Paul Hodgson: SEC remains out of step on ESG disclosures

Recent meeting of the Investor Advisory Committee debated ESG

While the SEC’s proxy voting guidance has been receiving all the attention of late, it’s worth noting that ESG more broadly has been under review at its Investor Advisory Committee.

At the recent meeting of the Dodd-Frank era committee, which was considering whether investors use ESG data in investment/capital allocation decisions, SEC Chairman Jay Clayton’s introductory remarks demonstrated that the SEC leadership is as out of step with the rest of the world on environmental issues as is the rest of the Trump administration.

Clayton’s remarks can be summarised as: ‘we’ve done perfectly well with our principles-based disclosure for “the better part of the century” and I wish you’d turn your attention to some issues that would actually be of use to the Commission’. He then went on to list eight such subjects, including one, startlingly, that asked them to discuss how to assure US investors that non-US companies which claim they meet certain ESG standards actually do so.

However, to the panel. Satyajit Bose, an academic in sustainability management at Columbia University, was the first but certainly not the last to note that there is a close correlation between ESG metrics and financial performance and that there are now studies of studies saying this.

Notably, he also said that journals that study management theory find a much closer correlation than those journals dealing with sustainability. 

Michelle Dunstan, a portfolio manager at AllianceBernstein, noted that all the firm’s portfolios consider ESG performance — not just those that are labelled ESG – and that the most significant problem they face is lack of consistent data. And again, she was only the first of the investors on the panel to note this.

Jonathan Bailey, head of ESG investing at Neuberger Berman, said there had been a 94% increase in the number of RFPs asking them how they consider ESG in their portfolio management this year and others noted that ESG was brought up in most due diligence meetings with investment clients.

Bailey described the firm’s use of third party data suppliers but noted that these were not sufficient to close the gap caused by the lack of consistent issuer data, and that these therefore had to be supplemented by qualitative dialogue with issuers.

While noting the increase in the publication of sustainability reports, at least in the S&P 500, he said that, with a few exceptions, this activity was a waste of shareholders’ capital because they do not have quantitative disclosure that is decision-useful.

His exceptions were Nike, NRG and Jet Blue. In response to concerns about releasing information that peers were not, he encouraged the SEC to issue safe harbour or comply and explain rules that could protect companies. 

He also noted that 21% average support for executive compensation shareholder resolutions pushed the SEC to mandate disclosure and that average support levels of 25% for environmental proposals and of 29% for social proposals signalled that it was overdue for the SEC to act.

Action should also be taken now, he warned, as action in other jurisdictions to mandate disclosure could ultimately see the US being out of step with the rest of the world and put US investors at a disadvantage.

Rakhi Kumar, SSGARakhi Kumar, head of ESG investments at State Street Global Advisors, said all the fund’s active investments take into account ESG data that helps establish return enhancements and risk mitigation, and that this policy is predicated on the finding that poor ESG performance will lead to poor financial performance in the long term.

Jessica Milano, Calvert’s ESG director, agreed that not all information disclosed is relevant. She said her firm supports a principles-based and fact-based disclosure regime for ESG.

During questioning from the IAC, Anne Simpson from CalPERS said that there are voluntary codes out there but few companies have adopted them, and told a story about a large oil company that had a series of graphs in its sustainability disclosures which had images but no figures.

When asked if it was a mistake, it replied – no, think of this as a cartoon.

In reply to her question about voluntary codes, Milano said that 100 companies had signed on to SASB and made disclosures, but less than a third had had these third party assured and none disclosed via the 10-K filing at the SEC.

And even this level of disclosure was referred to on several occasions by State Street’s Kumar as a floor. IAC member John Coates suggested a mandatory survey to see if companies were already generating SASB data, but not disclosing it because of liability concerns. This could be a way of determining how much imposing these disclosure regulations might cost.

But Bose said that that information was probably already available, for example CDP is already collecting carbon emission data.

On the wider picture, Simpson commented that sometimes disclosures might not be important for an individual company but added together can have a major effect on the portfolio as a whole. “We have to think about market level risk,” she said.