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SEC acting head explains why voluntary ESG disclosure regime is not enough

The current voluntary disclosure regime for climate and other sustainability issues in the U.S. has failed to produce the level of consistent, comprehensive and comparable information that investors need, U.S. Securities and Exchange Commission Acting Chair Allison Lee said at a March 1 CERAWeek conference hosted by IHS Markit.

Lee, who recently launched a review of corporate climate disclosures at the agency, said that the voluntary framework of competing and sometimes conflicting standards has shortcomings.

"When you have a voluntary framework, not everyone discloses, and that means significant gaps. It can mean an unlevel playing field for many businesses and it also means inconsistencies among those who do disclose," said Lee. "So investors can't really compare across businesses, across the industries ... and sometimes they can't even compare with respect to a single business that might choose different things to disclose at different times."

Moreover, companies are reporting in different ways ranging from traditional SEC filings to "something that looks almost like an ad brochure," Lee said. As such, she asked, "how can investors be confident that the information is reliable?"

"So I don't think it's realistic necessarily to think about achieving those goals through a voluntary regime," she added.

Lee went on to note that the level of financial reporting in the U.S. today was not achieved through voluntary standards. She acknowledged that not all disagreements will be resolved over the right path forward, but that some level of a healthy debate can be useful.

The SEC has taken the first steps toward developing a framework for climate and ESG disclosures. The next question, said Lee, is what would be the right approach and "how can we, as regulators, add value."

As for how the SEC might harmonize standards with the ones being developed or already in existence in other parts of the world, Lee said the SEC needs to work internationally toward some common principles that will serve as a baseline. After that, individual jurisdictions can tailor their standards to meet individual needs.

Lee also said she sees climate risks as generally different than other ESG risks given the "staggering complexity" of climate change and that no real question exists as to whether it poses a future risk to companies. With climate change, "people can't really build risk models that generally draw on historical information on how risk manifests over time" like they can for other kinds of risks, she explained.

"I think climate change presents unique issues and challenges," Lee said. At the same time, "ESG issues more broadly are also critically important to kind of a broader notion of what do we mean when we say 'sustainable business' and 'long-term value.'"

Listen to an episode of S&P Global's ESG Insisder podcast, where we explore the challenges of applying climate science to business models. Listen on SoundCloud, Spotify or Apple Podcasts.


IHS Markit is subject to a merger with S&P Global pending regulatory and other customary approvals.