SEC Commissioner poses ‘critical questions’ for ESG disclosure

In the wake of the G7 summit hosted earlier this week, it’s fair to say that sustainable finance is hot on the agenda of global businesses. This is particularly true of financial organisations, following a recent report by Greenpeace, which found UK banks to be responsible for 1.8 times the UK’s annual net CO2 emissions.

As Securities and Exchange Commission’s, Commissioner Elad Roisman, conceded in a recent speech “ESG is on everyone’s mind this year”. Indeed, it’s hard to miss the stream of environment-related content being published by financial organisations and regulators alike.

However, while many global regulators, from the UK’s Financial Conduct Authority (FCA) to the Monetary Authority of Singapore (MAS), have set about implementing environmental, social and corporate governance (ESG) related disclosure requirements, the SEC and other US-based regulators appear slow on the pickup. Roisman’s speech, which offers a comparatively critical view of ESG regulation, gives us potential insight as to why.

Are existing disclosures adequate?

Roisman notes that the SEC “already” has a disclosure framework that requires public issuers to disclose material information to investors. This includes information pertinent to proposed SEC ESG disclosure requirements, including “information one might categorize as ‘E’, ‘S’ or ‘G’”. As well as this, the SEC recently amended Regulation S-K to require more stringent disclosure around human capital. Despite this, he notes that newly appointed SEC Chair, Gary Gensler, has made it clear that further requirements are on their way.

While not saying it expressly, it would appear that Roisman believes the current SEC disclosure regime to be sufficient.

Critical questions surrounding ESG disclosure

Before the SEC imposes new rules surrounding ESG disclosure, Roisman believes the following 5 questions must be addressed:

1. What information are investors not currently receiving around ESG that is material to them making “informed investment decisions”?
   
2. The risks surrounding ESG disclosure are not necessarily risks that affect the company but, instead, the environment and climate. If that is the case, why is the SEC the appropriate body to require these disclosures as opposed to the Environmental Protection Agency (for example).
   
3. How would the SEC come up with “E” and “S” disclosure requirements and from where do they gain the expertise?
   
4. If the SEC were to incorporate or implement standards set by external bodies, how would the SEC oversee this on an ongoing basis, and what infrastructure would be required between the two bodies (SEC and external standard setters).
   
5. If the SEC came up with disclosure requirements, how would they balance those requirements against the inevitable costs of such rules?

Roisman’s speech focusses chiefly on answering the 5^th question. However, these questions all require a degree of reflection. For many it seems inevitable, and indeed right, that financial institutions are held to account for the role they play in climate change and governance issues, both internally and externally. However, the disclosure requirement solution may be more complex than is often made out.

Lack of ESG disclosure standards lead to misleading reporting

Roisman openly admits to having “reservations” about “prescriptive, line-item disclosure requirements in this space”. One reason for this is a lack of standardisation, which is “very hard to do”.

Regulatory standardisation is not unique to ESG, but it is particularly noticeable here where the principle of ESG is sound, but the concepts within are broad and open to interpretation. Indeed, it is this interpretability that can lead to issues such as greenwashing. As Roisman points out, requiring ESG disclosure information in a time when the data may be “inherently imprecise”, or relies on evolving assumptions that can be calculated in a number of ways, is “at best not useful and at worst misleading”.

CUBE comment

I often think ESG can be broadly compared to GDPR. As data evolved, people began to care about data, therefore new regulations were imposed. In the same vein, as ESG factors come to the fore, people are beginning to care, and we’re seeing new regulatory activity in this area.

Regulatory change is inevitable – but Roisman’s second question in particular sticks in my mind …GDPR is regulated and enforced by a body created solely with people’s information rights in mind (the Information Commissioner’s Office (ICO).) The same can’t be said for ESG. Why?

Perhaps more interesting than the disclosure issue, which could be attributed partially to politics, is the issue of standards. As Roisman rightly points out “standardization is very hard to do”. Regardless of political leaning, I would be hard-pushed to find someone that doesn’t agree that standardisation within financial regulation is lacking, at best. As with other issues that transcend jurisdictions and firm size, from cybersecurity to crypto, regulatory standardisation is needed, fast. Otherwise we see a host of global financial regulators working independently to tackle the same issue, while global banks struggle to ascertain which regulation takes precedence, what each means, and how to implement them accurately.

While Commissioner Roisman’s questioning may appear scathing and less forward-thinking than other Commissioners at the SEC, it raises interesting points that some may not have previously considered.

The future of regulatory activity around ESG is as inevitable as the changing of tides, however what those regulations contain, where they come from, how they’re enforced, and how they can be standardised remains unclear.