Back in January, in Davos, the World Economic Forum International Business Council— a group of 120 of the largest businesses—together with the Big Four accounting firms, announced a new initiative “to develop a core set of common metrics to track environmental and social responsibility” and released a draft set of metrics for review and consideration. (See this PubCo post.) Last month, the final results, the IBC Stakeholder Capitalism Metrics, were presented in this whitepaper, “Measuring Stakeholder Capitalism—Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” The preface to the whitepaper observes that we are “in the midst of the most severe series of challenges the world has experienced since World War Two. The COVID-19 pandemic has exposed the fragility of our global systems. It has exacerbated underlying economic and social inequalities and is unfolding at the same time as a mounting climate crisis…. The private sector has a critical role to play.” The whitepaper is presented in that larger context, as an effort
“to improve the ways that companies measure and demonstrate their contributions towards creating more prosperous, fulfilled societies and a more sustainable relationship with our planet. It also recognizes that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable—and valuable—in the long-term. The culmination of a year’s effort from contributors on every continent, this work defines the essence of stakeholder capitalism: it is the capacity of the private sector to harness the innovative, creative power of individuals and teams to generate long-term value for shareholders, for all members of society and for the planet we share. It is an idea whose time has come.”
Quite a heavy lift. But will the framework be widely adopted?
In 2018, in recognition of the increasing expectation of shareholders to see disclosure regarding material environmental, social and governance issues that affect financial performance and communities, Senator Mark Warner asked the GAO to prepare a report on public company disclosure regarding ESG. That report has now been issued. According to Warner, “[m]ost institutional investors find current company financial disclosures limited in their usefulness, and augment company disclosures through burdensome engagement with the company, purchasing third party compilation data, or initiating shareholder proposals. It is time for the SEC to establish a task force to establish a robust set of quantifiable and comparable ESG metrics that all public companies can adhere to.” Although SEC Chair Jay Clayton has acknowledged “the growing drumbeat for ESG reporting standards,” he has made clear his lack of enthusiasm for imposing a prescriptive sustainability disclosure requirement that goes beyond principles-based materiality. (See, e.g., this PubCo post and this PubCo post.) Will the SEC address the drumbeat?
In his annual letter to CEOs in January, CEO Laurence Fink announced that BlackRock was putting “sustainability at the center of [its] investment approach,” and made clear that companies needed to step up their games when it comes to sustainability disclosure. (See this PubCo post.) Even in the aftermath of the COVID-19 outbreak, both BlackRock and State Street have issued statements indicating their intention to continue to center their stewardship on the demand for additional disclosure on key ESG and sustainability issues such as climate change risk and human capital management. For those seeking to improve their ESG reporting, a managing director of consultant Protiviti offers a number of recommendations in this Forbes article.
At a meeting of the SEC’s Investor Advisory Committee last week, the Committee voted to make recommendations to the SEC on three topics: accounting and financial disclosure; ESG (environmental, social and governance) disclosure; and disclosure effectiveness. The ESG recommendation concluded that “the time has come for the SEC to address this issue,” and it should be no surprise that there was some controversy—including some dissenting votes—surrounding that recommendation. While recommendations from SEC advisory committees often hold some sway with the commissioners, given the long-held views of the current commissioners, it seems highly unlikely that the ESG recommendation will have much traction—at least not in the near term. The recommendations come as the membership of the committee undergoes a substantial shift as many members time out on their appointments. The recommendations are discussed below.
Last week, the SEC’s Investor Advisory Committee held a meeting focused in part on the use of environmental, social and governance information in the capital allocation process—how do investors use ESG information in making investment decisions? The panelists—an academic and several representatives of asset managers—all viewed ESG data as important to decision-making, particularly in relation to potential financial impact, even for investment portfolios that were not dedicated to sustainability.
All five SEC Commissioners testified yesterday at an oversight hearing held by the House Financial Services Committee, the first time all five have appeared since 2007, according to Chair Maxine Waters. (Here is their formal testimony.) These hearings are, of course, broken up into bite-size five-minute Q&A sessions, so there is not much opportunity for in-depth questioning. And most often, it seemed that the Representatives directed their questions to the Commissioners that were most likely to provide gratifying answers—meaning a Commissioner of the Representative’s own party. There were, however, some notable exceptions, such as Representative Katie Porter’s pointed questioning of Commissioner Hester Peirce with regard to her views on ESG disclosure. In the end, the hearing did provide some insight into the current thinking and expectations of many of these legislators and regulators.
According to this recent study from consulting firm McKinsey, investors want to see a different kind of sustainability reporting. The authors observe that, in light of mounting evidence “that the financial performance of companies corresponds to how well they contend with environmental, social, governance (ESG), and other non-financial matters, more investors are seeking to determine whether executives are running their businesses with such issues in mind.” Although there has been an increase in sustainability reporting, McKinsey’s survey revealed that investors believe that “they cannot readily use companies’ sustainability disclosures to inform investment decisions and advice accurately.” Why not? Because, unlike regular SEC-mandated financial disclosures, ESG disclosures don’t conform to a common set of standards—in fact, they may well conform to any of a dozen major reporting frameworks and many more standards, selected at the discretion of the company. That leaves investors to try to sort things out before they can make any side-by-side comparisons—if that’s even possible. According to McKinsey, investors would really like to see some type of legal mandate around sustainability reporting. The rub is that, ironically, it’s the SEC that isn’t on board with that idea—at least, not yet.
In this article from Directors & Boards, SEC Chair Jay Clayton talks again about short-termism and discusses his views on ESG disclosure, particularly disclosure regarding human capital management.
Happy International Women’s Day! To celebrate, let’s hear from Hester Peirce, the only woman SEC Commissioner. (Irony intended.)
In a speech delivered a few days ago to the Council of Institutional Investors, after expressing her gratitude for those contributions by CII to the public debate that Peirce views favorably (regarding proxy voting, stock buybacks and disclosure reform), she takes the opportunity to “air her grievances,” citing as a model Seinfeld’s 1997 Festivus episode. (“I got a lot of problems with you people, and now you’re gonna hear about it.”) What’s her complaint? It’s the focus of CII and other investors on what she views to be “non-investment matters at the expense of concentration on a sound allocation of resources to their highest and best use. Real dollars are being poured into adhering to an amorphous and shifting set of virtue markers.” And the pressure on the SEC “to get on the bandwagon and drag others with us is pretty intense. We are being asked more and more to shift securities disclosure to focus more on matters that do not go to an assessment of how effectively companies are putting investor money to work.”