told the GAO that more consistent and comparable data are needed.
For the report, which covers the period from January 2019 through July 2020, GAO officials reviewed annual reports, 10-K filings, proxy statements, and voluntary sustainability reports for 32 companies. Of those, 23 disclosed on more than half of 33 topics identified by the GAO. Board accountability and workforce diversity were among the most reported topics and human rights was the least reported. The GAO also found wide reporting gaps within specific topics, and noted that "disclosure on an ESG topic may depend on its relevance to a company's business."
The report was requested by Sen. Mark R. Warner, D-Va., a member of the Senate Banking Committee, which oversees the Securities and Exchange Commission. The 2018 request letter noted that investors are increasingly demanding information on ESG issues, but the SEC has not acted since 2016, when it issued a concept release on possible ESG disclosure rules.
Responding to the GAO report, Mr. Warner called on the SEC to establish an ESG task force to consider requiring disclosures, particularly amid the COVID-19 pandemic. "The COVID-19 crisis is exposing the myriad ways that company management practices pose operational and reputational risks for short and long-term performance," Mr. Warner said in an emailed statement.
"Most institutional investors find current company financial disclosures limited in their usefulness, and augment company disclosures through burdensome engagement with the company, purchasing third-party compilation data, or initiating shareholder proposals," he said.
While the SEC's consideration of principles-based guidance on ESG reporting "is a step in the right direction, the SEC would still leave it up to businesses to decide what kind of information to provide investors on ESG matters," said Mr. Warner, who has sponsored the Senate version of bicameral legislation to require public companies to disclose basic human capital metrics, including workforce turnover rates, skills and development training, workforce health and safety, and compensation statistics.
