A group of public pension funds, unions, activist investors, legal experts, and ESG advocates representing nearly $5 trillion in managed assets urged the SEC “to engage in a rulemaking process to develop a framework for public reporting companies to use to disclose specific, much higher quality ESG information than is currently being produced pursuant either to voluntary initiatives or current SEC requirements.”
Coalition members indicated that a primary purpose was corporate social responsibility. “It’s not about our personal values,” argued Illinois State Treasurer Michael W. Frerichs, who signed the letter. “We are trying to create values for public companies."
All Data Are Created Equal? The petition argues that an SEC rule "will reduce the current burden on public companies and provide a level playing field for the many American companies engaging in voluntary ESG disclosure." Likewise, the letter proposes that simply by mandating ESG disclosure, ESG standards “become clearer and reporting becomes more consistent and comparable.” It offers no roadmap, however, on how to get from such a mandate to capturing data that accurately reflects material ESG factors across companies and industries.
ESG Investments Receiving Greater Attention. A new survey shows 90 percent of investors think portfolios that integrate ESG factors are likely to perform as well or better than non-ESG investments. Additionally, 38 percent of asset owners and investment consultants polled in the RBC Global Asset Management survey believe ESG-integrated strategies help generate investment returns above those of a market index (alpha), a 14 percent increase from 2017. The share of those surveyed who believed ESG is not a source of alpha decreased from 46 percent in 2017 to 20 percent in 2018.
Definition of Materiality Varies Widely. There is little consensus as to what constitutes a material ESG factor, resulting in a wide array of standards and a flurry of fund rebranding without significant changes to the underlying assets, according to a recent Wall Street Journal article. What is material at one company may not be material at another.
Outlook: While the Republican-majority SEC is unlikely to take up the letter’s recommendations, the coalition that drafted it is similarly unlikely to go away. If Democrats win the presidency in 2020, a Democrat-led Commission may be more sympathetic to such ideas, as such a rule was on the Commission's agenda under former Chair Mary Jo White (D).