Sustainability Disclosures Emerge as Contentious Issue in SEC Plan



Enhanced sustainability disclosures is shaping up to be the most contentious and controversial measure found in the SEC’s proposal to modernize and streamline disclosure rules.

Industry groups and issuers disagree sharply with fund managers and investor advocates about whether public companies should be required to make disclosures on sustainability, environmental, social or governance issues, comment letters submitted to the SEC show.

The disagreement is all the more striking since the two sides found much else to agree with in general with the SEC’s concept release on Regulation S-K.

The Business Roundtable, an association of corporate CEOs, said that disclosures about broader social issues are of little interest to reasonable investors as a group and shouldn’t just target public companies. Companies are always free to make voluntary ESG disclosures if their investors demand them, and would be required to do so if the information was material.

The Center for Capital Markets Competitiveness (CCMC) of the U.S. Chamber of Commerce also strongly opposed prescriptive policy disclosure. According to the CCMC, SEC-mandated disclosures should not be used “to further social, cultural or political motivations that the federal securities laws were not designed to advance.”

The SEC disclosure regime “should not be an avenue for special interest activists to impose their agenda on shareholders at large.” The disclosure regime should be grounded in materiality, according to the CCMC, and should reflect the SEC’s mission to protect investors, facilitate orderly markets, and promote capital formation.

The CMCC said that so-called “special interest disclosures” tend to politicize the federal securities laws and the SEC, while fostering regulatory uncertainty that is detrimental to investors and businesses alike.

Such a disclosure regime would also be outside the SEC’s area of expertise. The agency serves well, in the CMCC’s view, in the operation, practices and regulation of the securities markets, but is ill-suited to be an instrument of social change.

The Sustainability Accounting Standards Board (SASB) presents a radically different perspective on ESG disclosures. (SASB is funded in part by Bloomberg Philanthropies, and Michael Bloomberg, founder of Bloomberg BNA’s parent company Bloomberg L.P., sits on its board.)

The SASB’s roster of directors also includes former SEC commissioners, former senior Commission staffers, the FASB chairman and other influential members. The SASB argued that reasonable investors do use sustainability disclosures, and that current sustainability disclosure practices are woefully inadequate. According to the board, more than 40 percent of all 10-K disclosure on sustainability topics consists of boilerplate language.

SASB recognized that prescriptive line-item disclosure requirements are not appropriate for all companies and all sustainability issues. Sustainability issues are not material for all companies, according to SASB, and when they are material, they manifest in unique ways and require industry-specific metrics.

Sustainability issues impact financial performance in specific ways that vary by topic and industry, said the board. As such, investors need guidance on which sustainability issues are material to which industries, and they need industry-specific metrics by which to evaluate and compare performance.

It is apparent that the SEC has a difficult challenge ahead in considering whether to require enhanced sustainability disclosures. This issue is likely to be the most contentious and controversial measure found in the SEC’s lengthy concept release.

A survey of proposed revisions to Regulation S-K with a summary of comment letters to the SEC's latest concept release is available here. Full text comment letters are available here.