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SEC divided over ESG disclosures as pressure from Congress rises

Top SEC officials are split over whether the regulator needs to develop a uniform framework for corporate America to follow when making environmental, social and governance disclosures.

At a House Financial Services Committee hearing Sept. 24, SEC Chairman Jay Clayton and Commissioners Robert Jackson Jr., Hester Peirce, Elad Roisman and Allison Herren Lee fielded dozens of questions over everything from cryptocurrencies to initial public offerings to the short-term funding markets' recent gyrations. But while the commission stood together when answering some lawmakers' questions, the SEC's top panel appeared to be divided over a handful of others including the idea of reforming, and even mandating, ESG disclosures.

With global sustainable investments at roughly $31 trillion and growing, the SEC has been facing mounting pressure over the last year to develop standardized ESG disclosures that U.S. companies could follow. Asset managers, advocacy groups and Democratic lawmakers say that doing so would finally provide investors with a clear picture of a company's ESG risks and opportunities, allowing them to stack different companies up against each other based on their ESG factors.

"Comparability is extremely important for investors," said Lee, one of the commission's Democratic representatives alongside Jackson, at the hearing. "It won't help if each individual executive inside of a company is making their own decision about what is material. It makes it difficult for investors to compare. You have to balance that."

Lee and Jackson both have signaled their interest in creating a uniform set of ESG disclosures that companies could follow when reporting such figures to their shareholders. At the hearing, Jackson doubled down on Lee's comments by saying "investors decide what's important to investors."

But their comments were in sharp contrast to Peirce, who said executives have been considering ESG issues within their organizations for a long time through the "materiality lens." The SEC commissioner, who is one of the agency's two Republican representatives, has previously said the ESG movement is pinning scarlet letters on "allegedly offending corporations without bothering much about the facts and circumstances." Roisman, the commission's other Republican member, did not directly address the topic at the hearing.

Clayton, a political independent appointed by President Donald Trump, did not directly say at the hearing whether he supports developing a uniform ESG disclosure framework. However, the SEC chief did acknowledge that such reports could be of value.

"I believe there are disclosures in each of those categories that, depending on the circumstances, can be quite meaningful to investors," Clayton said.

The SEC is not the only institution in Washington that has found its members at odds over ESG disclosures.

The topic has been a continued point of tension for some lawmakers on the Democrat-controlled House Financial Services Committee. Just days before the SEC hearing, the committee passed legislation by a 31-22 vote that would effectively begin requiring publicly traded companies in the U.S. to begin disclosing information about their ESG practices. Currently, companies are not required to make any ESG disclosures.

Introduced by Rep. Juan Vargas, D-Calif., the bill has a long road before it could be signed into law. But Vargas said in a brief Sept. 24 interview that there had been some interest among Senate Democrats in introducing a companion bill. Vargas' bill has previously been criticized by Rep. Bill Huizenga, R-Mich., who is the ranking member on the committee's Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.

Whether ESG disclosures will become mandatory or standardized remains unclear. But Clayton did acknowledge at the hearing that materiality, which he said "should be the touchstone of our markets," can evolve over time.

"As our markets change, what may be material does change, which is why we need to have a principles-based approach to disclosure," Clayton said.