May 26, 2020

SEC Investor Advisory Committee: Time to Take-up ESG Disclosure

Late last week, the SEC’s Investor Advisory Committee approved a recommendation that encourages the SEC to begin addressing ESG disclosure.  The recommendation might best be summed up as asking the SEC to “get moving” on ESG disclosure.  Throughout the recommendation it reiterates familiar concerns raised by many including the “plethora” of ESG data provider questionnaires that create an exorbitant amount of work for companies – leaving many questioning whether the information that’s collected is material to investors and leaving others to set questionnaires aside due to resource constraints.  The recommendation also says the SEC should take the lead or some other jurisdiction will.  Here’s an excerpt:

The US capital markets are the largest and deepest in the world. Therefore, the SEC should take the lead on this issue by establishing a principles-based framework that will provide the Issuer-specific material, decision-useful, information that investors (both institutional and retail) require to make investment and voting decisions. This disclosure should be based upon the same information that companies use to make their own business decisions. If the SEC does not take the lead, it is highly likely that other jurisdictions will impose standards in the next few years that US Issuers will be bound to follow, either directly or indirectly, due to the global nature of the flow of investment into the US markets.

The recommendation itself doesn’t call for specific reporting standards or a specific framework and instead references existing standards – GRI, SASB and the TCFD framework, etc. – as examples to help shape the SEC’s thinking.

Although the committee approved the recommendation, this blog describes views of committee members that opposed it:

Those who were not in favor of the recommendation expressed concerns about the ambiguity of the term “materiality,” and that ESG ratings should be left to the private parties, rather than mandating a central group, such as the SEC. Creating such a framework would be both expensive and inconclusive since private parties have yet to come to consensus themselves due to the issue’s complexity.  The naysayers also suggested protecting the Financial Accounting Standards Board from being “diluted” by the new ESG standards.

Another blog further summarizes committee member views and notes that, Commissioner Hester Peirce expressed her reservations about the recommendation – here’s her remarks in which she says today’s securities disclosure framework is “very good at handling all types of material information.”

Initial SEC Comment Letters Addressing Covid-19 Disclosures

For those wanting to get a sense of what the SEC might be looking at when reviewing Covid-19 related disclosures, a recent Intelligize blog reviewed some early SEC comment letters for insight.  The blog provides links to the comment letters so they’re available to provide full context and it identifies five initial lessons:

– Understand the continuum between risk factors’ reasonably likely known effects and MD&A’s known trends

– Provide forward-looking insights about the impact of Covid-19

– Provide a complete picture with your metrics

– Clarify the impact of any facility closures or supply chain issues

– Ensure that material information included in press releases also appears in SEC filings

Post-Covid-19 Governance & Social Purpose

Will board governance change in a post-Covid-19 world?  That’s a question considered in a recent Deloitte memo and it lists questions that should be on the radar for boards when thinking about their oversight role.  The memo lists considerations involving overboarding, succession planning, oversight, investor concerns and social purpose and stakeholder governance.  Questions for boards to consider about social purpose and stakeholder governance include:

– Will the pandemic cause a reordering of US business priorities?

– Will considerations regarding social purpose be impacted by continued market declines?

– Will the pandemic increase or decrease the focus on diversity, equity, and inclusion?

– Will shareholder value come back as being the primary priority?

– Lynn Jokela