US market regulator the Securities and Exchange Commission (SEC) may be about to come under pressure from its Asset Management Advisory Committee (AMAC) to strengthen its ESG reporting and transparency rules, following recommendations from experts this week.
At a meeting on Monday, the Committee’s ESG subcommittee presented advise which would require the SEC to regard ESG disclosure frameworks as equal in stature to accounting standards.
It follows the SEC Investor Advisory Committee (IAC) in May calling for “a structured US response” on ESG disclosures, noting that investors now consider ESG information material “regardless of whether their investment mandates include an ‘ESG-specific’ strategy”.
AMAC’s members include representatives from Goldman Sachs, Morningstar, S&P Dow Jones Indices, Fidelity, Vanguard and EY. Its ESG subcommittee was created to “improve the data and disclosure for ESG investing” and its preliminary recommendations include requiring the SEC to mandate the disclosure of material ESG risks in the same manner as financial disclosures, such as generally accepted accounting principles (GAAP).
In a discussion paper, the group says it does not see the need to change disclosure laws to improve the quality and comparability of ESG for investors, favouring the adoption of mandatory standards for these disclosures.
It says while mandating standards for these disclosures would be a lengthy and complex process without it there would be “little ability to verify truth in labelling for investment products that use ESG branding, which could result in misleading investors”.
The ESG Subcommittee, led by Michelle McCarthy Beck of TIAA Financial Solutions, notes that it does not recommend the “highly prescriptive approach” used in Europe as “that may result in the production of metrics that are not needed to assess an issuer’s material risks, and unnecessary cost”.
Instead it says it sees a “parsimonious approach” with a focus on a limited number of material metrics, tailored by industry, overseen by an independent standard setting entity such as SASB.
The subcommittee also recommends that the SEC identifies best practice on ESG investment product disclosure, including alignment with a taxonomy developed by The Board of Governors of the Investment Company Institute ESG Working Group.
The SEC should also highlight best practices on describing how investment products approach share ownership activities beyond proxy voting in their Statement of Additional Information, including information on engagement and taking the lead on shareholder motions.
The preliminary recommendations will now be put out for consultation with industry groups ahead of being finalised and voted on at AMAC’s next meeting.
In opening remarks to the AMAC meeting, Commissioner Hester Peirce, who has been vocal in her disparagement of ESG disclosure in the past, said: “One thing that has not changed on the eve of 2021 is the barnacle-like presence of ESG on the short-list of topics confronting asset managers. I continue to believe that, for all its hype, ESG investing does not require us to turn our rules inside out to accommodate it any more than any other broad genre of investing, like value investing, requires us to do.”
Commenting on the ESG Subcommittee’s recommendations she said she has concerns that the concepts around ESG and sustainability are “simply too amorphous and open to manipulation and multiple interpretations to lead to a meaningful disclosure regime”.
She added that comparing ESG disclosures to GAAP principles is mistaken and raises concerns that ESG is used as a “forum for social and political discussion”.