Last Thursday, the SEC’s Investor Advisory Committee (IAC) held an open meeting, which included a session to discuss investor use of environmental, social and governance (ESG) data in their investment and capital allocation decisions. During this session, the IAC heard insights from and asked questions of a panel consisting primarily of ESG-focused investors, as well as one academic. The panelists represented investment management firms Neuberger Berman, AllianceBerstein, State Street Global Advisors and Calvert Research and Management, as well as Columbia University’s program in sustainability management.
SEC Chairman’s Written Comments
SEC Chairman Clayton was not in attendance, though he submitted written remarks to the IAC, expressing his views on the matters to be considered at the meeting. In his remarks, Chairman Clayton noted the complexities of considering any kind of data when it comes to disclosure regulation, as for instance, many companies, even some in the same sector, may use different or incomparable data in making decisions. He emphasized that these complexities “are not a reason for inaction” and yet, subtly modifying former Financial Stability Board Chair, Bank of England Governor Mark Carney’s prior references to “decision-useful” information, Chairman Clayton noted that these are issues to acknowledge in order to facilitate the disclosure of “material” information.
Importantly, however, he called out the particular variances in approaches investors take to E, S and G analyses, with some incorporating objectives, while others look to investment performance over a particular time frame. He urged the IAC to explore these variances insofar as what they may mean for “effective and efficient” disclosure and reiterated his concerns regarding imposing a mandatory ESG disclosure framework on issuers, which may allow for data comparability, but in turn sacrifice what could be more relevant, firm-specific disclosure. Consistent with prior remarks, Chairman Clayton ended with a statement as to how “principles-based” disclosure requirements have served investors well for quite some time.
Key Takeaways from the Panel Discussion
I. Investor Use of ESG Data and the State of Disclosure
The panelists remarked on the increasing expectation that investment managers integrate ESG factors alongside traditional financial factors when operating on behalf of their clients. For instance, one panelist noted that in 2018, over one-third of requests for proposal and due diligence questionnaires his firm received globally related to the role of ESG in investment processes. Due to this client demand, all of the panelists representing investment firms described the various ways in which they consider ESG in their investment approaches. Some of the approaches described included:
- Performing investment analysis based on both financial and ESG data
- Developing proprietary ESG rating or scoring systems
- Using third-party data to evaluate potential investments
- Stewardship and active engagement with portfolio companies
- Exclusionary or screening investment practices
Nearly all the panelists remarked that the exact method of integrating ESG into investment decisions depends both on overall investment strategy as well as on specific client demands. Additionally, the panelists noted that even though they are seeing an uptick in ESG integration, the current lack of comparable, material and consistent disclosure of ESG data presents a prominent challenge to investors. Indeed, while many public companies now publish reports on their sustainability practices and ESG rating firms have only grown in number, the information provided may not be relevant, material or useful to investors, with many of the panelists citing concerns of “greenwashing.”
II. Disclosure Standards and Materiality Considerations
To improve the current state of ESG data, some panelists suggested that the IAC and SEC look to existing frameworks to start. In particular, panelists highlighted the standards developed by the Sustainability Accounting Standards Board, which are intended to be both financially material and industry specific. Some of the IAC members, in their questions to the panelists, also mentioned the Task Force on Climate-related Financial Risks (TCFD) recommendations as a framework to consider climate change-related disclosure. On the other hand, a couple of the IAC members cautioned against creating ESG disclosure requirements using these frameworks, warning of potential liability risks for companies and the lack assurance processes to verify the data. In fact, though all panelists and a few of the IAC members did not question the financial materiality of ESG matters in investment decisions, other IAC members were less sure.
Why is this relevant?
The IAC’s responsibilities under the Dodd-Frank Act include advising the SEC on regulatory priorities and the committee is authorized to submit findings and recommendations to the SEC. It remains to be seen whether the information provided in this meeting will impact SEC objectives or result in recommendations.
Legal assistant Sarah Foster contributed to this post.