A top Japanese bank is the latest to lobby the U.S. Securities and Exchange Commission to tighten standards for how public companies disclose environmental, social and governance, or ESG-related data to investors.
"One of our bugbears is that ESG standards are highly diverse on a massively complex subject … of huge and rising importance to investors … yet there is no SEC standardized requirement, for any industry, to report data on ESG as a whole," Paul Sankey, an oil and gas analyst at Mizuho Financial Group Inc. subsidiary Mizuho Americas LLC wrote Jan. 14. "We will be writing an open letter to the SEC Chairman suggesting this colossal gap in reporting vs ESG-related information need should be better met by reporting requirements, and should be remedied as soon as possible."
Sankey called SEC-mandated governance data, such as board composition and executive pay "excellent," but recommended against mandating the collection of "qualitative" social data, as determining how to capture it would be difficult.
Investors increasingly rely on ESG-related information to make investment decisions. In a Jan. 14 letter to CEOs where he announced a plan to divest thermal coal stocks, BlackRock Inc. CEO Larry Fink said the investment manager evaluates "in both our public and private investment portfolios, high-risk sectors that are exposed to a reallocation of capital. ... We will take action to reduce exposures where doing so can enhance the risk-return profile of portfolios." As for investments in other fossil fuel-related businesses, BlackRock said it is integrating tools into its risk management system that allow the investment manager to stress test investments for different carbon pricing scenarios and to analyze physical climate risks or "sustainability-related characteristics of companies." In the letter, Fink said BlackRock will join Climate Action 100+, an investor group that works with companies to improve climate disclosure and align their business strategy with the goals of the Paris Agreement on climate change.
But on Jan. 15, Sankey argued a lack of "formal, non-voluntary disclosure with the SEC of all ESG data, by all companies" could lead investors astray as they undertake similar efforts.
"Notably, the [U.S.] Environmental Protection Agency … requires disclosure by operator, not by equity share. … The [U.S.] Occupational Safety & Health Administration … requires data by plant. That is why we could never prove the most dangerous company at the time of BP's [Deepwater Horizon disaster]. You cannot aggregate the data," Sankey wrote. "By the same token, we've been told [EOG Resources Inc.] encourages safety reporting, actually incentivises it, and hence scores high on accident rates. … That is absolutely best practice, but will hit ESG scores that we hear are often totally lacking in nuance."