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Investor Advisory Committee Pushes SEC to Lead on ESG Disclosures

The U.S. Securities and Exchange Commission’s Investor Advisory Committee’s Investor-as-Owner Subcommittee recently voted 14-4 to approve a recommendation that urges the Commission (SEC) to begin an effort to update the reporting requirements of public companies to include material, decision-useful environmental, social, and governance (ESG) factors. The recommendation notes that ESG is no longer a fringe concept (thanks!), that investment and voting based in part on ESG disclosure is front and center in today’s global investment ecosystem and that investors are not being served or protected by the piecemeal, ad-hoc, inconsistent information currently available with respect to U.S. public companies. We agree that there is a need to systemize the reporting of ESG matters for the benefit of investors, including over $12 trillion of U.S.-domiciled professionally managed ESG-related assets.  

The recommendation notes that addressing ESG disclosure now will (a) provide investors with the material, comparable, consistent information needed for investment and voting decisions, (b) provide public companies with a framework to disclose material, decision-useful, comparable and consistent information in respect of their businesses, rather than the current situation where investors largely rely on third party ESG data providers, which may not always be reliable, consistent, or even material, (c) help level the playing field among all U.S. public companies regardless of market cap or capital resources, (d) help ensure the continued flow of capital to U.S. public companies and (e) enable the SEC to take control of ESG disclosure for U.S. capital markets before other jurisdictions impose disclosure regimes that become benchmarks which could be required of U.S. issuers and investors alike.

According to a report, the U.S. had over 125 third-party ESG data providers in 2016. The considerable number of providers, with different standards for evaluating a company’s ESG strategy, and the lack of standardization and transparency in ESG reporting and scoring presents major challenges for investors. Further, larger companies are able to commit the resources to respond to complex and lengthy questionnaires, while smaller companies lack the systems and staff to do so. So small- to mid-size issuers risk receiving a low ESG rating that may affect their stock price or access to capital, among other consequences. 

Furthermore, even when companies do share their ESG data, some may publish unconfirmed internal reports while others reference a range of existing third-party standards. Currently, independent organizations such as the Sustainability Accounting Standards Board and Task Force on Climate Related Financial Disclosures help streamline the process, but there is a lack of uniformity. Therefore, the IAC calls on the Commission to modernize the current disclosure framework

The recommendation notes that the U.S., which has the largest capital markets in the world, should take the lead on imposing ESG disclosure standards. Otherwise, jurisdictions such as the European Union, a key player in the ESG space, may create regulations that become a global benchmark for issuers around the world. This would potentially put U.S. issuers at a disadvantage

Although the IAC voted largely in favor of the recommendation, certain members, such as Steven Holmes, General Partner Emeritus at InterWest Partners, expressed that ESG ratings should be within the purview of private parties rather than “opining and mandating some central group, such as by the SEC.” Commissioner Allison Herren Lee voiced her support for the recommendation, acknowledging that the debate around ESG disclosures is controversial but that investors overwhelmingly want these disclosures. It is still unclear when or whether the SEC will move forward with exploring an SEC-regulated ESG reporting framework – but we are certain that a wide-range of asset-managers and investors will continue to demand it.

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Sahir Surmeli

Member / Co-chair, Energy & Sustainability Practice

Sahir Surmeli is a Mintz business counselor who advises companies, boards, entrepreneurs, investment banks, and venture and private equity investors as they build and grow companies. He handles public offerings, 144A and private financings, acquisitions, joint ventures, and strategic partnerships.

Thomas R. Burton, III

Member / Chair, Energy & Sustainability Practice

Tom Burton has helped to shape the clean energy industry by drawing on his passion for innovation. As a Mintz attorney, Tom counsels investors, entrepreneurs, and Fortune 100 companies. He also guides start-up organizations and accelerators to foster the next generation of energy leaders.