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Mar 20, 2019

SEC official cautions on new ESG disclosure rules

Prefers to let market determine reporting on evolving risks

US companies appear unlikely to face additional ESG-related reporting requirements in the near future, despite calls from major investors for new rules.

William Hinman, director of the SEC’s division of corporation finance, recently expressed caution about mandating specific disclosures in the ESG field, expressing a preference for market forces to determine what companies report. He noted that sustainability disclosure is of interest to investors but pointed to the array of issues that fall under the ESG umbrella as illustrating the importance of existing US securities disclosure requirements, which are largely principles-based and flexible.

‘While many market participants have expressed a desire for more specific sustainability disclosure requirements, others have concerns that specific sustainability disclosure requirements could result in disclosure that might not be considered material to a reasonable investor,’ he told attendees at an event in London. ‘In addition, market participants who do support additional sustainability disclosure requirements do not themselves uniformly recommend additional disclosure on the same sustainability issues.

‘The marketplace evolution of sustainability disclosures is ongoing – companies certainly provide more sustainability information than they did 10 years ago – and allowing this evolution to continue should provide market participants with a continued opportunity to sort out the types of information they find useful.

‘Had we leapt into action and issued prescriptive sustainability disclosure requirements when people first began calling for them, I believe we would have stymied that evolution and stifled efforts to develop useful disclosure frameworks. Substituting regulatory prescriptions for market-driven solutions, especially while those solutions are evolving is, in my view, something we need to manage with utmost care.’

In the meantime, the agency is keeping tabs on market-led approaches developing in this area and is comparing the information companies voluntarily provide – typically outside of their SEC filings – with the disclosure they log with the SEC, Hinman said. ‘As we approach this or other disclosure topics, I am always cognizant that imposing specific bright-line requirements can increase the costs associated with being a public company and yet not deliver the relevant and material information that market participants are seeking,’ he told attendees, according to prepared remarks.

He encouraged companies to consider their disclosure on ‘all emerging issues’, including risks that may affect their long-term sustainability. He urged them to assess whether their disclosure is sufficiently detailed to provide insight into management plans to mitigate material risks. ‘This is a process where I believe it is helpful to think about how management engages with board members on the topic,’ he added.

Hinman pointed to an interpretive release published by the commission in 2010 that discussed how existing disclosure requirements may apply to climate-related issues and reminded companies of the need to regularly assess their disclosure obligations as they pertain to climate-related issues. That guidance remains a relevant and useful tool for companies, he commented.

But he noted that the 2010 guidance does not tackle the board’s risk management role in this area. ‘To the extent a matter presents a material risk to a company’s business, the company’s disclosure should discuss the nature of the board’s role in overseeing the management of that risk,’ he said. The commission stated this in regard to cyber-security in 2018 guidance, and ‘parallels may be drawn to other areas where companies face emerging or uncertain risks, so companies may find this guidance useful when preparing disclosures about the ways in which the board manages risks, such as those related to sustainability or other matters,’ he added.

Hinman’s comments come as the SEC faces calls to beef up its rules around ESG disclosure. A coalition of academics, institutional investors and government officials last October petitioned the agency to spell out what and when companies must tell investors about ESG issues. They urged the commission to ‘initiate rulemaking to develop mandatory rules for public companies to disclose high-quality, comparable, decision-useful [ESG] information.’

The signatories included CalPERS and New York State comptroller Thomas DiNapoli. Although more public companies, facing investor pressure, voluntarily produce sustainability reports designed to explain how they are creating long-term value, there are substantial problems with the nature, timing and extent of these disclosures due to a lack of adequate standards, the petitioners argued.

In addition, the Human Capital Management Coalition, a group of institutional investors with a combined $2.8 trillion in assets, in 2017 petitioned the SEC to require companies to disclose more information about their human capital practices.

But Hinman’s stance appears to reflect that of SEC chair Jay Clayton. In remarks made earlier this year about human capital disclosure requirements, Clayton said: ‘I am wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies. Instead, I think investors would be better served by understanding the lens through which each company looks at [its] human capital.’


Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...