As Investors Focus On ESG, SEC Committee Recommends Guidelines

Many investors and other stakeholders are expressing the need for more information on environmental, social and governance (ESG) topics. In the business and investment community, there is growing sentiment that in the global investment landscape, U.S. regulators are falling behind on ESG, particularly in comparison to the European Union.

The pandemic has brought “Sustainability” into focus as parallels are drawn between its unforeseen economic crisis and other known and potentially-destructive conditions, such as climate change. It has also raised awareness of social justice issues and vulnerable communities.

As a result, pressure continues to build on the U.S. Securities and Exchange Commission (SEC) to adopt regulations to help standardize and harmonize the way companies disclose relevant ESG information.

In the U.S., ESG reporting has remained largely voluntary. Earlier this year, the SEC’s Investor Advisory Committee (the Committee) recommended that the SEC address ESG disclosures. While the SEC has welcomed debate and discussion of ESG topics for years, it has not adopted ESG-specific guidelines. To provide transparency into issuers’ ESG information, private parties have developed a slew of different reporting frameworks and scoring systems. But there are no standard criteria on specific disclosures that must be included and information that must be considered in scoring systems.

The result is a lack of comparability of specific content and depth of ESG information, with disclosures ranging from detailed and voluminous, to none at all.

Increasing investor demand for ESG-specific disclosures and the absence of regulated ESG-specific guidelines creates a unique risk for reporting entities such as asset managers and businesses. They are expected to determine what is material and disclose information based on materiality without consensus on the content or specific topics for disclosure, and regardless of the existence of ESG-specific disclosure guidelines the SEC will take an interest in a reporting entity’s ESG-specific disclosures in terms of their transparency and completeness, and the accuracy of those representations.

On May 21, 2020, the Committee recommended that the SEC update reporting requirements for SEC-registered issuers to include ESG-related topics as part of their periodic disclosures through SEC filings. The Committee gave these reasons for its recommendation:

1. Investors require reliable, material ESG Information upon which to base investment and voting decisions.

2. Issuers should directly provide material information to the market relating to ESG issues used by investors to make investment and voting decisions.

3. Requiring material ESG disclosure will level the playing field between issuers.

4. Ensure the flow of capital to the US markets and to US issuers of all sizes.

5. The US should take the lead on disclosure of material ESG disclosure.

ESG Interest from Investors

In Weaver’s recent Investor Roundtable: A 2020 Global Outlook, conducted with Opalesque, the investors discussed their interest in ESG and how “ESG investing is also a challenge because if you talk to three different investors you will have four ESG definitions and compliance requirements.” The three broad subjects of environmental, social and governance encompass a seemingly endless list of attributes, including such factors as a company’s usage of renewable energy and its carbon footprint (environmental), its ethical supply chain sourcing and public stance on social justice issues (social) and the diversity of its board and transparency in communicating with shareholders (governance).

In the absence of standardization and regulation, the sheer variety of topics and data on these subjects creates challenges for reporting companies in their efforts to provide the information investors seek in order to make their investment and voting decisions.

The surge of interest in ESG topics is due in part to the growth in sustainable investing. According to the US SIF Foundation, sustainably invested assets in the US grew 18-fold between 1995 and 2018, reflecting the growing importance of incorporating sustainability issues into investment analysis and decision-making.

In its report, the Committee pointed out that ESG factors have an impact beyond sustainable investing: the ESG-related perception of a company can have a direct impact on its stock price and ability to access capital when being evaluated by investment managers with or without ESG-related investment mandates.

Many companies have developed their own ESG disclosure regimes to provide the information sought by stakeholders, while others have relied on third-party providers. For investors, the lack of comparability among the plethora of disparate ESG frameworks and scoring systems creates challenges in meaningful investment analysis related to companies’ ESG impacts, as the extent of disclosure and factors considered in disclosure can vary from company to company.

Given the interest in ESG reporting and the weight placed on it by investors, the SEC’s focus on this topic is no surprise. However, investor and regulator attention on a company’s ESG disclosures heightens the risk profile of those disclosures, especially without a uniform standard on which to formulate and evaluate them. The best intention to provide materially accurate disclosures can fail when there is no standard or benchmark by which to judge them.

ESG Reporting: Obtaining Third-Party Assurance

So what can U.S. companies do today to be prepared for what may lie ahead? Although the SEC has not yet taken specific action to implement an ESG requirement, there is a rising expectation of transparency and comparability as well as a demand for complete and accurate information. With that in mind, companies can take actions to bring additional confidence to their reporting, including obtaining third-party assurance for specific criteria and metrics.

By identifying the metrics that are most important to its stakeholder base and obtaining a level of assurance over the related disclosures, a reporting company can support investor perception of an objective and reliable set of disclosures while reducing such reporting risks as incomplete or misleading disclosures. Independent auditors have historically provided such assurance over traditional financial information, and they can provide assurance over ESG information as well.

The levels of assurance provided by an independent auditor can vary based on the needs of the reporting entity and its stakeholders. The types of assurance procedures and the resulting form of conclusions expressed by the auditor will vary based on the level of assurance needed. Examination or review procedures are typical, and limited assurance attest engagements have become fairly common for ESG reporting and are viewed as the baseline level of assurance for key disclosures.

Weaver Assurance and Advisory Experience

Understanding the need to deliver transparency, maximize opportunities and manage risks related to ESG information, Weaver’s ESG assurance and advisory professionals help asset managers and US businesses face the challenges of ESG reporting and disclosure. Our services include providing assurance over ESG disclosure information and advising clients on their ESG reporting strategy.

If you are interested in exploring ESG reporting assurance options or advisory needs for your company, we welcome you to contact Weaver’s ESG team.

Find out more about current standards and the issues involved in environmental, social and governance reporting at weaver.com.

© 2020