Comments on ESG disclosures by the Acting Director of the Division of Corporation Finance

On March 11, 2021, John Coates, Acting Director of the SEC’s Division of Corporation Finance, released a statement on ESG disclosures in connection with remarks made at the 33rd Tulane Corporate Law Institute. Mr Coates said he believes the SEC’s policies on ESG information should continue to adapt existing rules and standards to the realities of climate change and as investors increasingly demand ESG information for help them make informed investment and voting decisions. As the debate on ESG information continues1Mr. Coates said that an effective ESG disclosure system should reflect a consensus among investors and companies on useful, reliable and comparable disclosures under standards flexible enough to remain relevant. He highlighted the following issues that should be addressed in the process of creating such standards:

  • What information is most useful?
  • What is the right balance between principles and metrics?
  • To what extent can standardization be achieved in all industries?
  • How and when should standards change?
  • What is the best way to verify or provide insurance2 on disclosures?
  • Where and how should disclosures be compared globally?
  • Where and how can disclosures be aligned with information businesses already use to make decisions?

Its comments focused on three topics: (i) the costs of not having a consensual ESG disclosure system; (ii) whether ESG disclosures should be voluntary or mandatory; and (iii) the benefits of a global ESG reporting framework.

On costs, Coates observed that critics of ESG disclosure requirements often cite the costs associated with preparing ESG disclosures, but countered that it is just as important to recognize the costs associated with making ESG disclosures. not have ESG disclosure requirements. In this regard, he noted that while there is an abundance of ESG data available to investors, there is a lack of consistent, comparable and reliable ESG information available for investors to make investment decisions and informed voting. This dynamic can ultimately be costly for companies because investments are hampered in the absence of such information. Companies also incur higher costs as they are faced with numerous and contradictory requests for information on the same ESG topics. Additionally, these higher costs can be onerous for small businesses, where failure to provide ESG information can result in higher capital costs.

On whether ESG disclosures should be voluntary or mandatory, Mr. Coates noted that ESG disclosure requirements may include mandatory disclosures where disclosure is only required when the item is material. In addition, he noted that companies should already assess whether their information in their sustainability reports is important.

Finally, he said the case for a single global ESG reporting framework is compelling. Although the process is complex, he said ESG issues are global issues and it would not be helpful if multiple standards applied to companies that operate or raise capital in multiple markets, and commented that the work of the IFRS Foundation to establish a sustainability standards board shows promise.

The pace of reporting from the SEC and its staff continues to accelerate, with the content representing a departure from recent actions by the SEC. In the SEC press release adopting amendments to Articles 101, 103 and 105 of Regulation SK3, the SEC declined to adopt prescriptive disclosure requirements with respect to climate change risk, human capital and diversity.4 Given recent statements and the new administration, we can expect further action from the SEC on ESG disclosures. While any rule making involves a long period of time, the SEC is poised to be more aggressive in reviewing corporate disclosures and issuing updated disclosure guidelines.

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