Controversy as US moves towards mandatory ESG disclosures

By Gavin Hinks

SEC seal

The US is set to enter a full blown debate over environmental, social and governance (ESG) disclosures. Last month the Securities and Exchange Commission’s acting chair Allison Herren Lee signalled in a speech that the regulator was working on a raft of changes for companies to make climate change disclosures.

The arguments setting obstacles in the way are now being rehearsed. This week Vanderbilt University law professor Amanda Rose set out her “ESG fuzziness” claim. Referring to the prospect of introducing a new mandatory ESG reporting regime, Rose writes the “vagueness” of ESG definitions makes it difficult to identify the most important issues in the topic.

“The difficulty with these proposals is that they speak in generalities about the importance of ‘ESG’ to investors without specifying which, if any, specific ESG topics are financially material, and they invite the SEC to model a mandatory ESG-disclosure framework on frameworks developed by private standard setters without strict regard for notions of financial materiality.”

Rose goes on to highlight the potential reporting costs involved, cites a Department of Labor statement that ESG “is not a clear or helpful lexicon for a regulatory standard”, suggests current ESG performance ratios are “inconsistent and difficult to decipher”,  and says studies linking ESG performance to financial performance are “difficult to interpret”.

“There is no a priori reason to believe that a company’s approach to climate change and a company’s approach to diversity or any other ESG issue will have the same sort of impact on a company’s financial performance…” writes Rose.

Others highlight the likely alternative reasons for stiff opposition to enhanced ESG disclosures. University of Kansas law professor Virginia Harper Ho writes that the “deep roots” of shareholder primacy in the US and general scepticism of regulatory moves are both factors that mitigate against non-financial reporting reform. Companies also fear creating more reasons for litigation.

Harper Ho suggests a “comply or explain” approach similar to governance regimes elsewhere in the world, including the UK, may be the best way forward for US companies to engages with ESG reporting.

Efforts to improve reporting

Lee signalled the advance to mandatory ESG disclosures for US companies in a speech in March in which she said “climate and ESG are front and centre for the SEC. We understand these issues are key to investors—and therefore key to our core mission.”

On the same day Lee made a request for comments addressing how the watchdog’s disclosure rules can “provide more consistent, comparable, and reliable information”.

In her speech Lee said the past year had been critical in clarifying why the separation of social value and market value was breaking down, adding to the importance of ESG. Covid, she said, highlighted worker safety and supply chain risk. But ESG was also connected to the death of George Floyd.

“We know climate presents heightened risks for marginalised communities, linking it to racial justice concerns,” Lee says. “We saw in real time that the issues dominating our national conversation were the same as those dominating decision-making in the boardroom.”

Lee created a taskforce at the beginning of March to look specifically at ESG disclosures. But other efforts to improve reporting are under way elsewhere, including a bill simplifying reporting standards making steady progress since 2019 through the House of Representatives.

The arguments against ESG or non-financial reporting will be delivered with determination. But under a new president, the US looks set to push ahead nonetheless.

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