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Investors Double Down On Push For SEC To Create Uniform ESG Data Framework

Investors once again called on Wall Street's main securities regulator to formalize an environmental, social and governance data reporting framework in the U.S.

As money has steadily flowed into ESG-linked investment strategies, companies across corporate America are disclosing more information than ever before about their risk exposures to rising sea levels, possible regulations in the coal industry and new state laws mandating a certain level of board diversity. But asset managers that consider ESG in their investment strategies say the SEC still needs to develop a uniform reporting framework those companies can follow to ensure that their data is reliable and comparable to their peers.

"There's a clear and compelling need for more complete, accurate and standardized data," Michelle Dunstan, a portfolio manager at AllianceBernstein Holding LP, said at an SEC Investor Advisory Committee meeting held Nov. 7 in Washington, D.C. "Increasingly, ESG issues are material to companies' long-term financial implications."

The SEC has faced continued pressure from lawmakers, industry participants and even some of its own commissioners within the last year to develop a standardized approach to ESG reporting in the U.S.

Executives from AllianceBernstein, State Street Global Advisors Inc. and Calvert Research & Management urged the SEC to follow its European peers in creating an ESG reporting framework at the Nov. 7 meeting. That structure, the panelists said, would provide the investment community with the ability to more easily include specific company ESG disclosures in their investment processes and compare those institutions against their peers.

"Boilerplate ESG disclosure is not terribly useful to investors in differentiating companies," Jessica Milano, Calvert's director of ESG investment research, said at the meeting. "Research suggests that, without regulatory guidance, this type of information is becoming more common."

At the center of the debate around standardizing ESG reporting is a question of whether that information is material to a company's operations.

SEC Chairman Jay Clayton, along with his colleagues on the commission, is facing renewed pressure from the investment community to standardize ESG disclosures in the U.S.
Source: AP Photo

SEC Chairman Jay Clayton, along with his colleagues on the commission, is facing renewed pressure from the investment community to standardize ESG disclosures in the U.S.
Source: AP Photo

SEC Chairman Jay Clayton said in prepared remarks for the Nov. 7 meeting that materiality is a "disclosure that a reasonable investor needs to make informed investment and voting decisions based on each company's particular facts and circumstances."

Investment managers, ESG proponents and shareholder advocates say nonfinancial ESG factors such as a company's exposure to fossil fuels or lack of workforce diversity are explicitly relevant to how a company is managed over its long-term future. For example, a real estate company ought to consider its exposure to coastlines in flood zones, they say. Otherwise, that company could find itself in a dire financial situation if an extreme weather situation hits unexpectedly.

Yet skeptics say increasing the amount of SEC-mandated disclosures would open up companies to a host of new complications.

"I see a limited role [for the SEC] in this space," J.W. Verret, a George Mason University law professor who serves on the Investor Advisory Committee, said at the meeting. "We should be mindful of the fact that disclosure [can] be counterproductive and directly harmful. It can, in some instances, provide proprietary information about a company, or it could increase the regulatory or legal risks that a company faces."

Clayton, the SEC's chief regulator, wrote in his prepared remarks that he does have some concerns about imposing a mandatory uniform ESG reporting framework because disclosures related to specific environmental, social and governance factors "run the risks of sacrificing what may be the more relevant, company-specific disclosure for the potential of greater comparability across companies."

However, Clayton has said in the past that what can be material to a company can change over time as markets evolve as well. It is that realization that could be the key for ESG to be more widely accepted, Rakhi Kumar, senior managing director and head of ESG investments and asset stewardship at State Street Global Advisors, said at the meeting.

"The current view of risk and the way we think of risk has to be expanded, if you want to address ESG issues," Kumar said.