Wednesday, April 17, 2019

ESG Disclosure: Evaluating SEC’s Peirce and IOSCO’s Comments (Part 1 of 2)

Co-authored by Lee Dehihns & Jack Cox

It is no secret that ESG has been a substantial investing theme in recent years. There continues to be added pressure for increased ESG disclosure and ESG standards development. This year, the International Organization of Security Commissions (IOSCO) has outlined the importance of added ESG disclosure. However, one SEC commissioner, Hester Peirce harshly criticized IOSCO’s call to institutional investors to disclose their ESG factors in a recent speech she gave in Washington, D.C.

Who is IOSCO? They are an international body that consists of organizations that regulate securities and futures markets. In fact, IOSCO is recognized as the global standard setter for the securities sector. Whenever IOSCO releases a statement on disclosure, it should be deemed to be significant; moreover, IOSCO never intends to repudiate existing laws or regulations. Their three securities objectives are: to protect investors, to ensure that markets are fair, efficient and transparent, and to reduce systemic risk.[1]

In January, IOSCO published a statement that set out the importance for issuers to consider including Environmental, Social, and Governance factors when disclosing information. Examples of ESG matters could include environmental factors related to sustainability and climate change, social factors about labor practices and diversity, as well as general governance-related factors. This added disclosure, according to IOSCO, is material and holds an impact in investment and voting decisions. Furthermore, ESG matters can represent substantial risks and opportunities to an issuer.[2]

Before moving forward, it is critical to understand the definition of materiality. Under case law, its definition is that there must be “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”[3] In short, for information to be material, it must be useful and informative, and be information that a reasonable investor would like to see.

Disclosure practices vary from issuers, from company to company, and from industry to industry. In other words, specific ESG disclosure may have a more material impact for some issuers than others. Some frameworks that have been developed have come from the Carbon Disclosure Project (CDP), the Global Reporting Initiative (CRI), Integrated Reporting (IR), and the Sustainability Accounting Standards Board (SASB).

With increased international calls for corporations to disclose how investments can impact socioeconomic issues, the SEC’s Hester Peirce states that there is no political will within The United States to incorporate ESG criteria into corporate disclosures. She remarks, “I do not speak for the commission or for my fellow commissioners, but I found the statement to be an objectionable attempt to focus issuers on a favored subset of matters, as defined by private creators of ESG metrics, rather than more generally on material matters.” She argues further and says that ESG criteria is immaterial and that existing fundamental disclosure should be the focus of both issuers and regulators and that it could distract the regulated community from existing federal mandates. She explains, “Issuers already spend considerable amounts of money complying with existing disclosure requirements. Requiring disclosures aimed at items identified by organizations that are not accountable to investors unproductively distracts issuers.”[4] Peirce elaborates that the SEC would be required to define ESG factors as well as possibly enforce existing regulation and procedures in order to ensure that disclosed ESG criteria is honest and accurate.

Hester Peirce should reevaluate her comments on IOSCO’s statement. ESG disclosure adds value and the opportunity to further evaluate sustainability whether it be narrow in scope at the entity level, or broader in scope at an industry level. ESG disclosure has a positive and a material impact from the perspective of both issuers and investors. In Part 2 of this piece, we will look into some evidence to support this theory.

[1] “About IOSCO.” IOSCO, 2019, www.iosco.org/about/?subsection=about_iosco.

[2] STATEMENT ON DISCLOSURE OF ESG MATTERS BY ISSUERS. IOSCO, 18 Jan. 2019.

[3] Deane, Stephen. “The Rulemaking Process: Two Accounting and Auditing Mini-Case Studies.” SEC Emblem, U.S. Securities and Exchange Commission, 22 Aug. 2017, www.sec.gov/news/speech/deane-speech-rulemaking-process.

[4] Noon, Alison. “SEC’s Peirce Bucks Call For Corporate Responsibility Rules.” Law360, LexisNexis, 6 Mar. 2019, www.law360.com/articles/1135612/sec-s-peirce-bucks-call-for-corporate-responsibility-rules.

Opinions expressed in the blog are those of the authors, and do not reflect the positions of SILC or of any other party.