Legal Considerations in Responsible Investment

Large Investors Ask SEC to Issue Rules on ESG Disclosure Standards

Investors are demanding greater transparency of publicly traded companies on environmental, social, and governance (“ESG”) issues. On October 1, 2018, legal experts and ESG advocates, as well as investors, state treasurers, public pension funds and unions representing more than $5 trillion in assets under management filed a Request for rulemaking on environmental, social, and governance (ESG) disclosure with the U.S. Securities and Exchange Commission (“SEC”). The petition asks the SEC to develop a framework requiring issuers to make uniform disclosures of ESG information.

Investors want information that will enable them to allocate capital to long-term, socially beneficial uses. The petitioners assert that uniform disclosure is critical for evaluating companies’ long-term performance and risk management. Although companies sometimes provide ESG information, the reports are not standardized, and are neither required nor monitored. Reporting is inconsistent and in some cases not reliable. The petitioners assert that developing a comprehensive framework for clearer, consistent, complete, and more easily comparable information will bridge the gap between what investors want and what companies are providing.

The Center for American Process (“CAP”), a public policy research and advocacy organization, released a new Report on Corporate Long-Termism, Transparency, and the Public Interest to accompany the rulemaking petition. The report states that ESG factors are highly correlated with long-term risk, and asserts that “shareholders and stakeholders of all types and size do not have access to the long term-oriented information they need-in particular, ESG information in a consistent, comparable, and reliable manner.” CAP emphasizes the need for the SEC to lead the way on setting strong disclosure standards. The report notes that such a standard would ensure the protection of long-term investors, effective capital allocation, and better service of public interest.

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