Detail

Environmental, Social and Governance (ESG) Risk Disclosure Gaining Interest Among Policymakers

  • August 9, 2019

A recent hearing by a House Financial Services subcommittee reflects a growing interest among policymakers regarding environmental, social, and governance (ESG) reporting by public companies.  (" Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance (ESG) Disclosures ," July 10 hearing) 

Rep. Carolyn Maloney (D-N.Y.) – chairwoman of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets – stated during the July 10 hearing, "Investors overwhelmingly want companies to disclose ESG information, especially because there's now considerable evidence that companies that perform better on ESG metrics, also perform better financially."  

  • ESG disclosures generally address issues in the areas of environmental sustainability (e.g., climate change); social (e.g., human rights and labor practices); and governance (e.g., executive- and board-level diversity) matters.  ( Financial Services Committee memorandum , July 5)  Nareit's ESG Dashboard  identifies and tracks key performance indicators to better measure and quantify best ESG practices for the U.S. REIT industry.  
  • Rep. Carolyn Maloney (D-N.Y.) – chairwoman of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets – stated during the hearing, "Investors overwhelmingly want companies to disclose ESG information, especially because there's now considerable evidence that companies that perform better on ESG metrics, also perform better financially." 
  • She added, "I believe the best way to improve the quality and consistencies of these disclosures is for the Securities and Exchange Commission (SEC) to establish standards for ESG Disclosure that would apply to all public companies in the United States." (Video of entire hearing, July 10) 
  • During the hearing, policymakers considered the merits of five draft bills that would require public companies to disclose information on several ESG topics – including climate change risk, political expenditures and human rights risk.  ( DavisPolk , July 11)   
  • Issues raised included whether the draft bills would mandate this type of disclosure for all public companies. Other issues included:
• Whether mandated disclosure is necessary given current voluntary disclosure practices; 
•  The potential increased regulatory burden of these disclosures, which could negatively impact U.S. IPO markets; and 
•  Whether ESG issues qualify as material information for investors.  
  • In the Senate, the Committee on Banking, Housing and Urban Affairs held a hearing in April 2019 on the application of ESG principles in investing. 

  • Regulators also are considering ESG topics. The Commodity Futures Trading Commission last month voted to establish a Climate-Related Market Risk Subcommittee to address climate-related financial risks. (CFTC, July 10)
  • SEC Chairman Jay Clayton in a recent interview said that not all ESG matters are created equally. "Matters considered to be in the G category tend to be a lot closer to the core governance issues that investors have come to expect in terms of disclosure from our public companies. In contrast, matters considered to be in the E category, such as regulatory risk, and risk to property and equipment vary widely from industry to industry and country to country," Clayton said.  (Directors & Boards, July 22) 
According to a recent report by  US|SIF , ESG factors in the United States continue to play an increased role in investment decisions. Total US-domiciled assets under management using ESG strategies grew from $8.7 trillion at the start of 2016 to $12 trillion at the start of 2018, a 38 percent increase.  This represents 26 percent-or 1 in 4 dollars-of the total US assets under professional management.  (US|SIF,  2018 Report on US Sustainable, Responsible, and Impact Investing Trends ).