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SEC committee pushes for ESG disclosure rules

US firms could becoming ‘rule-takers’ as other regions step up, warns investor group

US market regulator the Securities and Exchange Commission (SEC) has been urged by one of its own committees to develop standardised principles-based rules for ESG disclosure.

In a report presented to the SEC yesterday, the regulator’s Investor Advisory Committee (IAC) called 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”.

The committee also observed that issuers are not always the primary source of ESG data, with a “patchwork” of third-party sources feeding “inconsistent and unreliable” information to the market.

A standardised disclosure framework is key to level the playing field between small and large companies, said the IAC. It observed that smaller companies were often unable to dedicate the resources to respond to questionnaires provided by the ESG data firms, leaving them at greater risk of being issued low ESG scores, compared to larger, better-financed companies. This can have a negative impact on share price performance and the ability to raise capital, it pointed out.

The report said that the Commission is best placed to determine which ESG factors were material to investors, contending that the variety of approaches to ESG disclosures had resulted in a “a lack of consistent, comparable, material information in the marketplace” despite imposing significant reporting burdens on companies.

The committee also observed that issuers are not always the primary source of ESG data, with a “patchwork” of third-party sources feeding “inconsistent and unreliable” information to the market.

The IAC concluded that inaction by the SEC would result in US companies becoming ‘rule-takers’, saying “it is highly likely that other jurisdictions will impose standards in the next few years that US issuers will be bound to follow…due to the global nature of the flow of investment into the US markets”.

The EU is currently working on a number of new ESG disclosure rules for companies, banks, investors and others, which will come into force over the next year or so.

The report recommended that the development of ESG disclosure rules should “begin in earnest” with the Commission launching “outreach efforts” to market participants including roundtables, RFI’s and other consultations.

In remarks delivered before the report’s presentation, SEC Commissioner Hester Pierce was critical of the recommendations saying that it seemed “an unnecessary response when our existing securities disclosure framework is very good at handling all types of material information.

Pierce compared the proposals unfavourably to ESG reporting requirements introduced by Chinese regulators, which she described as “a less transparent and less consistently applied regulatory system than our own”. However, such a framework might be “a better match for the ambiguity that characterises ESG”, she said pointedly.

The IAC previously broke ranks with the SEC over now-abandoned proposals to limit the influence of proxy advisors in shareholder voting. According to remarks submitted to the SEC, the committee criticised the proposals as not being in the interest of shareholders as they “would be left in a typical vote with one and precisely one voice to listen to – those of directly self-interested directors and officers”.